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

                                    FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 1999

OR

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

For the transition period from ______________ to _____________

                         Commission file number: 0-11635

                              LASER PHOTONICS, INC.
                              ---------------------
            (Name of small business issuer specified in its charter)

          Delaware                                               59-2058100
          --------                                               ----------
  (State or other jurisdiction                                (I.R.S. Employer
of incorporation or organization)                            Identification No.)

                  2431 Impala Drive, Carlsbad, California 92008
                  ---------------------------------------------
          (Address of principal executive offices, including zip code)

                                 (760) 602-3300
                                 --------------
                (Issuer's telephone number, including area code)

         Securities registered under Section 12(b) of the Exchange Act:

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

         Securities registered under Section 12(g) of the Exchange Act:

                    Common Stock, $0.001 par value per share
                    ----------------------------------------
                                (Title of Class)

Indicated by check mark whether the registrant: (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. Yes X No __

Indicate by check mark if disclosure of delinquent filers in 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. [___]

The number of shares outstanding of the issuer's Common Stock as of April 11,
2000, was 14,913,260 shares. The aggregate market value of the Common Stock
(14,539,645 shares) held by non-affiliates, based on the closing market price
($12.00) of the Common Stock as of April 11, 1999 was $174,475,740.

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         THIS ANNUAL REPORT ON FORM 10-K (THE "REPORT") MAY BE DEEMED TO CONTAIN
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT OR
HEREAFTER INCLUDED IN OTHER PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), REPORTS TO THE COMPANY'S
STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY THE
COMPANY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH
COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR OPERATING)
OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR
OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES BASED
UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS. THESE RISKS
INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS SET FORTH HEREIN, EACH OF WHICH COULD
ADVERSELY AFFECT THE COMPANY'S BUSINESS AND THE ACCURACY OF THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN.

PART I

ITEM 1.  BUSINESS

BUSINESS OF THE COMPANY - GENERAL

         GENERAL. The following should be read in conjunction with the Company's
Consolidated Financial Statements and the related Notes thereto, contained
elsewhere in this Report. This Report contains forward-looking statements, which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Unless the context otherwise requires, the term "Company" refers to Laser
Photonics, Laser Analytics and Acculase.

         Laser Photonics, Inc. was incorporated on November 3, 1987. Unless the
context otherwise requires, the term "Company" refers to Laser Photonics, Inc.,
a Delaware corporation ("Laser Photonics"), Laser Analytics, Inc., a
Massachusetts corporation ("Laser Analytics"), its wholly-owned subsidiary, and
Acculase, Inc., a California corporation ("Acculase"), its 76.1% owned
subsidiary.

         The Company is engaged in the development, manufacturing and marketing
of proprietary excimer laser and fiber optic equipment and techniques directed
toward the treatment of psoriasis and cardiovascular and vascular disease. The
Company anticipates developing such equipment and technologies to treat other
medical problems and for non-medical applications. However, no assurances to
this effect can be given.

         The Company historically has incurred significant net losses from
operations. As of December 31, 1999, the Company had an accumulated deficit of
$25,617,537. The Company expects to continue to incur operating losses for a
period of between nine (9) and twelve (12) months from the date of this Report,
as it continues to devote significant financial resources to the marketing of
its psoriasis treatment products and expansion of operations. No assurance can
be given that the Company will sustain losses only for a period of nine (9) to
twelve (12) months or that it will ever be profitable. In order to achieve
profitability, the Company will have to manufacture and market its psoriasis
treatment products, which need to be accepted in the marketplace on a commercial
basis. There can be no assurances that the Company will manufacture or market
any products successfully or operate profitably in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

         EXCIMER LASER TECHNOLOGY. The basis of the Company's business is its
excimer laser technology. The word "excimer" is an acronym for excited dimer. A
dimer describes a molecule formed, by means of a catalyst, from two or more
atoms. Solid state lasers using, for example, a crystalline substance as a
medium may contain both excited dimers and dimers in non-excited or "ground"
state. In such devices, power is supplied to increase the percentage of dimers,
which are excited. Other types of lasers generate infrared energy that produces
heat upon tissue interaction.

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         An excimer laser uses a medium in which the dimers exist only in the
excited state. The Company's excimer laser, using xenon chloride gas as a
medium, pumps electricity in and generates excited dimers. This system creates
and excites the dimers at the same time. Once the power is shut off, the dimers
cease to exist. This type of laser usually, though not always, generates beams
in the ultraviolet ("UV") end of the light wave spectrum. The wavelength of the
beam depends largely on the type of gas used. In the case of the Company's laser
technology, the wavelengths are measured in nanometers ("nm") and may vary
between 174 nm and 351 nm.

         The Company's initial medical applications for its excimer laser
technology are intended to be used in the treatment of psoriasis and
cardiovascular disease.

         Between March, 1998 and November, 1999, the Company entered into five
clinical trial agreements (collectively the "Clinical Trial Agreements") with
Massachusetts General Hospital ("MGH") to compare the effects of excimer light,
using its excimer laser technology, to the Ultraviolet "B" ("UVB") treatment
currently in use to treat psoriasis and other skin disorders. Under these
agreements, the Company provided prototype laser equipment to MGH for
preclinical dose response studies under Institutional Review Boards ("IRBs")
approval and agreed to support the clinical trials with research grants totaling
$660,000. The final data from the first of these clinical trial agreements was
collected in December, 1998, and formed the basis for a 510(k) submission
(defined below) to the United States Food and Drug Administration (the "FDA") on
August 4, 1999. The four remaining studies are ongoing and have not been
completed as of the date of this Report. On January 27, 2000, the FDA issued a
510(k) to the Company, establishing that the Company's excimer laser psoriasis
treatment system has been determined to be substantially equivalent to currently
marketed devices for the treatment of psoriasis. The wavelength of UVB used by
other products, that are deemed to be substantially equivalent, is approximately
310nm, whereas the Company's psoriasis treatment system uses a wavelength of
308nm. The Company introduced its psoriasis treatment products for the purposes
of commercial application testing in March, 2000, and intends to begin
distribution of its psoriasis treatment products to the market in July, 2000.
However, no assurance to this effect can be given.

         The Company believes that its excimer laser system for treating
psoriasis may replace and/or augment the current phototherapy modalities in use
to treat the symptoms of psoriasis, including UVB. In UVB treatments, the
patient stands in a light box lined with special UVB lamps and the whole body is
radiated (other than protected areas, such as eyes and genitals). The need for
long periods of treatment is due to the fact that the healthy skin, as well as
the psoriasis affected skin, is being treated in the light boxes, so that the
dosage or radiation must be controlled or the patient will be severely burned.
The Company's excimer laser, however, can be used to treat only the skin area
that is affected by psoriasis. Since it is believed that skin that is affected
by psoriasis is not as susceptible to UVB radiation, the Company believes that a
high dose of UVB applied directly to the affected area may significantly reduce
the number of treatments and the time needed to control psoriasis.

         Cardiovascular and vascular applications of the Company's excimer laser
relate to an experimental procedure known as Transmyocardial Revascularization
("TMR"). In August, 1997, the Company and Baxter Healthcare Corporation
("Baxter"), entered into a strategic alliance for the manufacturing and
marketing of excimer laser products for TMR (the "Baxter Agreement"). The
Company is in the process of negotiating modifications to the Baxter Agreement.
No assurance can be given that the Company will successfully complete such
negotiations.

         This strategic alliance with Baxter is significant to the Company
because Baxter has, among other things: (i) purchased from the Company certain
existing excimer laser systems for cardiovascular and vascular disease; (ii)
agreed to fund the total cost of regulatory approvals worldwide for the use of
the Company's excimer laser systems for the treatment of cardiovascular and
vascular disease; and (iii) agreed to fund all sales and marketing costs related
to the introduction and marketing of the Company's equipment for treating
cardiovascular disease using TMR (the "TMR System"). Due to Baxter's strong
worldwide marketing presence, relationships with leading clinicians and
regulatory expertise, Baxter is absorbing many of the significant expenses of
bringing the Company's TMR System to market. In the opinion of management of the
Company, because of the significant costs being borne by Baxter and because of
the favorable terms of the Baxter Agreement, the Company's earnings potential
has not been compromised by the Baxter Agreement, whereas a significant portion
of the Company's risk related to the development and introduction of its TMR
System has been shifted to Baxter. As of December 31, 1999, pursuant to the
terms of the Baxter Agreement, the Company has delivered the first two TMR
Systems to Baxter. Baxter has paid the Company an aggregate of $1,968,000, of
which $1,550,000 was received for the two (2) TMR Systems and $418,000 was
received for certain advances for additional excimer laser systems and to obtain
CE Mark compliance (defined below) in Europe.

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         The Company's TMR System requires pre-market approval ("PMA") prior to
being marketed in the United States. In January, 1995, management of Acculase
met with representatives of the FDA to discuss preclinical data submission
requirements necessary before initiating human trials of the TMR System.
Subsequently, animal testing of the TMR System was performed in collaboration
with several heart research institutions in the United States, culminating in a
trial at the New York Hospital Cornell Medical Center, which serves as the
pre-clinical basis for an Investigational Device Exemption ("IDE") that was
granted by the FDA in August, 1996. In the first quarter of 1998, the Company
transferred the IDE to Baxter in connection with the Baxter Agreement. Based on
the results of the Phase I trial, Baxter has petitioned for a Phase II trial
(defined below). However, no assurance can be given as to when or if such
petition will be granted. The Company believes that Baxter intends to expand the
Phase II studies to a multi-site trial (more than 10 institutions) and expand
the procedure to include patients who are candidates for incomplete coronary
artery bypass graft surgery ("CABG") revascularization. However, no assurance to
this effect can be given. The Company does not expect Baxter to submit PMA to
the FDA before the year 2001, and possibly later. Baxter will be required to
obtain additional IDEs for other applications of the TMR System and for other
products that the Company develops that are regulated by the FDA as medical
devices.

         DISCONTINUATION OF NON-EXCIMER LASER BUSINESS OPERATIONS. The Company's
former business strategy consisted of the development of a wide range of laser
products using different solid-state lasers. Between 1986 and the date of this
Report, the Company sold over 1,000 lasers, usually on a private label basis, to
other manufacturers. The Company also considered pursuing a strategy of using
its excimer laser technology for a photolithography product, which was
abandoned. The Company's former strategies proved to be unsuccessful, in the
opinion of then current management of the Company. Although the Company
generated revenues from the sale of its products, former management believed
that the Company would never be able to operate profitably in the markets where
the Company was then doing business. The Company currently believes that its
excimer laser technology provides the basis for reliable cost-effective systems
that will increasingly be used in connection with a variety of applications.
Accordingly, the Company has discontinued its business operations related to the
Company's former business strategy and is focused solely on excimer laser
products for various medical applications.

         To facilitate the Company's focus on excimer laser technology, the
Company has been attempting to sell certain of its non-excimer laser assets,
which are related to its business operations at its Orlando, Florida and
Wilmington, Massachusetts facilities. The Company did not complete the sale of
certain of its assets related to these operations pursuant to an agreement with
one party. The Company intends to discontinue its Florida business operations on
or before the end of April, 2000, and is in negotiations to sell certain assets
related to these business operations. There can be no assurances that the
Company will be able to complete such a proposed transaction. The Company paid
$950,000 in cash to the landlord for the Florida lease in connection with the
satisfaction of a judgment and settlement of certain claims against the Company
in the aggregate amount of $1,114,000. Further, as of April 6, 2000, the Company
closed the transactions with respect to the sale of certain assets and the grant
of an exclusive license for certain patents related to non-excimer lasers
related to the Company's Massachusetts business operations to Laser Components
GmbH ("Laser Components"), for a purchase price of $213,000. Laser Components is
unaffiliated with the Company. In addition, Laser Components assumed the
Company's prospective obligations under the Company's Massachusetts office
lease. The Company has discontinued its Massachusetts operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business-Discontinuance of the Company's Non-Excimer Laser
Business Operations."

          Management's decision to suspend its business operations not related
to the Company's excimer laser technology has resulted in the discontinuance of
its business operations, which generated approximately 76% of the Company's
revenues for 1998 and 1999. As of April 7, 2000, all but approximately $465,000
of the debts related to these operations have been paid from the proceeds of a
financing in August, 1999 resulting in gross proceeds of $9,310,374 to the
Company (the "August 9, 1999 Financing") and a financing in March, 2000
resulting in net proceeds of approximately $14,570,000 to the Company (the
"March 16, 2000 Financing") and the sale of certain assets related to the
Company's non-excimer laser operations. As of the date of this Report, the
Company intends to focus solely on those portions of its business that deal with
its excimer laser technology, although these activities have not generated
sufficient revenues to sustain operations without outside financing.

                                       4
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         RELATIONSHIP WITH ACCULASE SUBSIDIARY. Laser Photonics owns 76.1% of
the issued and outstanding common stock of Acculase. In addition to Laser
Photonics, there are approximately eight other stockholders of Acculase,
including certain former officers and directors of the Company. Helionetics,
Inc. ("Helionetics"), a former principal stockholder of the Company, filed a
petition for bankruptcy reorganization in 1997 and is no longer a stockholder of
Acculase. Acculase owns certain technologies related to the Company's excimer
lasers and their delivery systems. The loss of any of these technologies to the
Company could have a material adverse effect upon the business of the Company.
See "Business-Strategic Alliance with Baxter Healthcare Corporation" and
"Business-Intellectual Property."

         In the early 1990's, Acculase was unable to raise equity or debt
financing to further the development of its excimer laser technology. Only with
the initial assistance of Helionetics, and the subsequent assistance of Laser
Photonics, was Acculase able to obtain the capital needed to develop its excimer
laser products and, consequently, develop the business relationship with Baxter.
See "Business-Strategic Alliance with Baxter Healthcare Corporation."

         Of the stockholders of Acculase, only Laser Photonics participates in
the day-to-day management of Acculase or contributes any financing to the
operations or the development of Acculase. Laser Photonics has been required to
engage in significant financing activities since 1997 to obtain the funding
necessary to support Acculase's ability to develop its excimer laser products.
Acculase has been unable to raise money throughout its history, largely because
it is and has been a privately owned company. Acculase has had to rely upon the
Company, since the Company obtained control of the 76.1% ownership interest of
Acculase, in 1995, to raise financing to capitalize the development of its
excimer lasers. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Certain Relationships and Related Transactions."

         On September 18, 1997, Acculase, Pennsylvania Merchant Group, Ltd.
("PMG"), one of the Company's investment bankers, and Baxter agreed, in
connection with fulfilling the obligations of the parties under the Baxter
Agreement, that Acculase needed to acquire a license (the "Lasersight License")
from Lasersight Patents, Inc. ("Lasersight"), an unaffiliated third party, for
certain patents which relate to the use of excimer lasers for the cardiovascular
and vascular markets. On September 23, 1997, Baxter purchased certain patent
rights to related patents from Lasersight for $4,000,000, and in December, 1997,
Acculase received from Baxter the Lasersight License. Acculase then paid
$4,000,000 to Baxter for the transfer of the Lasersight License, from funds
raised in a private placement of Laser Photonics' securities. In the event that
Baxter terminates the Baxter Agreement, Baxter will grant to Acculase an
exclusive sublicense of all of Baxter's rights under the Lasersight License. In
such event, Acculase will acknowledge and agree that, upon the grant of such
exclusive sublicense, Acculase will assume all obligations and liabilities of
Baxter under the Lasersight License. See "Business-Excimer Laser System for
Treatment of TMR Strategic Alliance with Baxter Healthcare Corporation,"
"Business-Intellectual Property" and "Certain Relationships and Related
Transactions."

         Management of the Company believes that the provision of financing and
management assistance to Acculase has provided a significant benefit in the
development of the Acculase technology to Acculase and the Acculase
stockholders, other than the Company, and that Acculase could not have obtained
any of these benefits without the financial and management assistance provided
by Laser Photonics. This assistance has resulted in significant dilution to the
ownership interest of the stockholders of Laser Photonics, without dilution to
the ownership interest of the stockholders of Acculase. As of December 31, 1999,
Laser Photonics had made cash and non-cash advances as loans for the benefit of
Acculase, which total approximately $17,000,000. From 1995 through December 31,
1999, Laser Photonics made cash advances for the benefit of Acculase of
approximately $9,200,000, including allocations of payments for obligations of
Acculase, salaries and expenses, financing costs, cash transfers and corporate
overhead, and has made non-cash advances for the benefit of Acculase in the form
of the issuance of Common Stock and Warrants in certain financings, the issuance
of derivative securities of Laser Photonics at prices below market to employees
and consultants of Acculase, the assumption of interest charges relating to
conversion features of certain derivative securities, together with interest
accruing on the principal amount of all cash and non-cash advances at 8% PER
ANNUM, which total approximately $7,800,000. All such amounts advanced to
Acculase were loaned without any date certain as to when such loans would be
repaid. In addition, Laser Photonics has issued 1,090,500 options as incentives
to employees to work for Acculase. Should Laser Photonics be unable to acquire
the shares of Acculase not already owned by Laser Photonics, it is likely that
Laser Photonics will have to continue to dilute the ownership of its Common
Stock to pay the operating costs of Acculase for an indefinite period of time.
See "Business-Business of the Company-Relationship with Acculase Subsidiary",
"Business-Intellectual Property" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

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         Management of the Company believes that this situation will continue
until such time as Acculase is generating enough revenue that it can finance its
operations from internally generated cash flow. No assurance can be given that
Acculase will ever be able to finance its operations from internally generated
cash flow. Thus, the Company may have to continue to dilute the ownership of the
stockholders of Laser Photonics indefinitely to finance the operations of
Acculase. The Boards of Directors of the Company and Acculase have voted to
enter into a reorganization pursuant to which Acculase will become a
wholly-owned subsidiary of Laser Photonics, and the stockholders of Acculase
(other than Laser Photonics) will exchange their Acculase shares for shares of
Common Stock. The exact ratio of the anticipated exchange of Acculase common
stock for Common Stock of Laser Photonics will be based on a valuation to be
prepared by one of the Company's advisors and a separate fairness opinion from
an investment banker to be hired by the Board of Directors of Acculase. As of
the date of this Report, both boards of directors are awaiting advice on the
exchange ratio of Acculase shares for shares of Common Stock of the Company.
Once the Board of Laser Photonics has determined the exchange ratio for its
offer, Laser Photonics will cause its offer to be submitted to the Acculase
stockholders.

         Because of the majority ownership of Acculase by the Company, the
Company controls a sufficient number of the issued and outstanding shares of
Acculase in order to approve the proposed reorganization. Generally, under
California law, when a dissenting stockholder opposes a reorganization, which
requires stockholder approval, such as a reorganization in which the
stockholders of Acculase may otherwise be required to accept shares of Laser
Photonics in exchange for their shares in Acculase, the exclusive remedy of the
dissenting stockholder is the right to receive the appraised cash value of his
shares in Acculase.

         However, in the case where one entity (such as Laser Photonics)
controls both corporations, which are the subject of the proposed
reorganization, the stockholders of the controlled entity (in this case
Acculase), may be entitled to institute an action to attack the validity of the
reorganization or to have the reorganization set aside or rescinded. There can
be no assurance that any of the Acculase stockholders will not file such an
action, or that a court will not set aside the proposed reorganization
transaction.

         In the event that some or all of the Acculase stockholders exercise
their appraisal rights, decline to accept the terms of the proposed exchange of
Laser Photonics Common Stock for Acculase common stock, and wish to receive cash
in lieu thereof, and the aggregate amount sought by the Acculase stockholders
exceeds an amount to be determined by the Board of Directors, the Company will
reserve the right to terminate or postpone the reorganization, until such time
as the Company has adequate funds to cash out those Acculase stockholders who
exercise their appraisal rights.

EXCIMER LASER TECHNOLOGY

         The basis of the Company's business is its excimer laser technology.
The word "excimer" is an acronym for excited dimer. A dimer describes a molecule
formed, by means of a catalyst, from two or more atoms. Solid state lasers
using, for example, a crystalline substance and medium, may contain both excited
dimers and dimers in non-excited or "ground" state. In such devices, power is
supplied to increase the percentage of dimers, which are excited. Other types of
lasers generate infrared energy that produces heat upon tissue interaction. In
general, such laser beams are in the infrared end of the light wave spectrum and
create a great deal of heat.

         An excimer laser uses a medium in which the dimers exist only in the
excited state. The Company's excimer laser, using xenon chloride gas as a
medium, pumps electricity in and generates excited dimers. This system creates
and excites the dimers at the same time. Once the power is shut off, the dimers
cease to exist. This type of laser usually, though not always, generates beams
in the UV end of the light wave spectrum. The wavelength of the beam depends
largely on the type of gas used. In the case of the Company's laser technology,
the wavelengths may vary between 174 nm and 351 nm.

         Many lasers cut things, but different lasers do so in different ways.
An excimer laser, sometimes called a "cold laser," having photon energy greater
than most organic bonds, cuts organic material by directly breaking bonds that
hold the organic material together ("photoablation"). Other lasers, sometimes
called "hot lasers," involve vibrating water molecules, which create steam, and,
which in turn, cut organic material ("thermal ablation").

         Management of the Company believes that a cold laser has significant
advantages over a hot laser. However, no assurance to this effect can be given.
The Company's competitors for the TMR System, PLC Systems, Inc. ("PLC") and
Eclipse Surgical Technologies, Inc. ("Eclipse"), are using either a homium
(Ho:YAG) laser technology or CO2 laser technology (both of which are hot
lasers). Most of the myocardium (75%-80%) is composed of water, and the balance
is organic material. The technologies of the Company's competitors require a
surgeon or cardiologist to send one or more high-energy "pulses" through the
myocardium to create the desired channels. These high-energy pulses are absorbed
by the water in the myocardium. These high-energy pulses cause the water in the
myocardium to turn to steam while ablation is taking place. The conversion of
water to steam is accompanied by a volume increase of approximately 1,500 times.

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In the opinion of management of the Company, it is likely that the steam created
from this thermal ablation will travel into the tissue surrounding the TMR
channels, which can greatly extend the zone of thermal injury. The patients who
might benefit from this type of treatment already have compromised cardiac
function and cannot afford to lose additional muscle function around each
channel to thermal injury. In contrast to the use of the Ho:YAG and the CO2
lasers, the excimer laser is not absorbed by water and, thus, there is little or
no steam created by photoablation. Management believes that no thermal injury
occurs from photoablation. However, no assurance to this effect can be given.
There can be both mechanical and chemical effects to the myocardium by using the
excimer laser. These mechanical and chemical effects include the creation of
gases and the vaporization of water. The bubbles created by this creation of
gases and vaporization of water can cause tearing in tissue within the
myocardium, which is not considered by management of the Company to be
significant. The use of the Ho:YAG and the CO2 lasers also causes this type of
vapor bubble formation. See "Business-Competition."

         Some of the companies attempting to develop laser driven TMR
technologies use flexible fibers capable of delivering the laser energy either
through a small incision in the chest or percutaneously through a catheter
inserted in the femoral artery in the groin. This method of delivering laser
energy has certain obstacles in optimizing the delivery of that energy. Both
infrared and UV laser radiation are difficult to transmit through fiberoptic
channels because of the high absorption of the fiber or high photon energy of
the light. Infrared lasers do not employ fiberoptics, since the energy output
would be absorbed by the medium. Thus, infrared lasers use mirrors to transmit
the radiation to the desired target. UV radiation has very high photon energies
capable of breaking down molecular bonds, and the only suitable solid material
capable of transmitting UV radiation is quartz (fused silica). Although quartz
has low absorption properties, it is still difficult to transmit the energy
through such fibers because the profile of the beam from the laser creates hot
spots that damage the internal structure of the fiberoptics. The Company has a
patented method of reducing these hot spots and the consequent damage.
Management of the Company believes that using an excimer laser has the following
additional benefits over hot lasers: (i) creation of TMR channels will avoid the
formation of steam bubbles that may travel to the brain; and (ii) the excimer
laser allows for the more rapid creation of TMR channels (discussed below)
leading to less operating room time. See "Business-Strategic Alliance with
Baxter Healthcare Corporation."

EXCIMER LASER SYSTEM FOR THE TREATMENT OF PSORIASIS.

         GENERAL. As of the date of this Report, the Company has developed an
excimer laser and laser delivery system for the treatment of psoriasis.
Psoriasis or autogenic skin cell proliferation is a chronic inflammatory skin
disease, for which there is no known cure. There are many different treatments,
both topical and systemic, that can clear psoriasis for periods of time. Plaque
psoriasis (PSORIASIS VULGARIS), the most common form, is characterized by
inflamed lesions topped with silvery white scales. Psoriasis can be limited to a
few plaques or it can cover moderate to extensive areas of skin. No one knows
exactly what causes psoriasis, although it is believed to be an immune medical
disorder. Normal skin cells mature in 28 to 30 days, but psoriasis skin cells
take only three (3) to six (6) days to mature, thus creating the silvery white
scales.

         According to the National Psoriasis Foundation ("NPF"), there are three
(3) approaches to the treatment of psoriasis: topical therapy (creams and
lotions), phototherapy (PUVA and UVB) and systemic medications. The Company's
excimer laser technology for the treatment of psoriasis, if successful, is
intended to replace and/or augment all of the current treatment modalities.

         The NPF estimates that psoriasis that affects more than 7,000,000
Americans and that between 150,000 and 260,000 new cases occur each year. An
estimated 10% to 20% of afflicted persons eventually contract psoriatic
arthritis, which attacks the ligaments around joints. Both genders are affected
by the condition, which is slightly more prevalent among women. Approximately
10% to 15% of the people who suffer from psoriasis are under the age of ten. The
NPF further estimates that over 1,500,000 patients suffering from psoriasis are
treated by dermatologists each year and that the overall current yearly cost to
treat psoriasis is estimated to be from $1.6 to $3.2 billion. In addition to
cost, the NPF estimates that 56,000,000 hours of work are lost each year by
psoriasis sufferers. Approximately 400 people in the United States per year die
from complications caused by psoriasis. An additional 400 people per year
receive Social Security benefits for disability due to psoriasis symptoms.
Management of the Company believes that one-half or more of all psoriasis
sufferers respond to currently available UV light treatments, who could receive
the benefits of the Company's treatment. According to the NPF, UVB treatments
are considered to be one of the most effective therapies for moderate to severe
psoriasis with the least risk. However, no assurance to this effect can be
given.

                                       7
<PAGE>

         Between March, 1998 and November, 1999, the Company entered into the
Clinical Trial Agreements to compare the effect of excimer laser light using its
excimer laser technology to the current UVB treatment being used to treat
psoriasis and other skin disorders. The Company provided prototype laser
equipment for pre-clinical dose response studies. The Company has agreed to
support the clinical trials with research grants of approximately $660,000, of
which $448,000 has been paid, as of the date of this Report. The final data from
the first of these clinical trial agreements was collected in December, 1998,
and formed the basis for a 510(k) submission to the FDA on August 4, 1999. The
four remaining studies are ongoing and have not been completed as of the date of
this Report. On January 27, 2000, FDA issued a 510(k) to the Company,
establishing that the Company's excimer laser psoriasis system has been
determined to be substantially equivalent to currently marketed devices for the
treatment of psoriasis. The Company introduced its psoriasis products for the
purposes of commercial application testing in March, 2000, and intends to
distribute the psoriasis treatment system for commercial use in July, 2000. As
of the date of this Report, the Company has generated no revenues from the
psoriasis treatment system.

         There are three (3) bases for the Company's belief that its excimer
laser system for treating psoriasis may replace and/or augment the current
phototherapy modalities in use to treat the symptoms of psoriasis. First, the
treatment is directly only on the unhealthy portions of skin. Second, fewer
treatments should be required. Third, the reduced exposure to UVB lamps should
reduce the risk of skin cancer. The Company has tested its excimer laser system,
as it compares to the UVB therapy currently being extensively used to control
psoriasis. In using UVB, the patient stands in a light box lined with special
UVB lamps and the whole body is radiated, other than protected areas such as
eyes and genitals. The need for long periods of treatment is due to the fact
that the healthy skin, as well as the psoriasis affected skin, is being treated
in the light boxes, so that the dosage or radiation must be controlled or the
patient will be severely burned. The Company's excimer laser, however, can be
used to treat only the skin area that is affected by psoriasis. Since it is
believed that skin that is affected by psoriasis is not as susceptible to UVB
radiation, the Company believes that a high dose of UVB applied directly to the
affected area significantly reduces the number of treatments and the time needed
to control psoriasis.

         TREATMENT OF PSORIASIS USING EXCIMER LASERS. The Company expects that
the number of treatments that will be needed to control psoriasis should
decrease from over 30, using alternative treatment methods, to less than ten
(10), using the Company's excimer laser treatment system. Further, the Company
estimates that the typical treatment time using the Company's excimer laser
treatment system will be greatly reduced. However, no assurance to this effect
can be given. The other benefits to the use of the Company's excimer laser
treatment system should be to reduce or eliminate the side effects of current
treatment modalities. UVB treatments have the same long term effects as chronic
sun exposure, which causes skin cancer and/or premature skin aging. It is hoped
that by treating only the psoriasis affected skin with the Company's excimer
laser treatment system, total radiation dosage will be reduced, thereby reducing
the chances of cancer and premature skin aging. However, no assurances to this
effect can be given.

         The Company's excimer laser equipment designed to treat psoriasis
generates UV light with a wavelength of 308 nm. The UVB light currently being
used in phototherapy of psoriasis has a wavelength of 310 nm. The Company
believes that the Company's excimer laser treatment system will be effective in
replacing other methods of treating psoriasis with UVB light. However, no
assurance to this effect can be given. The Company believes that the use of
fiber optics to deliver UV light allows for precise control of the light and an
ability to deliver the light to areas that are currently not accessible with
standard treatment methods (i.e., the scalp). The Company believes that its
excimer laser treatment system should become the preferred method to treat many
psoriasis plaques because the system can intensely treat affected areas without
affecting healthy skin with radiation, that would otherwise cause adverse side
effects. Current UVB therapy cannot deliver such dosages without causing
sickness as a result of radiation. The more intense doses of UV light will
result in faster response and fewer visits, all with fewer side effects. The
very narrow band of radiation from the excimer laser will also help avoid
potential mutanagenic effects of broadband UV light sources. There can be no
assurances that the Company's excimer laser technology will be successful in
treating psoriasis or result in commercially viable products. See
"Business-Government Regulation."

         On January 2, 1998, the Company and R. Rox Anderson, M.D., entered into
a consulting agreement (the "Anderson Agreement"), in which Dr. Anderson agreed
to provide consulting services to the Company to develop data in connection with
an IDE for the Company's psoriasis treatment products. As of May 21, 1999, the
Company established a Scientific Advisory Committee, of which Dr. Anderson is
the Chairman, for the purpose of providing management with critical analyses of
business opportunities and potential strategies for the Company's excimer laser
business. See "Management-Scientific Advisory Board."

                                       8
<PAGE>

EXCIMER LASER SYSTEM FOR TREATMENT OF TMR

         GENERAL. Heart muscle, like all tissues of the body, must be constantly
supplied with oxygen in order to function effectively. Oxygen is delivered to
the myocardium by the blood, which is distributed to the myocardium through the
right and left coronary arteries. If these arteries are narrowed or blocked, as
a result of atherosclerosis, oxygen-rich blood cannot supply the metabolic
demand of the myocardium. Cardiovascular disease eventually may cause ischemic
myocardium (oxygen-starved heart muscle tissue), often evidenced by severe and
debilitating angina (chest pains caused by lack of oxygen to the heart muscle),
which can progress to myocardial infarction (the death of an area of the heart
muscle). Advanced multi-vessel ischemic heart disease is typically treated with
bypass surgery.

         The Company's TMR System for the treatment of coronary heart disease
creates new channels for blood to flow to ischemic myocardium. Rather than
opening narrowed coronary arteries, the TMR System is intended to treat ischemic
myocardium directly, by lasing small channels through ischemic areas of the
heart, which connect directly with the left ventricle of the heart, a reservoir
of oxygen-rich blood. Management believes that these channels may provide new
pathways for blood flow into the heart muscle. However, there can be no
assurances to this effect.

         CARDIOVASCULAR DISEASE AND ALTERNATIVE TREATMENT METHODS. According to
the American Heart Association, cardiovascular disease, the partial or total
blockage of arteries, is the leading cause of death and disability in the United
States. Coronary artery disease accounts for approximately 1,000,000, or
one-half, of all deaths in the United States annually. Approximately 1,500,000
new cases of heart attacks or angina are reported each year. Over 13,000,000
Americans suffer from coronary heart disease and 350,000 new cases of heart
disease are diagnosed every year in the United States.

         Atherosclerosis, the principal form of cardiovascular disease, is
characterized by a progressive narrowing of the coronary arteries due to
accumulated plaque (lesions) on the walls of the arteries, which supply
oxygenated blood to the heart, potentially resulting in angina and damage to the
heart. Typically, the condition worsens over time and often leads to heart
attack or death. More than 6,000,000 Americans experience anginal symptoms per
year. Drug therapy may be effective for mild cases of coronary artery disease
and angina, either through medical effects on the arteries that improve blood
flow without reducing plaque or by decreasing the rate of formation of
additional plaque (i.e., by reducing blood levels of cholesterol).

         The primary therapeutic options for treatment of coronary artery
disease are drug therapy, percutaneous transluminal coronary angioplasty
("PTCA") or balloon angioplasty, including techniques, which augment or replace
PTCA, such as stent placement and atherectomy, and CABG or open heart bypass
surgery. The objective of each of the different approaches is to increase blood
flow through the coronary arteries to the heart. According to the American
Hospital Association, approximately 1,100 hospitals in the United States perform
cardiovascular related surgical procedures.

         According to the 1998 Heart and Stroke Facts Statistics published by
the American Heart Association, approximately 573,000 coronary bypass operations
were performed on 360,000 patients and 434,000 balloon angioplasty procedures
were performed in the United States on approximately 408,000 patients in 1995.
The American Heart Association estimates the cost of cardiovascular disease in
1997 at $259.1 billion, including physician and nursing services, hospital and
nursing home services, medications and lost productivity resulting from
disability. Hospital charges for bypass surgery are typically between $25,000 to
$45,000, and bypass surgery requires prolonged hospitalization and extensive
recuperation periods. The Company estimates that approximately $700,000,000 of
this market would have been applicable to the Company's TMR System, had it been
approved by the FDA in 1997, for use for TMR procedures that are not an adjunct
to coronary graft bypass surgery. However, no assurance to this effect can be
given.

         CABG is an open chest procedure developed in the 1960s, in which
conduit vessels are taken from elsewhere in the body and grafted to the blocked
coronary arteries, so that blood can bypass the blockage. CABG typically
requires use of a heart-lung machine to render the heart inactive (to allow the
surgeon to operate on a still, relatively bloodless heart) and involves
prolonged hospitalization and patient recovery periods. Accordingly, it is
generally reserved for patients with severe cases of coronary artery disease
("CAD") or those who have previously failed to receive adequate relief of their
symptoms from PTCA or related techniques. Unfortunately, most bypass grafts fail
within one to fifteen years following the procedure. Repeating the surgery
("re-do bypass surgery") is possible, but is made more difficult because of scar
tissue and adhesions that typically form, as a result of the first operation.
The American Heart Journal estimates that 12% of all CABG procedures in the
United States are re-do bypass surgeries. Moreover, for many patients, CABG is
inadvisable for various reasons, such as the severity of the patient's overall
condition, the extent of coronary artery disease or the small size of the
blocked arteries.

                                       9
<PAGE>

         PTCA is a less-invasive alternative to CABG, which was introduced as an
approved procedure in the early 1980s. PTCA is a procedure, in which a
balloon-tipped catheter is inserted into an artery, typically near the groin,
and guided to the areas of blockage in the coronary arteries. The balloon is
then inflated and deflated at each blockage site, thereby rupturing the blockage
and stretching the vessel. Although the procedure is usually successful in
widening the blocked channel, the artery often renarrows within six (6) months
of the procedure, a process called "restenosis," often necessitating a repeat
procedure. A variety of techniques for use in conjunction with PTCA have been
developed in an attempt to reduce the frequency of restenosis, including stent
placement and atherectomy. Stents are small metal frames delivered to the area
of blockage, using a balloon catheter that is deployed or expanded within the
coronary artery. The stent is a permanent implant intended to keep the channel
open. Atherectomy is a means of using mechanical, laser or other techniques at
the tip of a catheter to cut or grind away plaque.

         When these treatment options are exhausted, the patient is left with no
viable surgical alternative other than, in limited cases, heart transplantation.
TMR, currently under clinical investigation by the Company and available from
certain other companies, offers potential relief to a large class of patients
with end stage heart disease. There are an estimated 120,000 people worldwide
per year that qualify for TMR under the conditions set forth above.

         STRATEGIC ALLIANCE WITH BAXTER HEALTHCARE CORPORATION. On August 19,
1997, Acculase and Baxter executed the Baxter Agreement, which provides for an
alliance with Baxter, in which Acculase granted to Baxter an exclusive worldwide
right and license to manufacture and sell the Company's TMR System, consisting
of certain excimer laser technology products relating to the treatment of
cardiovascular and vascular disease and the disposable products associated
therewith. The Company agreed to manufacture the TMR System to the
specifications of Baxter at a schedule of prices, based upon the volume of TMR
Systems purchased by Baxter from the Company. Pursuant to the Baxter Agreement,
the Company agreed, for a period of five (5) years, not to engage in any
business competitive with the laser products licensed by Baxter. Further, Baxter
maintains, pursuant to the Baxter Agreement, a security interest in certain
patents owned by the Company related to the TMR System to secure the Company's
performance under the Baxter Agreement and licenses. Failure of the Company to
perform its obligations under the Baxter Agreement could result in the loss of
the patents subject to such security interest. The Baxter Agreement expires upon
the expiration of the last to expire licensed patent, which is currently
scheduled to expire in 2008. However, Baxter may terminate the Baxter Agreement
at any time upon five (5) days' written notice. Due to Baxter's strong worldwide
marketing presence, relationships with leading clinicians and regulatory
expertise, Baxter is absorbing many of the significant expenses of bringing the
Company's TMR products to market. See "Business-Intellectual Property,"
"Business-Research and Development" and "Business-Markets and Marketing."

         Pursuant to the terms of the Baxter Agreement, Baxter has delivered the
first two (2) TMR Systems to Baxter. Baxter has paid the Company an aggregate of
$1,968,000, of which $1,550,000 was received for the two (2) TMR Systems and
$418,000 was received for certain advances for additional excimer laser systems
and to obtain Certification European (CE) ("CE Mark") compliance in the European
Union ("EU"), a requirement for Baxter to sell the TMR Systems within the
European Economic Area ("EEA"). In addition, Baxter has agreed to: (i) pay to
the Company a royalty of 5% of the sales price received for each disposable
product sold in the United States and 10% of the sales price received for each
disposable product sold throughout the rest of the world, or if the laser
equipment is sold on a "per treatment" basis, the imputed average sales price
based on average sales, other than on a "per treatment" basis, calculated
quarterly for such disposable products sold, adjusted to amortize and recapture,
over a 36-month period, Baxter's cost of manufacturing such products; (ii)
purchase from the Company certain existing excimer laser systems for
cardiovascular and vascular disease; (iii) fund the total cost of obtaining
regulatory approvals worldwide for the use of the TMR System for the treatment
of cardiovascular and vascular disease; (iv) fund all sales and marketing costs
related to the introduction and marketing of the TMR System to treat
cardiovascular and vascular disease; and (v) pay a fixed price per laser for the
first eight (8) lasers to be manufactured by the Company and, thereafter, to pay
a per unit price on a reducing scale from $75,000 to $45,000 per TMR System,
based on the annual number of TMR Systems purchased by Baxter. Prices for TMR
Systems may be adjusted annually after three (3) years, based upon changes in
costs of materials (but not overhead or profit margin). See "Business-Government
Regulation," "Business-Markets and Marketing," "Business-Competition" and
"Business-Intellectual Property."

                                       10
<PAGE>

         In September, 1997, the Company, PMG and Baxter agreed, in connection
with fulfilling the obligations of the parties under the Baxter Agreement, that
the Company needed to acquire the Lasersight License, for a certain patent,
which relates to the use of excimer lasers for the cardiovascular and vascular
markets. On September 23, 1997, Baxter purchased certain patents rights to
related patents from Lasersight for $4,000,000. In December, 1997, Acculase
acquired from Baxter a license to the patent rights for $4,000,000, from the
proceeds of a private placement of the Company's securities. See
"Business-Intellectual Property" and "Certain Relationships and Related
Transactions."

         The Company is in the process of negotiating modifications to the
Baxter Agreement. No assurance can be given that the Company will successfully
complete such negotiations.

         TMR TREATMENT USING EXCIMER LASERS. TMR is a surgical procedure, which
may be performed on the beating heart, in which a laser device is used to create
pathways through the myocardium directly into the heart chamber and as an
adjunct to coronary graft bypass surgery. The pathways through the myocardium
are intended to enable improved perfusion, or blood supply, to the myocardium
from the heart chamber, reducing angina in the patient. TMR potentially can be
performed using any of several different surgical approaches, including open
chest surgery, minimally invasive surgery through small openings in the chest or
percutaneous surgery, involving the use of a laser-tipped catheter threaded
through a peripheral artery. The Company is pursuing a treatment protocol using
small openings in the chest for better access to the myocardium. In connection
with TMR, as an adjunct to open heart surgery, the treatment protocol calls for
the patient's chest to be open. TMR, in some protocols, is designed to be less
invasive and less expensive than bypass surgery. Also, TMR may be useful in
conjunction with angioplasty or bypass surgery to obtain more complete
revascularization. TMR potentially offers end-stage heart disease patients, who
are not candidates for PTCA or CABG, a means to alleviate their symptoms and
improve their quality of life. No assurance can be given that the TMR System
will be found to be effective in relieving symptoms of CAD or that it will
receive government approval for commercialization. See "Business-Government
Regulation."

         The main challenge in treating atherosclerosis is to allow blood flow
to the heart muscle without significantly damaging the heart. TMR does not
target the coronary arteries for treatment. During the TMR procedure, the
patient is given general anesthesia, and an incision is made in the patient's
side between the ribs, exposing the heart. Laser systems competitive with the
TMR System use much greater energy and power levels, and are required to
synchronize the laser pulse with the electrocardiogram to protect the patient
from adverse arrhythmias, or excessive energy levels, if the heart is not full
of blood, thereby acting as a laser pulse "backstop." The TMR System does not
need this synchronization due to the lower overall power and energy requirements
of the excimer laser. Animal research results using the Company's TMR System
have indicated that excimer laser channels remain open for extended periods of
time, whereas no such data is available from any of the other competitive laser
TMR products. Management believes that these open channels may provide pathways
for oxygenated blood from the ventricle to the heart muscle to get into the
heart muscle, which is the ultimate purpose of such procedures as CABG and
angioplasty. However, no assurance to this effect can be given.

         Based on clinical results to date, the Company believes that its TMR
System will provide the following benefits, including: (i) use as an alternative
to bypass or angioplasty procedures, or on patients who would otherwise not be
suitable for coronary bypass surgery; (ii) the TMR System may allow the surgeon
to provide oxygenated blood to areas of the heart muscle that are not accessible
by coronary bypass grafts. With the advent of these procedures, where CABG
surgery is performed on a beating heart, management believes that TMR will be an
effective complement to this procedure. TMR can be performed on the anterior,
posterior and lateral walls of the heart, whereas other procedures usually are
only performed on the anterior wall of the heart; (iii) management believes the
medical costs associated with the use of the TMR System will be less than the
costs of traditional bypass surgery, which requires a larger surgical team, more
supporting equipment and a longer hospital stay. The cost of TMR in some
situations may also be less than angioplasty, when combinations of additional
devices, such as atherectomy catheters, stents or intravascular ultrasound, are
required; (iv) since the use of the TMR System is less invasive and does not
involve stopping and starting the heart, the patient may recover more quickly
than if conventional bypass techniques were used, with a potentially reduced
risk of complications, as compared with the risks associated with bypass
surgery; and (v) TMR may potentially be used on post-transplant patients
suffering from chronic rejection atherosclerosis. Presently, the only treatment
for this condition is re-transplantation. No assurance can be given that any of
these benefits will be obtained by patients receiving TMR or that, if they are,
such benefits will result in revenues or profitable operations to the Company,
or the FDA will approve the TMR System. See "Business-Government Regulation."

                                       11
<PAGE>

DISCONTINUANCE OF THE COMPANY'S NON-EXCIMER LASER BUSINESS OPERATIONS

         The Company's former business strategy consisted of the development of
a wide range of laser products using different solid-state lasers. Between 1986
and the date of this Report, the Company sold over 1,000 lasers, usually on a
private label basis, to other manufacturers. The Company also considered
pursuing a strategy of using its excimer laser technology for a photolithography
product, which was abandoned. The Company's former strategies proved to be
unsuccessful, in the opinion of then current management of the Company. Although
the Company generated revenues from the sale of its products, former management
believed that the Company would never be able to operate profitably in the
markets that the Company was then doing business. The Company currently believes
that its excimer laser technology provides the basis for reliable cost-effective
systems that will increasingly be used in connection with a variety of
applications. Accordingly, the Company has decided to discontinue its business
operations related to the Company's former business strategy and is focused
solely on excimer laser products for various medical applications.

         To facilitate the Company's focus on excimer laser technology, the
Company has been attempting to sell certain of its non-excimer laser assets,
which are related to its business operations at its Orlando, Florida and
Wilmington, Massachusetts facilities. The Company did not complete the sale of
certain of its assets related to these operations pursuant to an agreement with
one party. The Company intends to discontinue its Florida business operations on
or before the end of April, 2000, and is in negotiations to sell certain assets
related to these business operations. There can be no assurances that the
Company will be able to complete such a proposed transaction. As of April 7,
2000, all but approximately $465,000 of the debts related to these operations
have been paid from the proceeds of the August 9, 1999 Financing resulting in
gross proceeds of $9,310,374 to the Company and the March 16, 2000 Financing
resulting in net proceeds of approximately $14,570,000 to the Company and the
sale of certain assets related to the Company's non-excimer laser operations.
The Company paid $950,000 in cash to the landlord for the Florida lease in
connection with the satisfaction of a judgment and settlement of certain claims
against the Company in the aggregate amount of $1,114,000. Further, as of April
6, 2000, the Company closed the transactions with respect to the sale of certain
assets and the grant of an exclusive license for certain patents related to
non-excimer lasers related to the Company's Massachusetts business operations to
Laser Components GmbH ("Laser Components"), for a purchase price of $213,000.
Laser Components is unaffiliated with the Company. In addition, Laser Components
assumed the Company's prospective obligations under the Company's Massachusetts
office lease. The Company has discontinued its Massachusetts operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business-Discontinuance of the Company's Non-Excimer Laser
Business Operations."

         Management's decision to suspend these business operations is
consistent with the Company's new business strategy and has resulted in the
discontinuance of business operations which generated approximately 76% of the
Company's revenues for 1998 and 1999. The Company has retained accounts
receivable of an aggregate of $176,179 (net of an allowance of $83,000), at
December 31, 1999, from these business operations and certain of its patents
related to its non-excimer laser systems.

         THE COMPANY'S FORMER LASER PRODUCTS. The Company has historically
produced other laser applications and products. These lasers were sold in two
(2) markets, medical applications and scientific applications.

         In the first of these markets, the Company developed a number of
medical lasers, such as Ruby Laser Systems, ND: YAG Laser Systems and
Alexandrite Laser Systems. Only the Ruby Laser System has generated any
meaningful revenues to the Company since 1995. Set forth below is a brief
summary of the Company's non-excimer medical laser systems.

         RUBY LASER SYSTEM. The use of solid-state laser systems, such as
dermatology for the treatment of benign pigmented lesions of the skin, such as
nevus of ota, moles, age spots and tattoos, represents an extension of the
Company's scientific ruby laser technology, a technology that was one of the
earliest laser systems developed by the Company for commercial use. Laser energy
created by the ruby laser is highly absorbed by pigmented lesions, but poorly
absorbed by normal skin. Using the ruby laser system, therefore, allows the
physician to treat the skin lesion effectively without anesthesia and without
causing normal pigmented changes or scarring. The Company began manufacturing
and shipping these systems in August, 1991 on a private label basis. The
manufacturing/distribution agreement with the customer officially terminated in
1993. In May, 1995, the Company resumed production of the ruby laser using a
distributor network for marketing the product. Ruby laser revenue for fiscal
years ended December 31, 1997, 1998 and 1999, were $180,000, $65,000 and none,
respectively. Sales were limited due to prolonged engineering time to develop
the higher energy, longer pulse width system and by the inability of the
Company's customer to establish a strong distribution network while awaiting the
upgraded product.

                                       12
<PAGE>

         SCIENTIFIC LASER SYSTEMS. The Company's scientific products had been
sold into niche markets for use principally in applications such as
spectroscopy, calibration, alignment and ultra-fast event measurement by
universities, government and private industry research laboratories. The Company
had manufactured and marketed scientific products based on a wide range of
technologies which include: nitrogen laser systems, nitrogen pumped dye laser
systems, solid state mid infrared laser systems, as well as laser diodes and
laser diode spectrometers.

         In February, 1989, the Company acquired Laser Analytics, formerly a
wholly-owned subsidiary of Spectra Physics, Inc., and an unaffiliated third
party. From the date of the acquisition until the sale of the assets of Laser
Analytics, the Company has funded the continued development efforts focused
primarily on improvements in the production of tunable infrared laser diodes.
This technology uses a spectrometer based on the Company's tunable infrared
laser diode to measure naturally occurring, non-radioactive stable isotopes in
exhaled breath. These measurements are useful in diagnosing such medical
problems as diabetes, lung and liver dysfunction and digestive tract diseases,
such as the detection of helicobacter pylori, which has been shown to be a
precursor to liver and stomach cancer.

         The tunable diode lasers are based on lead-salt semiconductor
technology for use in advanced research, such as high-resolution molecular
spectroscopy, combustion diagnostic studies and atmospheric chemistry. These are
"high end" instruments designed for research, which require a high level of
sophistication and performance. These lasers are sold both as a standardized
unit and as a customized unit. In addition, the Company has designed a system
using the tunable diode laser technology for pollution monitoring applications.
The Company has granted an exclusive license to Laser Components to certain
patents which relate to the manufacture and marketing of tunable lead salt diode
lasers.

GOVERNMENT REGULATION

         The Company's approved products, products awaiting approval and its
research and development activities are subject to regulation by numerous
governmental authorities, principally, the FDA and corresponding state and
foreign regulatory agencies. The FDC Act, the regulations promulgated
thereunder, and other federal and state statutes and regulations, govern, among
other things, the pre-clinical and clinical testing, design, manufacture,
safety, efficacy, labeling, storage, record keeping, advertising and promotion
of medical devices and drugs, including the products currently under development
by the Company. Product development and approval within this regulatory
framework takes a number of years and involves the expenditure of substantial
resources.

         UNITED STATES PRODUCT REGULATION. In the United States, medical devices
are classified into three (3) different classes, Class I, II and III, on the
basis of controls deemed reasonably necessary to ensure the safety and
effectiveness of the device. Class I devices are subject to general controls
(i.e. labeling, pre-market notification and adherence to the FDA's good
manufacturing practice ("GMP") requirements and quality system regulations
"QSR"). Class II devices are subject to general and special controls (i.e.
performance standards, postmarket surveillance, patient registries and FDA
guidelines). Class III devices are those, which must receive premarket approval
by the FDA to ensure their safety and effectiveness (i.e. life-sustaining,
life-supporting and implantable devices, or new devices, which have been found
not to be substantially equivalent to legally marketed devices).

         CLEARANCE PROCEDURE. Before a new medical device can be marketed, such
as the Company's excimer laser for the treatment of psoriasis, marketing
clearance must be obtained through a premarket notification under Section 510(k)
of the Federal Food, Drug, and Cosmetics Act ("FDC Act") or a PMA application
under Section 515 of the Food and Drug Administration Modernization Act of 1997
("FDA Act"). A 510(k) clearance will typically be granted by the FDA, if it can
be established that the device is substantially equivalent to a "predicate
device," which is a legally marketed Class I or II device or a preamendment
Class III device (i.e. one that has been marketed since a date prior to May 28,
1976), for which the FDA has not called for PMAs. The FDA has been requiring an
increasingly rigorous demonstration of substantial equivalence, which may
include a requirement to submit human clinical trial data. It generally takes
four (4) to twelve (12) months from the date of a 510(k) submission to obtain
clearance, but it may take longer. Acculase filed its 510(k) for its psoriasis
product on August 4, 1999, and on January 27, 2000, the FDA issued the 501(k)
for the Company's psoriasis product. The Company's excimer laser psoriasis
system has been determined to be substantially equivalent to currently marketed
devices for the treatment of psoriasis. The Company believes that it has
received adequate funds from the March 16, 2000 Financing to begin marketing its
psoriasis product.

                                       13
<PAGE>

         The FDA may determine that a medical device is not substantially
equivalent to a predicate device, or that additional information is needed
before a substantial equivalence determination can be made for purposes of
obtaining a 510(k) clearance. A "not substantially equivalent" determination, or
a request for additional information, may prevent or delay the market
introduction of new products that fall into this category. For any devices that
are cleared through the 510(k) process, modifications or enhancements that could
significantly affect the safety or effectiveness, or that constitute a major
change in the intended use of the device, will require new 510(k) submissions.

         A PMA application may be required, if a proposed device is not
substantially equivalent to a legally marketed Class I or II device, or if it is
a preamendment Class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device, typically including the results of
clinical trials, bench tests and laboratory and animal studies. The PMA must
also contain a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must include the proposed labeling,
advertising literature and any training materials. The PMA process can be
expensive, uncertain and lengthy, and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.

         Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit a
substantive review. If the FDA so determines, the FDA will accept the
application for filing. Once the submission is accepted for filing, the FDA
begins an in-depth review of the PMA. The FDA review of a PMA application
generally takes one to three years from the date the PMA is accepted for filing,
but may take significantly longer. The review time is often significantly
extended by the FDA's asking for more information or clarification of
information already provided in the submission. During the review period, an
advisory committee, typically a panel of outside clinicians, may be convened to
review and evaluate the application and provide a recommendation to the FDA as
to whether the device should be approved. The FDA accords substantial weight to,
but is not bound by, the recommendation of the advisory panel. Toward the end of
the PMA review process, the FDA generally will conduct an inspection of the
manufacturer's facilities to ensure compliance with applicable GMP requirements,
which include elaborate testing, control documentation and other quality
assurance procedures. The Company has not yet undergone an FDA GMP inspection,
and does not anticipate that it will undergo such an inspection until after
filing of an initial PMA application by Baxter for the TMR System.

         If FDA evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contain a number of conditions that must be met
in order to secure final approval of the PMA. When and if those conditions have
been fulfilled to the satisfaction of the FDA, the FDA will issue a PMA approval
letter, authorizing marketing of the device for certain indications. If the
FDA's evaluation of the PMA application or manufacturing facilities is not
favorable, the FDA will deny approval of the PMA application or issue a
"non-approvable" letter. The FDA may determine that additional clinical trials
are necessary, in which case the PMA may be delayed for one or more years, while
additional clinical trials are conducted and submitted in an amendment to the
PMA. Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process, may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.

         HUMAN CLINICAL TRIALS. If human clinical trials of a device are
required, either for a 510(k) submission or a PMA application, or, in the
opinion of the FDA, if the device presents a "significant risk," the sponsor of
the trial (usually the manufacturer or the distributor of the device) must file
an IDE application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate IRBs, human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs without the need for FDA approval. Submission of an IDE
does not give assurance that the FDA will approve the IDE and, if it is
approved, there can be no assurance that the FDA will determine that the data
derived from the studies support the safety and efficacy of the device or
warrant the continuation of clinical studies.

                                       14
<PAGE>

         Sponsors of clinical trials are permitted to sell investigational
devices distributed in the course of the study, provided such compensation does
not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or investigator may make a change to the investigational plan that may
affect its scientific soundness or the rights, safety or welfare of human
subjects.

         STATUS OF BAXTER'S PMA APPLICATION FOR THE TMR SYSTEM. The TMR System
is anticipated to be regulated as a Class III medical device and to require PMA
approval prior to being marketed in the United States. Although the Company has
received an IDE from the FDA permitting the Company to conduct clinical trials
of its TMR System in the United States, and such clinical trial has commenced,
there can be no assurance that data from such studies will demonstrate the
safety and effectiveness of the TMR System or will adequately support a PMA
application for the product. In the first quarter of 1998, the Company
transferred the IDE to Baxter in connection with the Baxter Agreement. In
addition, Baxter may be required to obtain additional IDEs for other
applications of the TMR System, and for other products that the Company develops
that are regulated by the FDA as medical devices. There is no assurance that
data, typically the results of animal and laboratory testing, that may be
provided by Baxter in support of future IDE applications, will be deemed
adequate for the purpose of obtaining IDE approval or that Baxter will obtain
approval to conduct clinical studies of any such future product.

         In January, 1995, management of Acculase met with representatives of
the FDA to discuss preclinical data submission requirements necessary before
initiating human trials of the TMR System. Subsequently, animal testing of the
TMR System was performed in collaboration with several heart research
institutions in the United States, culminating in a trial at The New York
Hospital Cornell Medical Center, which serves as the pre-clinical basis for an
IDE that was granted by the FDA in August, 1996. All of the Company's rights
under the IDE have been assigned to Baxter. Pursuant to this IDE, Phase I human
clinical studies began at New York Hospital Cornell Medical Center and at Good
Samaritan Hospital in Los Angeles, California. The IDE submission provides for
the TMR System to be used in open-heart procedures on patients diagnosed with
end stage heart disease. The Phase I trial includes only patients that are
suffering from ischemia and angina, and who are not candidates for CABG or for
balloon angioplasty. Based on the results of the Phase I trial, Baxter has
petitioned for a Phase II trial. However, no assurance can be given as to when
or if such petition will be granted. The Company is advised that Baxter intends
to expand the Phase II studies to a multi-site trial (more than 10 institutions)
and expand the procedure to include patients who are candidates for incomplete
CABG revascularization. However, no assurance to this effect can be given. The
Company does not expect Baxter to submit a PMA to the FDA before the year 2001,
and possibly later. Baxter will be required to obtain additional IDEs for other
applications of the TMR System and for other products that the Company develops
that are regulated by the FDA as medical devices.

         ONGOING REGULATION. If clearance or approval is obtained, any device
manufactured or distributed by the Company will be subject to pervasive and
continuing regulation by the FDA. The Company will be subject to routine
inspection by the FDA and will have to comply with the host of regulatory
requirements that usually apply to medical devices marketed in the United
States, including labeling regulations, GMP requirements, Medical Device
Reporting ("MDR") regulation (which requires a manufacturer to report to the FDA
certain types of adverse events involving its products), and the FDA's
prohibitions against promoting products for unapproved or "off-label" uses. The
Company's failure to comply with applicable regulatory requirements could result
in enforcement action by the FDA, which could have a material adverse effect on
the Company's business, financial condition and results of operations.

         The FDA Act makes changes to the device provisions of the FDC Act and
other provisions in the FDC Act affecting the regulation of devices. Among other
things, the changes will affect the IDE, 510(k) and PMA processes, and also will
affect device standards and data requirements, procedures relating to
humanitarian and breakthrough devices, tracking and postmarket surveillance,
accredited third party review and the dissemination of off-label information.
The Company cannot predict how or when these changes will be implemented or what
effect the changes will have on the regulation of the Company's products and
anticipated products.

         If the FDA believes that a company is not in compliance with law, it
can institute proceedings to detain or seize products, issue a recall, enjoin
future violations and assess civil and criminal penalties against that company,
its officers and its employees. Failure to comply with the regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, regulations
regarding the manufacture and sale of the Company's products are subject to
change. The Company cannot predict the effect, if any, that such changes might
have on its business, financial condition or results of operations.

                                       15
<PAGE>

         In complying with the GMP and QSR regulations, manufacturers must
continue to expend time, money and effort in product, record keeping and quality
control to assure that the product meets applicable specifications and other
requirements. The FDA periodically inspects device-manufacturing facilities in
the United States in order to assure compliance with applicable GMP
requirements. The FDA, under GMP guidelines, requires the Company to carry
certain inventories of its medical lasers for emergency medical service.
Typically, major service problems must be responded to within 24 hours. The
Company is not required by any regulatory body to keep inventories on hand to
meet service or delivery issues. Certain raw materials have lead times of
greater than sixteen (16) weeks. The Company keeps a safety stock of these
items, when appropriate. The Company estimates that less than $100,000 of
current inventory is set-aside for safety stock. Failure of the Company to
comply with the GMP regulations or other FDA regulatory requirements could have
a material adverse effect on the Company's business, financial condition or
results of operations.

         OTHER REGULATION. The Company is also subject to the Radiation Control
for Health and Safety Act with laser radiation safety regulations administered
by the Center for Devices and Radiological Health ("CDRH") of the FDA. These
regulations require laser manufacturers to file new product and annual reports,
to maintain quality control, product testing and sales records, to incorporate
certain design and operating features in lasers sold to end users and to certify
and label each laser sold (except those sold to private label customers), as
belonging to one of four (4) classes, based on the level of radiation from the
laser that is accessible to users. Various warning labels must be affixed and
certain protective devices installed, depending on the class of product. CDRH is
empowered to seek fines and other remedies for violations of the regulatory
requirements. As of the date of this Report, the Company has filed the
documentation with CDRH for its laser products requiring such filing, and has
not experienced any difficulties or incurred significant costs in complying with
such regulations.

         THIRD PARTY REIMBURSEMENT IN THE UNITED STATES. In the United States,
healthcare providers, including hospitals and physicians, that purchase devices
with medical applications for treatment of their patients, generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to reimburse all or a part of the costs and fees
associated with the procedures performed using these devices. A particular
treatment is generally purchased by hospitals, which then bill various
third-party payors, such as government programs and private insurance plans, for
the healthcare services provided to their patients. Third-party payors may deny
reimbursement if they determine that a prescribed device has not received
appropriate regulatory clearances or approvals, is not used in accordance with
cost-effective treatment methods, as determined by the payor, or is
experimental, unnecessary or inappropriate. If the FDA clearance or approval
were received, third-party reimbursement would also depend upon decisions by
HCFA for Medicare, as well as by individual health maintenance organizations,
private insurers and other payors.

         The success of the Company's marketing plan for its psoriasis treatment
products will depend on, among other things, the ability of healthcare providers
to obtain satisfactory reimbursement from third-party payors for medical
procedures in which the Company's psoriasis treatment products are used. The
Company has not yet applied to HCFA for the right to reimbursement for the costs
of its psoriasis treatment products. The Company expects that, when such
application for the right to reimbursement is made, the process will take from
18 to 24 months, and no assurance can be given that a favorable response will be
received from HCFA. If HCFA does not grant the right to reimbursement, it could
have a material adverse effect on the Company's business. However, in the first
three years after the commercial introduction of the Company's psoriasis
treatment products in July, 2000, Company does not believe that HCFA
reimbursement is required for the Company to be financial successful. However,
no assurance to that effect can be given. See "Business- Markets and Marketing."

         Certain third-party payors, such as Medicare, determine whether to
provide coverage for a particular procedure and then reimburse hospitals for
inpatient medical services at a prospectively fixed rate based on the diagnosis
related group ("DRG") to which the case is assigned. DRG assignment is based on
the diagnosis of the patient and the procedures performed. The fixed rate of
reimbursement established by Medicare is independent of the hospital's cost
incurred for the specific case and the specific devices used. Medicare and other
third-party payors are increasingly scrutinizing whether to cover new products
and the level of reimbursement for covered products. In April, 1999, HCFA
announced that as of July 1, 1999, Medicare intermediaries and carriers would be
instructed to cover the costs of TMR for patients with certain severe angina,
which have not responded to standard medical treatment. No assurance can be
given that HCFA's policy change will result in the generation of revenue to the
Company. It is important that the hospital and physician providers, the
insurance industry, the health plan underwriters, employers and patients
understand the clinical and economic benefits of TMR, as indicated by the IDE
studies. Study results are concurrent with the quality of care and economic
issues currently driving the healthcare market. The market for the Company's
products also could be adversely affected by future legislation to reform the
nation's healthcare system or by changes in industry practices regarding
reimbursement policies and procedures.

                                       16
<PAGE>

         Third-party payors that do not use prospectively fixed payments
increasingly use other cost-containment processes that may pose administrative
hurdles to the use of the Company's products. Potential purchasers must
determine whether the clinical benefits of the Company's TMR Systems justify the
additional cost or the additional effort required to obtain prior authorization
or coverage and the uncertainty of actually obtaining such authorization or
coverage.

         Physician services are reimbursed by Medicare based on a physician fee
schedule coding system. There is no assurance the codes that will be used for
submitting claims for TMR procedures using the Company's products will result in
Medicare payment levels that physicians consider to be adequate. These codes and
their associated weights are used by many other third-party payors, in addition
to Medicare. A failure by physicians to receive what they consider to be
adequate reimbursement for the TMR procedures, in which the Company's products
are used, could have a material adverse effect on the Company's business,
financial condition and results of operations.

         INTERNATIONAL PRODUCT REGULATION. The Company has received ISO
9001/EN46001 certification for its psoriasis and its TMR systems. This
authorizes the Company to affix a CE Mark to its products as evidence that they
meet all European Community quality assurance standards and compliance with
applicable European medical device directives for the production of its medical
devices. This will enable the Company to market its products in all of the
member countries of the EU. The Company also will be required to comply with
additional individual national requirements that are outside the scope of those
required by the EEA.

         ISO standards were developed by the International Organization for
Standards ("ISO") of the European Community ("EC") as a tool for companies
interested in increasing productivity, decreasing cost and increasing quality.
The EC uses ISO standards to provide a universal framework for quality assurance
and to ensure the good quality of products and services across borders. The ISO
9000 standards have facilitated trade throughout the EC, and businesses and
governments throughout the world are recognizing the benefit of the globally
accepted uniform standards. Any manufacturer utilized for purposes of
manufacturing the Company's products will be required to obtain ISO
certification to facilitate the highest quality products and the easiest market
entry in cross-border marketing. This will enable the Company to market its
products in all of the member countries of the EU. The Company also will be
required to comply with additional individual national requirements that are
outside the scope of those required by the EEA.

         Failure to comply with applicable regulatory requirements can result in
fines, injunctions, civil penalties, recalls or seizures of products, total or
partial suspensions of production, refusals by foreign governments to permit
product sales and criminal prosecution. Furthermore, changes in existing
regulations or adoption of new regulations or policies could prevent the Company
from obtaining, or affect the timing of, future regulatory approvals or
clearances. There can be no assurance that the Company will be able to obtain
necessary regulatory clearances or approvals on a timely basis, or at all, or
that the Company will not be required to incur significant costs in obtaining or
maintaining such foreign regulatory approvals. Delays in receipt of, or failure
to receive, such approvals or clearances, the loss of previously obtained
approvals or clearances or the failure to comply with existing or future
regulatory requirements could have a material adverse effect on the Company's
business, financial condition and results of operations. Any enforcement action
by regulatory authorities with respect to past or future regulatory
noncompliance could have a material adverse effect on the Company's business,
financial condition and results of operations.

         The time required to obtain approval for sale in various foreign
countries may be longer or shorter than that required for FDA approval for
United States sales, and the requirements may differ. In addition, there may be
foreign regulatory barriers other than premarket approval. The FDA must approve
exports of devices that require a PMA, but are not yet approved domestically,
unless they are approved for sale by any member country of the EEA and the other
"listed" countries, including Australia, Canada, Israel, Japan, New Zealand,
Switzerland and South Africa, in which case, they can be exported for sale to
any country without prior FDA approval. In addition, an unapproved device may be
exported without prior FDA approval to the listed countries for investigational
use in accordance with the laws of those countries. To obtain FDA export
approval, when required, the applicant must provide the FDA with data and
information to demonstrate that the device: (i) is not contrary to public health
and safety; and (ii) has the approval of the country to which it is intended for
export. To allow the FDA to determine that export of a device is not contrary to
public health and safety, the applicant is required to submit basic data
regarding the safety of the device, unless the device is the subject of an
FDA-approved IDE and the device will be marketed or used for clinical trials in
the importing country for the same intended use, or at least two IRBs in the
United States have determined that the device is a non-significant risk device
and the device will be marketed or used for clinical trials in the importing
country for the same intended use. The applicant also must submit a letter to
the FDA from the foreign country approving importation of the device.

                                       17
<PAGE>

         Now that the Company has obtained the CE Mark approval for its excimer
laser products, it will be subject to continued supervision by the notified body
and will be required to report any serious adverse incidents to the appropriate
authorities. The Company also will be required to comply with additional
national requirements that are outside the scope of EEA regulations. As of the
date of this Report, no application has been made outside the United States. The
Company is informed that Baxter anticipates that it will be in a position to
distribute the TMR System in Europe and Japan, once the necessary filings have
been approved. No assurance can be given that distribution will occur when
anticipated by Baxter, if at all. Even if distribution begins, no assurance can
be given that distribution of the TMR System by Baxter will result in sales of
the TMR System or revenues or profits to the Company.

         FOREIGN THIRD PARTY REIMBURSEMENTS. If the Company obtains the
necessary foreign regulatory registrations or approvals, market acceptance of
the Company's products in international markets would be dependent, in part,
upon the availability of reimbursement within prevailing healthcare payment
systems in foreign countries. Reimbursement and healthcare payment systems in
international markets vary significantly by country, and include both government
sponsored healthcare and private insurance. Although the Company is advised that
Baxter intends to seek international reimbursement approvals for the TMR System,
there can be no assurance any such approvals will be obtained in a timely
manner, if at all. In the case of the Company's psoriasis treatment products,
the Company intends to seek international reimbursement approvals, although the
timing of seeking such approvals has not been determined. Failure to receive
international reimbursement approvals could have a material adverse effect on
market acceptance of the Company's products in the international markets in
which such approvals are sought.

         The Company believes the overall escalating cost of medical products
and services has led, and will continue to lead, to increased pressures on the
healthcare industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance in either the United States or international markets that third-party
reimbursement and coverage will be available or adequate, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation or reimbursement policies of third-party payors will not
otherwise adversely affect the demand for the Company's products or its ability
to sell its products on a profitable basis. The unavailability of third-party
payor coverage or the inadequacy of reimbursement could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, fundamental reforms in the healthcare industry in the United States
and Europe continue to be considered, although the Company cannot predict
whether or when any healthcare reform proposals will be adopted and what impact
such proposals might have.

         Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed healthcare systems that control reimbursement for new devices
and procedures. In most markets, there are private insurance systems, as well as
government managed systems. There can be no assurance that reimbursement for the
Company's products will be available in the United States or in international
markets under either government or private reimbursement systems, or that
physicians will support and advocate reimbursement for procedures using the
Company's products. Failure by hospitals and other users of the Company's
products to obtain reimbursement from third-party payors, or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing the Company's products, would have a material adverse
effect on the Company's ultimate business prospects. Moreover, management is
unable to predict what additional legislation or regulation, if any, relating to
the healthcare industry or third-party coverage and reimbursement may be enacted
in the future, or what effect such legislation or regulation would have.

SOURCES AND AVAILABILITY OF RAW MATERIALS.

         Management believes that the Company currently has good relationships
with vendors of materials for its lasers. Most major components and raw
materials, including solid state laser rods, laser crystals, optics and
electro-optic devices are available from a variety of sources. The Company does
not rely on sole source vendors. Cash flow constraints are the main limiting
factors in parts availability.

                                       18
<PAGE>

PRODUCT WARRANTIES

         The Company's standard warranty on most products is one year for parts
and labor. Consumables have a ninety (90) day warranty period. Selected medical
products have a 12-month parts only warranty. During the warranty period, the
Company pays shipping charges one way. In connection with the Baxter Agreement,
the Company has agreed to warrant products for twelve (12) months from the date
of delivery to Baxter's customer or eighteen (18) months from the date shipped
by the Company, whichever is less. The Company warrants that its products are
free from defects in workmanship, materials and handling. The Company has
established a reserve for warranty costs based upon the estimated costs to be
incurred over the warranty period of the Company's products. The Company does
not provide the right to return units of its TMR System. In some cases,
demonstration equipment is sent to the customer prior to the sale to determine
suitability. In rare cases, the Company has allowed returns when accompanied by
a substantial restocking fee

PRODUCT LIABILITY INSURANCE

         The Company maintains liability insurance with coverage limits of
$3,000,000 per occurrence. Although the Company has never been subject to a
product liability claim, there can be no assurance that the coverage limits of
the Company's insurance policies will be adequate or that one or more successful
claims brought against the Company would not have a material adverse effect upon
the Company's business, financial condition and results of operations.

RESEARCH AND DEVELOPMENT

         The Company's research and development emphasis has shifted from pure
research to product modification and development to meet new market demands. The
Company has expended its own funds for research and development with respect to
its TMR and psoriasis treatment products. Baxter does not pay for any research
and development for the Company's cardiovascular and vascular related product
applications. However, Baxter is paying for all costs related to regulatory
matters, which, if successful, will enable the commercial sales of the Company's
excimer laser system for TMR. The Company's strategy is to utilize and modify
its existing excimer laser technology and component base to develop new products
and applications in targeted medical and scientific markets. In addition to
internal development, the Company may take advantage of opportunities, if they
arise, in the current laser market environment of consolidation and market
specialization by continuing to seek out and acquire both products and
technology at a cost the Company believes to be lower than the cost of the
internal development of significant products.

         The Company does not have any present acquisition plans. Because the
Company's products are focused in specific niche medical markets, the Company
does not believe the decline in research and development expenditures will
affect the Company's abilities to be competitive in these markets.

         For the years ended December 31, 1999, 1998 and 1997, the Company
expended $2,061,241, $1,243,372 and $685,109, respectively, on all research and
development. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

ENVIRONMENTAL CONCERNS

         The Company's medical lasers are not believed to cause any material
environmental concerns. The Company does not knowingly use any products known to
harm the environment. All solvents and cleaners are biodegradable. Cooling
systems, where applicable, use refrigerants, which are free of toxic materials.
Many medical lasers are of solid-state construction, so no hazardous gases or
liquid dyes are used in their operation or manufacture. In winter months,
medical laser cooling systems are filled with an ethylene glycol and water
mixture to prevent freezing during shipment. This mixture must be removed and
discarded upon installation. The Company has discontinued the operations of its
business relating to the commercialization of these types of lasers. The Company
has not received notice of violation of any environmental laws from a
governmental agency related to these former business operations.

         The Company's TMR System and its laser intended to be used to treat
psoriasis, utilize xenon-chloride gas as a lasing medium. The chlorine component
of this gas is extremely corrosive and must be handled with care. Although only
a small quantity of gas is present in each laser, proper handling is essential
for safe operation. Depleted gas is reacted prior to disposal. Excimer lasers
are common in hospitals and laboratories and the methods for disposal and
handling of these gases is well known. Management of the Company believes that
the use of these gases is not expected to impact the desirability of these
lasers in the market place.

                                       19
<PAGE>

MARKETS AND MARKETING

         The Company historically has marketed its scientific products through a
direct sales force in the United States and through a network of distributors
outside of the United States, although no foreign sales have been made in 1998
and 1999. The Company has historically promoted its products through attendance
at tradeshows, advertising in scientific journals and industry magazines and
direct mail programs.

         To assist the Company in developing its marketing plan, on May 11,
1999, the Company entered in an agreement with Healthworld, of which Steven
Girgenti, a director of the Company, is Chairman and Chief Executive Officer,
for provision of various services relating to the marketing of the Company's
products. The services include: (i) advertising and promotion, (ii) development
of market research and strategy; and (iii) preparation and consulting on media
and publicity. The term of the agreement is indefinite, but may be terminated by
either party on ninety (90) days' notice. Compensation for these services is
approximately $40,000 per month, plus reimbursement of expenses and payment of a
15% commission on advertising purchases. Services beyond those budgeted by the
parties are to cost $104 per person hour, which is materially less then the
normal hourly rate charged by Healthworld for such services. In lieu of a higher
hourly rate, on May 11, 1999, the Company issued to Healthworld warrants (the
"Healthworld Warrants") to purchase 174,000 shares of the Company's Common Stock
at an exercise price of $4.69 per share. On the date of grant of the Healthworld
Warrants, the price of the Common Stock was $4.69. The Healthworld Warrants have
a term of ten years and vest to the extent of 14,500 shares of Common Stock on
the eleventh day of each month, beginning June 11, 1999, during the term of the
agreement. The shares underlying the Healthworld Warrants are being registered
in connection with a pending registration statement. Under a separate agreement,
Healthworld provides: (i) two (2) fulltime managed-care specialists to make
calls on potential customers for a period of seven (7) months, at a cost of
$30,000 per month; (ii) twenty (20) fulltime sales representatives to market
among dermatologists for a period of four (4) months at a cost of $125,000 per
month; and (iii) certain general management services for a period of seven (7)
months at $10,000 per month. Under separate agreements, Healthworld will provide
certain medical education and publishing services (approximately $700,000 in
fees and costs over a period in excess of one year) and general public relations
services ($10,000 per month). With the assistance of Healthworld, the Company is
currently finalizing its marketing strategy for the rollout of the psoriasis
treatment system. See "Certain Relationships and Related Transactions."

         In the United States, healthcare providers that purchase devices with
medical applications for treatment of their patients generally rely on
third-party payors, principally private health insurance plans, federal Medicare
and state Medicaid, to reimburse all or a part of the costs and fees associated
with the procedures using such devices. The success of the Company's business,
in particular the generation of profits from its psoriasis treatment products,
may ultimately depend on the ability of healthcare providers to obtain
sufficient reimbursement from third-party payors for such costs and fees.
Third-party payors may deny reimbursement if they determine that a prescribed
device has not received appropriate regulatory clearances or approvals, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate. Since the Company's
psoriasis treatment products will initially constitute a new form of treatment,
no assurance can be given as to when or if patients will be able to obtain
partial or complete reimbursement from their insurance programs (or from
Medicare or Medicaid) for such treatment.

         The Company's marketing plan attempts to take account of this factor by
focusing, during the first three years after the commercial introduction of the
psoriasis treatment system, on (i) that segment of the dermatological treatment
community which controls more than 50% of the prescriptions (topicals, systemics
and phototherapy) for the treatment of psoriasis, and (ii) on geographic areas
where the average dual household income of patients is $75,000 or more.
Management believes that these patients generally have healthcare plans that pay
for psoriasis treatment. UVB regimens generally involve 18 to 30 treatments
every six months, and may require co-payments ranging from $5.00-$30.00 per
treatment. Other forms of therapy, such as frequent application of topicals and
creams, may cost between $250 to $500 per year. Management believes that the
Company's excimer laser regimen will require fewer patient treatments during a
given period than these alternative forms of treatment, but may be more
expensive and may not be covered by medical insurance. The Company believes that
persons suffering from psoriasis may have to accept paying higher out-of pocket
costs for the Company's psoriasis treatment than these traditional methods in
order for the Company to market its psoriasis laser treatment successfully. The
failure to achieve these goals could have a material adverse effect on the
Company's business operations and financial condition.

                                       20
<PAGE>

         At the same time, the Company intends to take all reasonable steps to
have its psoriasis treatment products sufficiently accepted in the
dermatological treatment community to enable healthcare providers to receive
partial or complete reimbursement for the fees and costs associated therewith.
In addition, the Company expects to apply to HCFA for designation of a specific
Medicare reimbursement code for the Company's psoriasis products. Management
believes that the issuance by HCFA of a specific reimbursement code for such
products could have a positive effect on the willingness of third-party insurers
to reimburse patients or healthcare providers for part or all of the costs of
treatment by the company's products, although no assurance can be given to that
effect. The HCFA application process will take from 18 to 24 months, and no
assurance can be given that a favorable response will be received from HCFA.
Even if HCFA designates a code which is specific to the Company's type of
psoriasis treatment products, no assurance can be given that it would result in
the generation of revenue to the Company. Failure to obtain a HCFA reimbursement
code could have a material adverse effect on the business and financial
condition of the Company.

         In the case of the Company's psoriasis treatment products, the Company
intends to seek international reimbursement approvals although the timing of
such seeking of approval has not been determined. If the Company obtains the
necessary foreign regulatory registrations or approvals, market acceptance of
the Company's products in international markets would be dependent, in part,
upon the availability of reimbursement within applicable foreign healthcare
payment systems. Reimbursement and healthcare payment systems in international
markets vary significantly by country, and include both government-sponsored
healthcare and private insurance. No assurance can be given that such approval
will be obtained. Failure to receive international reimbursement approvals could
have a material adverse effect on market acceptance of the Company's products in
the international markets in which such approvals are sought. See
"Business-Government Regulation."

         In the case of TMR, unlike balloon angioplasty and atherectomy, the use
of laser technology for the treatment of end stage heart disease requires the
purchase of expensive capital equipment. Two of the Company's competitors in the
field of TMR treatment (PLC and Eclipse) have received the right from HCFA to
Medicare reimbursement for the costs of such companies' TMR treatments. Since
the Company's TMR System has not yet received approval to be marketed, Baxter
has not sought, on behalf of the Company, reimbursement approval from HCFA.
Moreover, potential purchasers must determine whether the clinical benefits of
the Company's TMR System justify the additional cost or effort required to
obtain prior authorization or coverage and the uncertainty of actually obtaining
such authorization or coverage. Although the Company believes that Baxter
intends to seek international reimbursement approvals for the TMR System, there
can be no assurance that any such approvals will be obtained in a timely manner,
if at all. The failure to obtain such rights of reimbursement with respect to
the Company's TMR excimer laser systems could have a material adverse effect on
the business and financial condition of the Company. See "Business-Government
Regulation."

COMPETITION

         The markets for the Company's proposed products are extremely
competitive. The Company directly and indirectly competes with other businesses,
including businesses in the laser industry. In many cases, these competitors are
substantially larger and more firmly established than the Company. In addition,
many of such competitors have greater marketing and development budgets and
substantially greater capital resources than the Company. Accordingly, there can
be no assurance that the Company will be able to achieve and maintain a
competitive position in the Company's industry. The Company believes that its
competitive success will be based on its ability to create and maintain
scientifically advanced technology, attract and retain scientific personnel,
obtain patent or other protection for its products, obtain required regulatory
approvals and manufacture and successfully market its products either directly
or through outside parties.

         The Company does not have comparable resources with which to invest in
research and development and advertising, and is at a competitive disadvantage
with respect to its ability to develop products. The Company may also encounter
difficulties in customer acceptance because it is likely to be perceived as a
new entrant into the market whose identity is not yet well known and whose
reputation and commercial longevity is not yet established. Substantial
marketing and promotional costs, possibly in excess of what the Company can
afford, may be required to overcome barriers to customer acceptance. The Company
expects substantial direct competition, both from existing competitors and from
new market entrants. Larger and more established competitors may seek to impede
the Company's ability to establish a market share for any products, which may be

                                       21
<PAGE>

developed by the Company through competitive pricing activities. Also,
prospective customers for the Company's products may be reluctant to disrupt
relationships with well-established distributors of products, which may be
comparable in quality or pricing to any of the Company's products. The failure
to gain customer acceptance of the Company's excimer laser technology could have
a material adverse effect on the Company's business, financial condition and
results of operations.

         Market acceptance of laser treatment of psoriasis is dependent on the
Company's ability to establish with the medical community the clinical efficacy
of excimer laser technology to treat psoriasis. As a result of such factors,
there can be no assurance that the marketplace will be receptive to excimer
laser technology over competing therapies. Failure of the Company's products to
achieve market acceptance could have a material adverse effect on the Company's
business, financial condition and results of operations.

         Competition in the market for the treatment of CAD, and in the medical
device industry generally, is intense and is expected to increase. The Company
competes primarily with other producers of TMR devices for patients with end
stage heart disease. Many companies, research institutes and universities are
working in a number of disciplines to develop therapeutic devices and procedures
aimed at vascular and cardiovascular disease. Some of the Company's competitors
and potential competitors have substantially greater name recognition and
capital resources than does the Company and also may have greater resources and
expertise in the areas of research and development, obtaining regulatory
approvals, manufacturing and marketing. There can be no assurance that the
Company's competitors will not succeed in developing TMR products or procedures
that are more effective or more effectively marketed than products marketed by
the Company or that render the Company's technology obsolete. In addition, even
if the Company's products yield performance comparable to competing products,
there can be no assurance the Company will be able to obtain necessary
regulatory approvals to compete against competitors in manufacturing, marketing
and selling its products. The Company believes that the primary competitive
factors in the interventional cardiovascular market are: the ability to treat
safely end stage heart disease patients; the impact of managed care practices
and procedure costs; ease of use; and research and development capabilities.
Certain companies, including PLC and Eclipse, have completed enrollment in
randomized clinical trials of products and procedures involving TMR that compete
with those offered by the Company, and have received regulatory approvals in
Europe to begin commercially marketing their respective TMR devices. PLC and
Eclipse have also received approval from the FDA to commercially market their
TMR products in the United States. Earlier entrants in the market in a
therapeutic area often obtain and maintain greater market share than later
entrants. Furthermore, the length of time required for products to be developed
and receive regulatory approval and the ability to use patents or other
proprietary rights to prevent sales by competitors are also important
competitive factors.

INTELLECTUAL PROPERTY

         INTELLECTUAL PROPERTY POLICY. The Company regards its technological
processes and product designs as proprietary and seeks to protect its rights in
them through a combination of patents, internal procedures and non-disclosure
agreements. The Company also utilizes licenses from third parties for processes
and designs used by the Company, which are proprietary to other parties. The
Company believes that its success will depend, in part, on the protection of its
proprietary information and patents, and the acquisition of licenses of
technologies from third parties.

         There can be no assurances as to the range or degree of protection any
patent or registration which may be owned or licensed by the Company will
afford, that such patents or registrations will provide any competitive
advantages for the Company, or that others will not obtain patents or
registrations similar to any patents or registrations owned or licensed by the
Company. There can be no assurances that any patents or registrations owned or
licensed by the Company will not be challenged by third parties, invalidated,
rendered unenforceable or designed around, or that the Company's competitors
will not independently develop technologies, which are substantially equivalent
or superior to the technologies owned or licensed by the Company, and which do
not infringe patents or proprietary rights of the Company. There can be no
assurances that the Company or any licensor to the Company will be successful in
protecting its proprietary rights. There can be no assurances that any pending
patent or registration applications or future applications will result in the
issuance of a patent or registration.

         To the extent that the Company relies upon trade secrets and unpatented
know-how, and the development of new products and improvements of existing
products in establishing and maintaining a competitive advantage in the market
for the Company's products and services, there can be no assurances that such
proprietary technology will remain a trade secret or be available to the
Company, or that others will not develop substantially equivalent or superior
technologies to compete with the Company's products and services.

                                       22
<PAGE>

         Any asserted claims or litigation to determine the validity of any
third party infringement claims could result in significant expense to the
Company or any licensor of such technology and divert the efforts of the
Company's technical and management personnel, whether or not such litigation is
resolved in favor of the Company or any such licensor. In the event of an
adverse result in any such litigation, the Company or any such licensor could be
required to expend significant time and resources to develop non-infringing
technology or to obtain licenses to the disputed technology from third parties.
There can be no assurances that the Company or any such licensor would be
successful in such development or that any such licenses would be available to
the Company on commercially reasonable terms, if at all. See "Business-Legal
Proceedings."

         Although the Company believes its patents to be of significant value,
successful litigation against these patents by a competitor could have a
material adverse effect on the Company's business, financial condition and
results of operations. No assurance can be given that the existing patents will
be held valid, if challenged, that any additional patents will be issued or that
the scope of any patent protection will exclude competitors. The breadth of
claims in medical technology patents involves complex legal and factual issues,
and therefore, can be highly uncertain.

         The Company also relies upon unpatented proprietary technology and
trade secrets that it seeks to protect, in part, through confidentiality
agreements with employees and other parties. No assurance can be given that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, that others will not independently develop or otherwise
acquire substantially equivalent proprietary technology and trade secrets or
disclose such technology or that the Company can meaningfully protect its rights
in such unpatented technology. In addition, others may hold or receive patents,
which contain claims that may cover products developed by the Company.

         PATENTS ISSUED. The Company owns thirty-six (36) patents, worldwide, of
which Laser Photonics owns twenty-one (21) patents and Acculase owns an
additional sixteen (16) patents. Of the patents owned by Laser Photonics,
seventeen (17) are issued in the United States and one each is issued in Canada,
Switzerland, France and Great Britain. Of the sixteen (16) patents owned by
Acculase, four (4) patents are filed in the United States, two (2) patents are
issued in each of Australia, Canada, Germany and Israel, and one is issued in
each of the EU, France, Switzerland/Liechtenstein and Great Britain.

         In connection with the Company's excimer laser technology, the Company
has been issued four (4) United States patents. The first patent, which was
issued in January, 1990, provides patent protection until 2007 and covers the
Company's base excimer laser design. The second patent, which was issued in May,
1990, provides patent protection until 2007 and covers a liquid filled flexible
laser light guide. The third patent, which was issued in May, 1991, provides
patent protection until 2007, and covers a means of measuring optical fiber
power output. The fourth patent, which was issued in September, 1991, provides
patent protection until 2008 and relates to the laser optical fiber coupling
apparatus used in the Company's excimer lasers. One of the patent applications
pending relating to a proprietary laser catheter design, was initially denied.
The Company has not continued to pursue this patent application. Baxter has
retained the right to pursue this patent application. Baxter and the management
of the Company do not believe that Baxter will pursue this patent application,
as there is no economic justification for pursuing this patent application at
this time. See "Business-Legal Proceedings."

         The Company also received patents for its base excimer laser design in
certain European countries in December, 1994, Australia in November, 1991,
Canada in December, 1992, and Israel in February, 1993. The European,
Australian, Canadian, and Israeli patents provide protection until August, 2008,
August, 2004, December, 2009, and August, 2008, respectively. The Company
received patents for a fiber optic laser catheter design in Australia in
September, 1998, and in Israel in February, 1996, which expire in September,
2009 and February, 2111, respectively. Patent applications are pending in Japan
and Canada for a fiber optic laser catheter design.

         All of the Company's patents and patent applications related to the
Company's excimer laser technology are licensed to Baxter under the Baxter
Agreement. The Company has pledged the four (4) United States patents and a
German patent to Baxter as security for the obligations of the Company under the
Baxter Agreement. See "Business-Strategic Alliance with Baxter Healthcare
Corporation."

         In connection with the sale of certain assets related to the Company's
non-excimer laser business carried out in its Massachusetts facility, the
Company has granted an exclusive license to Laser Components for use in the
commercialization of tunable lead salt diode lasers with respect to eight (8)
patents, which are not related to the Company's excimer lasers. Certain of the
Company's patents unrelated to its excimer laser technologies either may have
expired or may be delinquent in fees owing to various governmental authorities,
and there can be no assurances as to whether such patents are currently in
effect. See "Business-Sale of the Company's Non-Excimer Laser Assets and
Business."

                                       23
<PAGE>

         LICENSED TECHNOLOGY. The Company licenses two (2) United States patents
used in connection with its excimer lasers from Patlex Corporation, and licenses
a United States patent used in connection with its excimer lasers from Baxter.
The Company is in negotiations with Baxter to obtain a foreign patent used in
connection with its excimer lasers, which has certain comparable aspects to the
United States patent licensed from Baxter. On September 18, 1997, the Company,
PMG and Baxter agreed, in connection with fulfilling the obligations of the
parties under the Baxter Agreement, that the Company needed to acquire a license
from Lasersight for certain patents which relate to the use of excimer lasers
for the cardiovascular and vascular markets. In the event that Baxter terminates
the Baxter Agreement, Baxter will grant to the Company an exclusive sublicense
of all of Baxter's rights under the Lasersight License. In such event, the
Company will acknowledge and agree that upon the grant of such exclusive
sublicense, the Company will assume all obligations and liabilities of Baxter
under the Lasersight License. See "Business-Strategic Alliance with Baxter
Healthcare Corporation."

         On November 26, 1997, the Company entered into an agreement (the "MGH
Agreement") with MGH, pursuant to which the Company has obtained an exclusive,
worldwide, royalty-bearing license from MGH to develop, manufacture, use and
sell products, utilizing a pending patent, which incorporates certain
phototherapy technology of MGH, related to the diagnosis and treatment of
certain dermatological conditions and diseases. No assurance can be given that
the pending patent will be issued. As of the date of this Report, the Company
has generated no revenues from the MGH Agreement. The Company has paid $37,500
to MGH, and has further agreed to pay MGH $50,000, upon issuance by the United
States Patent and Trademark Office of any patent right relating to the pending
patent application (which has not yet occurred as of the date of this Report).
The Company has agreed to pay certain royalties to MGH beginning with the first
commercial sale of the products in any country, on any sales of products made
anywhere in the world by the Company, or its affiliates and sublicensees.

         The licensed technology is the subject of a currently pending
provisional patent application filed with the United States Patent and Trademark
Office by MGH. As of the date of this Report, the pending patent has not been
approved. The Company has agreed to use its best efforts to develop and make
commercially available products with respect to the licensed technology within
certain time frames defined in the MGH Agreement, or MGH may have the right to
cancel the exclusive license or convert any exclusive license to a non-exclusive
license.

EMPLOYEES

         As of April 4, 2000, the Company and its subsidiaries had 35 full-time
employees. These employees include the four (4) executive officers of Laser
Photonics in its Carlsbad, California and Radnor, Pennsylvania facilities, five
(5) administrative, two (2) clerical personnel, eighteen (18) engaged in
manufacturing of laser products, three (3) persons engaged in research and
development, three (3) engineers. In addition, the Company employs one part-time
person for administration and one for manufacturing. The Company intends to hire
additional personnel as the development of the Company's business makes such
action appropriate. The loss of the services of key employees could have a
material adverse effect on the Company's business. Since there is intense
competition for qualified personnel knowledgeable of the Company's industry, no
assurances can be given that the Company will be successful in retaining and
recruiting needed personnel. See "Management."

         The Company's employees are not represented by a labor union or covered
by a collective bargaining agreement, and the Company believes it has good
relations with its employees. The Company provides its employees with certain
benefits, including health insurance.

                                  RISK FACTORS

         THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. ONLY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT SHOULD MAKE AN INVESTMENT IN THESE SECURITIES. IN ADDITION TO THE
FACTORS SET FORTH ELSEWHERE IN THIS REPORT, PROSPECTIVE INVESTORS SHOULD GIVE
CAREFUL CONSIDERATION TO THE FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING THE SECURITIES OFFERED HEREBY.

                                       24
<PAGE>

         THIS REPORT MAY BE DEEMED TO CONTAIN FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER INCLUDED IN OTHER
PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE COMMISSION, REPORTS TO THE COMPANY'S
STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY THE
COMPANY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH
COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR OPERATING)
OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR
OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES BASED
UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS. THESE RISKS
INCLUDE, BUT ARE NOT LIMITED TO, RISKS SET FORTH HEREIN, EACH OF WHICH COULD
ADVERSELY AFFECT THE COMPANY'S BUSINESS AND THE ACCURACY OF THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN.

         THERE IS A LIMITED PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK.
PERSONS WHO MAY OWN OR INTEND TO PURCHASE SHARES OF COMMON STOCK IN ANY MARKET
WHERE THE COMMON STOCK MAY TRADE SHOULD CONSIDER THE FOLLOWING RISK FACTORS,
TOGETHER WITH OTHER INFORMATION CONTAINED ELSEWHERE IN THE COMPANY'S REPORTS,
PROXY STATEMENTS AND OTHER AVAILABLE PUBLIC INFORMATION, AS FILED WITH THE
COMMISSION, PRIOR TO PURCHASING SHARES OF THE COMMON STOCK:

         LACK OF PROFITABILITY AND HISTORY OF LOSSES; BANKRUPTCY PROCEEDING. The
Company filed a Petition for Reorganization (the "Bankruptcy Proceeding") under
Chapter 11 of the Federal Bankruptcy Act on May 13, 1994, Case No.
94-02608-611-Federal Bankruptcy Court-Middle District, Florida (the "Bankruptcy
Court"). An order was issued on May 22, 1995, confirming the Company's Third
Amended Plan of Reorganization (the "Bankruptcy Reorganization" or the "Plan").
The Company incurred losses of $2,123,814, $5,357,968, $2,307,101, $5,908,587
and $9,920,067, for the period from May 23, 1995 to December 31, 1995, and for
the years ended December 31, 1996, 1997, 1998 and 1999, respectively. As of
December 31, 1999, the Company had an accumulated deficit of $25,617,537. The
Company expects to continue to incur operating losses for a period of between
nine (9) and twelve (12) months from the date of this Report as it continues to
devote significant financial resources to the marketing of its psoriasis
treatment products and expansion of operations. In order to achieve
profitability, the Company will have to manufacture and market its psoriasis
treatment products, which need to be accepted in the marketplace on a commercial
basis. There can be no assurance given that the Company will sustain losses only
for a period of nine (9) to twelve (12) months or that the Company will
manufacture or market any products successfully or operate profitably in the
future. See " Risk Factors-Uncertainty Related to Third Party Reimbursement,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and "Financial Statements."

         UNCERTAINTY RELATED TO THIRD-PARTY REIMBURSEMENT. In the United States,
healthcare providers that purchase devices with medical applications for
treatment of their patients generally rely on third-party payors, principally
private health insurance plans, federal Medicare and state Medicaid, to
reimburse all or a part of the costs and fees associated with the procedures
using such devices. The success of the Company's business, in particular the
generation of profits from its psoriasis treatment products, may ultimately
depend on the ability of healthcare providers to obtain sufficient reimbursement
from third-party payors for such costs and fees. Third-party payors may deny
reimbursement if they determine that a prescribed device has not received
appropriate regulatory clearances or approvals, is not used in accordance with
cost-effective treatment methods as determined by the payor, or is experimental,
unnecessary or inappropriate. Since the Company's psoriasis treatment products
will initially constitute a new form of treatment, no assurance can be given as
to when or if patients will be able to obtain partial or complete reimbursement
from their insurance programs (or from Medicare or Medicaid) for such treatment.

                                       25
<PAGE>

         The Company intends to take all reasonable steps to have its psoriasis
treatment products sufficiently accepted in the dermatological treatment
community to enable healthcare providers to receive partial or complete
reimbursement for the fees and costs associated therewith. In addition, the
Company expects to apply to HCFA for designation of a specific Medicare
reimbursement code for the Company's psoriasis products. Management believes
that the issuance by HCFA of a specific reimbursement code for such products
could have a positive effect on the willingness of third-party insurers to
reimburse patients or healthcare providers for part or all of the costs of
treatment by the Company's products, although no assurance can be given to that
effect. The HCFA application process will take from 18 to 24 months, and no
assurance can be given that a favorable response will be received from HCFA.
Even if HCFA designates a code which is specific to the Company's type of
psoriasis treatment products, no assurance can be given that it would result in
the generation of revenue to the Company. Failure to obtain a HCFA reimbursement
code could have a material adverse effect on the business and financial
condition of the Company. See "Business-Markets and Marketing."

         POTENTIAL NEED FOR ADDITIONAL FINANCING. The Company has historically
financed its operations through working capital provided from operations, loans
and the private placement of equity and debt securities. As of December 31,
1999, the Company had total debts of $4,431,336 and had $4,535,557 of cash on
hand. On March 16, 2000, the Company completed the March 16, 2000 Financing of
1,409,092 shares of its Common Stock and received net proceeds of $14,570,000,
and on that date had $18,400,00 of cash on hand. The Company believes that it
has adequate capital to support its operations, to finance its requirements to
accomplish the rollout of the Company's psoriasis treatment products, and to pay
all of its debts on a current basis. The Company estimates that it has funds on
hand for each of these purposes and for working capital for at least 13 months.
However, no assurance to this effect can be given. In the event that the Company
does not generate sufficient revenues from prospective operations, the Company
may be required to obtain additional financing. No assurance can be given that
additional financing will become available to the Company, or that the Company
will achieve profitable operations. Further, any additional financing may be
senior to the Company's Common Stock, may be priced below market or may result
in significant dilution to the holders of the Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."

         DILUTION FROM ISSUANCES OF COMMON STOCK TO PAY OBLIGATIONS OF THE
COMPANY AND EFFECT OF OUTSTANDING WARRANTS AND OPTIONS. On March 16, 2000, the
Company completed a private offering of 1,409,092 shares of its Common Stock at
$11.00 per share and received net proceeds of $14,570,000. The price of the
Company's Common Stock, on the date when the terms of this private placement
were negotiated was $13.50 per share, and the price on the closing date (March
16, 2000) was $15.88. The issuance of shares of Common Stock at below market
prices may be deemed to be dilutive to existing stockholders. The exercise of
Warrants to purchase up to 2,237,105 shares of Common Stock, at exercise prices
ranging from $1.50 to $4.69 per share, could result in significant additional
dilution to existing stockholders. The average exercise of the Warrants is $3.09
per share. In addition, the Company has issued 3,609,379 options to acquire
shares of Common Stock to various employees, directors and consultants of the
Company at prices ranging from $0.50 to $17.75 per share (some of which exercise
prices were significantly below market price on their grant dates), of which the
shares underlying the 200,000 Options are being registered in connection with
the pending registration statement. The Company does not intend to grant options
or warrants at exercise prices significantly below market, although no assurance
can be given to this effect. The holders of the Warrants and Options, which are
outstanding and unexercised, are given an opportunity to profit from a rise in
the market price of the Common Stock, with a resulting dilution in the interest
of the other stockholders. The terms on which the Company might obtain
additional financing during the period may be adversely affected by the
existence of the Warrants and Options. To the extent that additional capital is
raised through the sale of additional equity or convertible securities or
additional options are issued to obtain the services of officers, employees,
directors or consultants, the issuance of such securities could result in
additional dilution to the Company's stockholders and the holders of the
Warrants and Options may exercise the Warrants and Options at a time when the
Company might be able to obtain additional capital through a new offering of
securities on terms more favorable than those provided herein. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources," "Certain Relationships and Related
Transactions" and "Description of Securities."

         FINANCIAL RISK FROM PENDING LITIGATION AGAINST THE COMPANY. The Company
has legal claims, both pending and threatened, as follows: (i) the Company has
had a counterclaim filed against it in the lawsuit brought by Baxter against The
Spectranetics Corporation ("Spectranetics"), in which Spectranetics claims an
undetermined amount of damages against the Company; (ii) claims have been
asserted by Ray Hartman, a former officer and director of the Company and his
wife Sandra Hartman, who was an employee of Laser Photonics and Acculase; and
(iii) a claim has been asserted by the Laser Analytics, Inc., a Texas
corporation, for $232,000 for monies purportedly lent to the Company. The

                                       26
<PAGE>

damages alleged in those claims are for significant amounts and the outcome of
these disputes are unknown, as of the date of this Report. An adverse ruling
against the Company in any of these matters could have a material adverse effect
upon the Company and its financial condition. See "Business-Legal Proceedings."

         POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. Results of operations are
expected to fluctuate significantly from quarter to quarter, depending upon
numerous factors, including the timing and results of clinical trials; delays
associated with the FDA and other regulatory approval processes; healthcare
reform and reimbursement policies; demand for the Company's products; changes in
pricing policies by the Company or its competitors; the number, timing and
significance of product enhancements and new product announcements by the
Company and its competitors; the ability of the Company to develop, introduce
and market new and enhanced versions of the Company's products on a timely
basis; customer order deferrals in anticipation of new or enhanced products
offered by the Company or its competitors; product quality problems; personnel
changes; and changes in Company strategy. Quarter to quarter operating results
could also be affected by the timing of the receipt of individual customer
orders, order fulfillment and revenue recognition with respect to small numbers
of individual laser units, since each unit carries a high price per unit. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business-Markets and Marketing."

         POSSIBLE LACK OF NET INCOME DUE TO HIGH AMORTIZATION OF GOODWILL AND
PATENT EXPENSES. The Company's business depends on the exploitation of a number
of technologies, some of which are the subject of patents. For financial
statement purposes, the Company is required to amortize the cost of acquisition
of these patents and licenses of patents owned by others over a period of years.
In addition, acquisitions of business operations and reorganization of existing
operations have required the Company to record certain assets as goodwill on its
financial statements and to amortize such goodwill over periods of years.
License fees paid are amortized over the life of the licenses and patent
expenses are amortized over the life of the patents. The impact on the current
and future financial statements of the Company is a reduction of net income in
the amount of such amortization. For 1998 and 1999, the total of such
amortization was $1,028,034 and $998,590 respectively. This amount of
amortization, when compared to the Company's revenue for any year, may make it
very difficult for the Company to show profitability until net revenues from
operations increase significantly or until most of these items have been
completely amortized. However, even if the Company's revenues increase to an
amount to offset existing levels of amortization, no assurance can be given
that, in future years, the Company will not incur other expenditures or undergo
other reorganizations which will require it to book significant additional
amounts of amortization. No assurance can be given that the Company will ever
earn enough revenue to offset most or all of its then current amortization
expenses. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Financial Statements."

         OWNING LESS THAN 100% OF THE SHARES OF ACCULASE HAS RESULTED IN THE
GRANT OF INCENTIVES TO EMPLOYEES AND RESULTED IN SUBSTANTIAL DILUTION TO THE
STOCKHOLDERS OF LASER PHOTONICS. Laser Photonics owns 76.1% of the issued and
outstanding common stock of Acculase. Acculase has been unable to raise money
throughout its history, largely because it is and has been a privately owned
company. A significant portion of the money raised by the Company in recent
financings has been used to loan money to Acculase to pay its costs of
operations and the cost of the development of its excimer lasers. Management of
the Company believes that the financing has provided significant benefits to
Acculase and that, without the financing provided by Laser Photonics, Acculase
could not have obtained these benefits. To accomplish the development of the
excimer laser product, through the raising of capital through stock sales, there
has been significant dilution in stock ownership to the stockholders of Laser
Photonics.

         In connection with obtaining required financing for Acculase, Laser
Photonics has had to engage in significant equity financing activities,
aggregating approximately $20,000,000, from 1997 to 1999, and an additional
$14,570,000 through March 31, 2000. As of December 31, 1999, Laser Photonics had
made cash and non-cash advances as loans for the benefit of Acculase, which
total approximately $17,000,000. These obligations include, but are not limited
to direct payment of obligations (including the acquisition of the Lasersight
License for $4,000,000 so that Acculase would be in compliance with the Baxter
Agreement), allocations of salaries and expenses, financing costs, cash
transfers and corporate overhead (including professional market and consulting
services) of approximately $9,200,000, and incurrence of non-cash costs by Laser
Photonics associated with the issuance of Common Stock and Warrants in certain
financings, the issuance of derivative securities to employees and consultants
of Acculase at exercise prices below market, the assumption of certain interest
charges, and the accrual of interest at the rate of 8% PER ANNUM on the
principal amount of such cash and non-cash advances, which total approximately
$7,800,000. All such amounts advanced to Acculase were loaned without any date
certain as to when such loans would be repaid. Laser Photonics has issued
1,090,500 options as incentives to employees and consultants to work for

                                       27
<PAGE>

Acculase. Further, Laser Photonics has sold stock to be able to hire employees
for Acculase. Laser Photonics has had to provide and continues to provide
incentives and compensation to management of Acculase because employees of
Acculase and prospective candidates for employment at Acculase desire stock
options from Laser Photonics, which have potential liquidity, rather then stock
options of Acculase, which are unlikely to have liquidity at any foreseeable
time. These financings and the grant of such incentives to employees have
resulted in substantial dilution to the stockholders of Laser Photonics, without
any dilution to the stockholders of Acculase. Should Laser Photonics be unable
to acquire the shares of Acculase not already owned by Laser Photonics, it is
likely that Laser Photonics will have to continue to dilute the ownership of its
Common Stock to pay the operating costs of Acculase for an indefinite period of
time. See "Business-Business of the Company-Relationship with Acculase
Subsidiary", "Business-Intellectual Property" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

         THE RISK OF NOT ACQUIRING THE UNOWNED ACCULASE SHARES MAY RESULT IN
CONTINUED DILUTION OF THE OWNERSHIP OF LASER PHOTONICS COMMON STOCK TO PAY THE
OPERATING COSTS OF ACCULASE FOR AN INDEFINITE PERIOD OF TIME. Due to the fact
that the Company may have to continue to dilute the ownership of the
stockholders of Laser Photonics indefinitely, the Boards of Directors of the
Company and Acculase have determined to enter into a reorganization to make
Acculase a wholly owned-subsidiary of Laser Photonics. The exact ratio of the
anticipated exchange of Acculase common stock for Common Stock of the Company
will be based on a valuation to be prepared by one of the Company's advisors and
a separate fairness opinion from an investment banker hired by the Board of
Directors of Acculase. Because of the majority ownership of Acculase by the
Company, the Company controls a sufficient number of the issued and outstanding
shares of Acculase in order to approve the proposed reorganization. However, any
Acculase stockholders that do not wish to exchange their shares of Acculase for
shares of the Company may assert certain appraisal rights under California law.
Generally, under California law, when a dissenting stockholder opposes a
reorganization which requires stockholders' approval, such as in a
reorganization in which the stockholders of Acculase may otherwise be required
to accept shares of Laser Photonics in exchange for their shares in Acculase,
the exclusive remedy of the dissenting stockholder is the right to receive the
appraised cash value of his shares of Acculase. However, in the case where one
entity (such as Laser Photonics) controls both corporations which are the
subject of the proposed reorganization, the stockholders of the controlled
entity (in this case, Acculase), may be entitled to institute an action to
attack the validity of the reorganization or to have the reorganization set
aside or rescinded. There can be no assurance that any of the Acculase
stockholders will not file such an action, or that a court will not set aside
the proposed reorganization transaction.

         In the event that some or all of the Acculase stockholders exercise
their appraisal rights, decline to accept the terms of the proposed exchange of
Laser Photonics Common Stock for Acculase common stock, and wish to receive cash
in lieu thereof, and the aggregate amount sought by the dissenting Acculase
stockholders exceeds an amount to be determined by the Board of Directors, the
Company will reserve the right to terminate or postpone the reorganization until
such time as the Company has adequate funds to cash out those Acculase
stockholders who exercise their appraisal rights. See "Business-Business of the
Company-Relationship with Acculase Subsidiary" and "Business-Intellectual
Property."

         GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS. Clinical
testing, manufacture, promotion and sale of the Company's excimer laser products
and related accessories are subject to extensive regulation by numerous
governmental authorities in the United States, principally the FDA, and
corresponding foreign regulatory agencies. The FDC Act, and other federal and
state statutes and regulations govern or influence the testing, manufacture,
labeling, advertising, distribution and promotion of medical devices.
Noncompliance with applicable requirements may result in fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, refusal to authorize the marketing of new products or to allow the
Company to enter into supply contracts and criminal prosecution. The Company's
excimer laser devices, for the various applications discussed in this Report,
will be regulated as either a Class II or Class III medical device. Class II
devices, such as the Company's psoriasis treatment products, claim "substantial
equivalence" to an existing (predicate) device. The Company has received
approval under the 510(k) process from the FDA. Some Class II devices may not be
found "substantially equivalent" to existing devices, and may be assigned a new
classification, which may or may not require further clinical data or which may
have certain restrictions, including post-market surveillance.

         FDA approval of a PMA must be obtained prior to commercial distribution
in the United States for the TMR System. A PMA application must be supported by
extensive information, including preclinical and clinical trial data. The PMA
process is expensive, lengthy and uncertain, and a number of products for which
PMA applications have been submitted by other companies have never been approved
for marketing. If granted, the approval of the PMA application may include
significant limitations on the indicated uses for which a product may be
marketed. There can be no assurance that Baxter will be able to obtain necessary

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<PAGE>

PMA application approvals to market the Company's excimer laser systems for all,
or any, of the currently anticipated applications, or any other products, on a
timely basis, if at all. Failure by Baxter to obtain such approvals, a delay in
receipt of such approvals, the loss of previously received approvals, or failure
to comply with existing or future regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company has received and transferred to Baxter a
conditionally approved IDE from the FDA, permitting Baxter to conduct clinical
trials of the TMR System, and such clinical trial has commenced, there can be no
assurance that data from such studies will demonstrate the safety and
effectiveness of the TMR System for the treatment of end stage heart disease or
will adequately support a PMA application for the TMR System. In addition,
Baxter will be required to obtain additional IDEs for other applications of the
Company's excimer laser technology. There can be no assurance that data,
typically the results of animal and laboratory testing, that may be provided by
Baxter in support of future IDE submissions, will be deemed adequate for the
purposes of obtaining IDE approval or that Baxter will obtain approval to
conduct clinical studies of any such future product. Even if IDE approval is
obtained and clinical studies are conducted, there can be no assurance that data
from such studies will demonstrate the safety and effectiveness of any such
product or will adequately support a PMA application for any such product.
Manufacturers of medical devices are also required to comply with applicable FDA
GMP requirements, which include standards relating to product testing and
quality assurance, as well as the corresponding maintenance of records and
documentation. There is no assurance that the Company will be able to comply
with applicable GMP requirements. See "Business-Government Regulation."

         NEED TO COMPLY WITH INTERNATIONAL GOVERNMENT REGULATION. International
sales of medical devices often are subject to regulatory requirements in foreign
countries, which vary from country to country. Sale and use of the Company's
products are subject to the right to affix a CE Mark approval in the EU and
subject to other regulatory requirements in those and other countries. The
Company has received the right to affix a CE Mark for its TMR System, but not
for its fiberoptic accessories. The time required to obtain approval for sale in
foreign countries may be longer or shorter than required for FDA approval, and
the requirements may differ materially. The FDA must approve exports of devices
that require a PMA, but are not yet approved domestically, unless they are
approved for sale by any member country of the EU or the other "listed"
countries, including Australia, Canada, Israel, Japan, New Zealand, Switzerland
and South Africa, in which case they can be exported for sale to any country
without prior FDA approval. In addition, an unapproved device may be exported
without prior FDA approval to the listed countries for investigational use in
accordance with the laws of those countries.

         In addition to ISO 9001/EN46001 certification (which the Company has
received for the TMR System), which is required to market the TMR System in the
EEA, the Company also will be required to comply with additional, individual
international requirements that are outside the scope of those required by the
EEA. Failure to comply with applicable regulatory requirements can result in
fines, injunctions, civil penalties, recalls or seizures of products, total or
partial suspensions of production, refusals by foreign governments to permit
product sales and criminal prosecution. Furthermore, changes in existing
regulations or adoption of new regulations or policies could prevent the Company
from obtaining, or affect the timing of, future regulatory approvals or
clearances. There can be no assurance that the Company will be able to obtain
necessary regulatory clearances or approvals on a timely basis, or at all, or
that the Company will not be required to incur significant costs in obtaining or
maintaining such foreign regulatory approvals. Delays in receipt of, or failure
to receive, such approvals or clearances, the loss of previously obtained
approvals or clearances or the failure to comply with existing or future
regulatory requirements could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business-Government Regulation-International Product Regulation."

         DISCONTINUANCE OF CERTAIN REVENUE GENERATING ASPECTS OF BUSINESS
OPERATIONS. Management's decision to suspend its business operations not related
to the Company's excimer laser technology has resulted in the intended
discontinuance of its business operations, which generated approximately 76% of
the Company's revenues for 1998 and 1999. All but approximately $465,000 of the
debts related to these operations have been paid from the proceeds of the August
9, 1999 Financing and the March 16, 2000 Financing and the sale of certain
assets related to the Company's non-excimer laser operations. As of the date of
this Report, the Company intends to focus solely on those portions of its
business that deal with its excimer laser technology, although these activities
have not generated sufficient revenues to sustain operations without outside
financing. There can be no assurances that the Company will be able to generate
profitable operations from its excimer laser business operations in the future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" and "Business."

                                       29
<PAGE>

         BAXTER'S SECURITY INTEREST IN ACCULASE'S PATENTS AND RISK OF LOSS OF
SIGNIFICANT TECHNOLOGY OWNED BY ACCULASE. On August 19, 1997, Acculase executed
the Baxter Agreement, which provides for an alliance with Baxter in which the
Company granted to Baxter an exclusive worldwide right and license to
manufacture and sell certain of the Company's TMR System consisting of certain
excimer laser technology products relating to the treatment of cardiovascular
and vascular disease and the disposable products associated therewith. Baxter
maintains, pursuant to the Baxter Agreements, a security interest in certain
significant patents owned by Acculase related to the TMR System to secure the
Company's performance under the Baxter Agreement. Failure of the Company to
perform its obligations under the Baxter Agreements could result in the loss of
the ownership of the patents subject to such security interest. Even though the
Lasersight License is granted to Acculase, should Baxter somehow obtain control
of those technologies and patents owned by Acculase and Acculase should lose its
rights to this technology, Laser Photonics would lack the essential elements of
the excimer laser technology. Such a situation would materially and adversely
affect the Company's business and its financial condition. See
"Business-Strategic Alliance with Baxter Healthcare Corporation" and
"Business-Intellectual Property."

         COMPANY'S RELIANCE ON PATENT PROTECTION AND PROPRIETARY TECHNOLOGY. The
Company's business could be adversely affected if it is unable to protect its
intellectual property, including patented and other proprietary technology,
certain of which is licensed to the Company or owned by the Company, and certain
of which is owned by the Company and licensed to or from Baxter. If the Company
or the owners or licensees of the proprietary technology are unsuccessful in
protecting their rights thereto or such technology was to infringe on
proprietary rights of third parties, that portion of the Company's business
could suffer material adverse effects. To the extent that the Company relies
upon unpatented trade secrets and know-how, there can be no assurances that such
proprietary technology will remain a trade secret or that others will not
develop substantially equivalent or superior technologies to compete with the
Company's products. In addition, there can be no assurance given that others
will not independently develop similar or superior technologies, enabling them
to provide superior products or services to those of the Company. There can be
no assurances that patentable improvements on such technology will be developed
or that existing or improved technology will have competitive advantages or not
be challenged by third parties.

         The laser industry has been marked by costly and time-consuming
litigation with respect to intellectual property rights between competitors.
Once the Company begins to exploit its excimer lasers commercially, no
assurances can be given that third parties will not claim that some or all of
the Company's proprietary technology infringes on proprietary rights of others.
Litigation may be used to seek damages or to enjoin alleged infringement of
proprietary rights of others. The defense of any such litigation, whether or not
meritorious, could divert financial and other resources of the Company from the
Company's business plan and, therefore, could have a material adverse effect on
the financial condition of the Company. An adverse decision to the Company in
any such litigation could result in significant damage awards payable by the
Company or could result in the Company's being enjoined from marketing its then
existing products, which could have an adverse effect on the Company's ability
to continue in business. In the event of an adverse result in such litigation,
the Company could be required to expend significant resources to develop
non-infringing technology or to obtain licenses to the disputed technology from
third parties. There can be no assurances that the Company will have the
resources to develop or license such technology, or if so, that the Company
would be successful in such development or that any such licenses would be
available on commercially reasonable terms. Further, the Company may be required
to commence litigation against third parties to protect any proprietary
technology rights of the Company. There can be no assurances that the Company
will be able to afford to prosecute such litigation, or if so, that such
litigation will be successful. See "Business-Intellectual Property" and
"Business-Legal Proceedings."

         DEPENDENCE ON THIRD PARTIES FOR MANUFACTURE AND MARKETING OF PRODUCTS
AND RISKS OF ACCESS TO ALTERNATIVE SOURCES AND DELAYS. The Company does not
currently have sufficient financial resources to conduct human clinical trials
necessary to commercialize the application of the TMR System. The Company has
entered into the Baxter Agreement, pursuant to which Baxter agreed to fund
necessary human clinical trials and market the Company's resulting products.
However, Baxter may terminate such funding and marketing commitment and cease
further funding at any time. If the Baxter Agreement is terminated for any
reason, there could be a material adverse effect on the Company's financial
condition and the Company may be compelled to curtail or cease business
operations related to its TMR System altogether. Should Baxter terminate the
Baxter Agreement, the Company will have to seek out other parties for the
purpose of financing the conduct of human clinical trials necessary to
commercialize the application of the TMR System. The Company believes that third
parties would have an economic incentive to provide such assistance to the
Company due to the fact that the Company's TMR System is believed by management
of the Company to be technically superior and less expensive than lasers from
other manufacturers used for the same medical applications. However, no
assurance to this effect can be given. Management of the Company believes that
this alone could make a strategic alliance or similar business relationship with
the Company attractive to another Company, which might assume Baxter's
responsibilities under the Baxter Agreement, although no assurance to this

                                       30
<PAGE>

effect can be given. In addition, the Company is not currently required to fund
the marketing of the Company's TMR System, as Baxter is responsible for all
marketing efforts and expenses for the TMR System, unless Baxter ceases to
remain in its strategic alliance with the Company. In such an event, the Company
will either be required to obtain additional financing, in an unknown amount, or
will need to obtain a replacement partner to complete the testing, and to market
the Company's TMR System, if approved by the FDA.

         There can be no assurance that any third party would be willing or able
to meet the Company's needs in a satisfactory and timely manner, if at all.
Should the Company be unable to locate third parties willing or able to meet the
Company's needs, management may have to suspend or discontinue its business
activities or certain components thereof or cease operations altogether, as they
relate to the TMR System. The amount and timing of resources to be devoted to
these activities are not within the control of the Company, and there can be no
assurance that manufacturing and marketing problems will not occur in the
future.

         Production of the Company's excimer lasers requires specific component
parts obtained from certain suppliers. In the event that such suppliers cannot
meet the Company's needs, the Company believes that alternative suppliers could
be found. However, a change in suppliers or any significant delay in the
Company's ability to have access to such resources would have a material adverse
effect on the Company's delivery schedules, business, operating results and
financial condition. See "Business-Sources and Availability of Raw Materials."

         The Company maintains limited manufacturing facilities, which may need
to be expanded in the future. The Company estimates that it will be able to
produce only 1,000 lasers per year in its facility in Carlsbad, California.
Should demand exceed that number of lasers, the Company's facilities will have
to be expanded. Although certain members of the Company's management have
manufacturing experience, the expansion of the Company's manufacturing
facilities and capabilities will subject the Company to numerous risks,
including unanticipated technological problems or delays. Such expansion will
also require additional sources of capital, which may not be available on
commercially reasonable terms, if at all. If demand for the Company's products
becomes great enough to require expansion of its manufacturing capability, and
if the Company is unable to expand its manufacturing capabilities, the Company
may be required to enter into arrangements with others for the manufacture and
packaging of its products. There can be no assurance that the Company will be
able to enter into any such arrangements on commercially reasonable terms, or at
all, or that the Company will ever be able to establish the capability to
manufacture its products on a commercial basis, in which case the Company's
business, results of operations and financial condition would be materially
adversely affected. See "Business-Alliance with Baxter Healthcare Corporation"
and "Business-Research and Development."

         UNCERTAIN MARKET ACCEPTANCE. The FDA issued a 510(k) for the Company's
psoriasis treatment system on January 27, 2000. The Company is finalizing its
marketing plan and introduced its psoriasis treatment products for the purpose
of commercial application testing at the end of March, 2000 and further intends
to begin to distribute its psoriasis treatment products to the market in July,
2000. Market acceptance of laser treatment of psoriasis is dependent on the
Company's ability to establish, with the medical community, the clinical
efficacy of excimer laser technology to treat psoriasis, and to convince
psoriasis patients to undergo laser treatment, which may not be covered by
medical insurance and may be more costly than other traditional forms of
treatment for psoriasis. The cost of the Company's TMR products may be
significantly greater than the cost of the therapeutic capital equipment
required with balloon angioplasty, stent implantation or atherectomy procedures.
Market acceptance of laser TMR, as an adjunct to CABG and for end stage heart
disease patients, will depend, in part, on Baxter's ability to establish, with
the medical community, the clinical efficacy of excimer laser TMR for end stage
heart disease patients. As a result of such factors, there can be no assurance
that the marketplace will be receptive to excimer laser technology over
competing therapies. Failure of the Company's products to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business-Government
Regulation," "Business-Markets and Marketing" and "Business-Competition."

         HIGHLY COMPETITIVE MARKETS; RISK OF ALTERNATIVE THERAPIES. Competition
in the market for the treatment of psoriasis and CAD, and in the medical device
industry, generally, is intense and is expected to increase.

         According to the NPF, there are three (3) approaches to treat
psoriasis: (i) topical therapy (creams and lotions), (ii) phototherapy (psoralen
ultraviolet light-PUVA and UVB), and (iii) systemic medications. The Company's
excimer laser technology for the treatment of psoriasis is intended to replace
and/or augment all of the current treatment modalities. Most of those patients
suffering from psoriasis that seek treatment receive phototherapy. Phototherapy
is widely available to the suffering patient. For the Company to be successful

                                       31
<PAGE>

in marketing its psoriasis treatment products, those doctors who prescribe
phototherapy for their patients will have to accept the Company's treatment
modality for the Company's products on a widely-used basis, and for the Company
to be successful in introducing its product. No assurance can be given that the
Company will be successful in obtaining wide acceptance by the medical community
for the Company's treatment modality.

         The Company's TMR System, if approved for general sale by the FDA, will
compete primarily with other suppliers of TMR equipment for the treatment of
patients with end stage heart disease and as an adjunct to coronary graft bypass
surgery. Companies producing competitive products may succeed in developing
products that are more effective or less costly in treating CAD than the TMR
System, and may be more successful than the Company in manufacturing and
marketing their products. In the TMR market, the Company competes primarily with
other producers of TMR systems.

         Many companies, research institutes and universities are working in a
number of disciplines to develop therapeutic devices and procedures aimed at
vascular and cardiovascular disease. Furthermore, a number of companies in the
pharmaceutical industry are working on drug therapies to treat psoriasis. Most
of these companies, research institutes and universities have substantially
greater financial, technical, manufacturing, marketing, distribution and/or
other resources than the Company. In addition, many of such companies have
experience in underlying human clinical trails of new or improved therapeutic
devices and procedures and obtaining FDA and other regulatory clearances of
devices and procedures for use in human health care. The Company has limited
experience in conducting and managing clinical testing and in preparing
applications necessary to gain regulatory clearances. Accordingly, other
companies may succeed in developing devices and procedures that are safer or
more effective than those proposed to be developed by the Company and in
obtaining FDA clearances for such devices and procedures more rapidly than the
Company.

         The Company's requirements for regulatory approval, and marketing of
some of its products for cardiovascular and vascular disease have been assumed
by Baxter. The Company's competitors spend substantial sums on research and
development for laser products in order to maintain their respective market
positions. The Company's competitors and many of its potential competitors have
substantially greater capital resources than the Company. There can be no
assurance the Company's competitors will not succeed in developing TMR products
or procedures that are more effective or more effectively marketed than products
marketed by Baxter or that render the Company's technology obsolete. Even if the
Company's products provide performance comparable or superior to competing
products, there can be no assurance the Company will be able to obtain necessary
regulatory approvals to compete against competitors in terms of manufacturing,
marketing and sales. PLC and Eclipse received regulatory approval in Europe to
begin marketing their various TMR products and received approval from the FDA to
market their TMR products in the United States. As of the date of this Report,
PLC and Eclipse are marketing their TMR products in the United States. PLC and
Eclipse have been marketing their products in Europe since 1996. Earlier
entrants to a market in a therapeutic area often obtain and maintain greater
market share than later entrants. The Company believes the primary competitive
factors in the market for its TMR Systems include clinical performance, product
safety and reliability, availability of third-party reimbursement, product
design specifically for TMR use, product quality, ease of use, price, customer
service and company reputation. In addition, the length of time required for
products to be developed and receive regulatory approval and the ability to use
patents or other proprietary rights to prevent sales by competitors are also
important competitive factors. Some of the medical indications that may be
treatable with TMR are currently being treated by drug therapies or surgery and
other interventional therapies, including CABG and PTCA. A number of these
therapies are widely accepted in the medical community, have a long history of
use and continue to be enhanced frequently. There is no assurance that
procedures using TMR will be able to replace or augment such established
treatments or that clinical research will support the use of TMR. Additionally,
new surgical procedures and new drug therapies are being developed by other
parties to treat CAD. New procedures and drug therapies could be more effective,
safer or more cost-effective than TMR. The inability of TMR to replace or
augment existing therapies or to be more effective, safer or more cost-effective
than new therapies could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business-Government Regulation," "Business-Markets and Marketing" and
"Business-Competition."

         NO MARKETING STUDIES. No independent studies with regard to the
feasibility of the Company's proposed business plan have been conducted at the
expense of the Company or by any independent third parties with respect to the
Company's present and future business prospects and capital requirements. In
addition, there can be no assurances that the Company's products or its
treatment modality for psoriasis using its psoriasis treatment products will
find sufficient acceptance in the marketplace to enable the Company to fulfill
its long and short term goals, even if adequate financing is available and
products are ready for market, of which there can be no assurance. See
"Business-Markets and Marketing."

                                       32
<PAGE>

         DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the skills
of its management and technical team. There is strong competition for qualified
personnel in the laser industry, and the loss of key personnel or an inability
to continue to attract, retain and motivate key personnel could adversely affect
the Company's business. There can be no assurances that the Company will be able
to retain its existing key personnel or to attract additional qualified
personnel. The Company does not have key-person life insurance on any of its
employees. See "Management."

         EFFECT OF POTENTIAL REFORMS IN THE REGULATION OF THE HEALTHCARE
INDUSTRY. Regulatory bodies in the United States and the EU are continuously
revising their rules. Fundamental reforms in the healthcare industry in the
United States and the EU continue to be considered, although the Company cannot
predict whether or when any healthcare reform proposals will be adopted and what
impact such proposals might have. Moreover, management is unable to predict what
additional legislation or regulation, if any, relating to the healthcare
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation would have. See
"Business-Government Regulation."

         PRODUCT DEFECTS; LIMITS OF PRODUCT LIABILITY INSURANCE. One or more of
the Company's products may be found to be defective after the Company has
already shipped such products in volume, requiring a product replacement.
Product returns and the potential need to remedy defects or provide replacement
products or parts could impose substantial costs on the Company and have a
material adverse effect on the Company's business and results of operations. The
clinical testing, manufacturing, marketing and use of the Company's excimer
laser devices and procedures may expose the Company to product liability claims.
The Company maintains liability insurance with coverage limits of $3,000,000 per
occurrence. Although the Company has never been subject to a product liability
claim, there can be no assurance that the coverage limits of the Company's
insurance policies are adequate or that one or more successful claims brought
against the Company would not have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Business-Product
Liability Insurance."

         EFFECTS OF CERTAIN REGISTRATION RIGHTS. The Company is registering,
pursuant to the pending registration statement, 9,893,032 shares of Common
Stock, consisting of 7,455,927 shares of Common Stock currently issued in the
name of certain selling stockholders (the "Selling Stockholders"), 2,237,105
shares of Common Stock underlying certain warrants (the "Warrants") and 200,000
shares of Common Stock underlying certain options (the "Options"). As of the
date of this Report, the Company has 14,913,260 shares issued and outstanding.
There can be no assurance that the registration of the shares being registered
pursuant to the pending registration statement will not have a material adverse
effect on the market price for the Company's Common Stock resulting from the
increased number of free trading shares of Common Stock in the market. See
"Certain Relationships and Related Transactions" and "Market for Registrant's
Common Equity and Related Stockholder Matters-Shares Eligible for Future
Sale-Dividend Policy."

         LACK OF DIVIDENDS ON COMMON STOCK. The Company has paid no dividends on
its Common Stock, as of the date of this Report, and there are no plans for
paying dividends in the foreseeable future. The Company intends to retain
earnings, if any, to provide funds for the expansion of the Company's business.
See "Market for Registrant's Common Equity and Related Stockholder Matters."

         POTENTIAL ANTI-TAKEOVER EFFECT OF DELAWARE LAW. The Company is subject
to certain provisions of the Delaware General Corporation Law, which, in
general, restrict the ability of a publicly held Delaware corporation from
engaging in certain "business combinations," with certain exceptions, with
"interested stockholders" for a period of three (3) years after the date of the
transaction in which the person became an "interested stockholder." The effect
of such "anti-takeover" provisions may delay, deter or prevent a takeover of the
Company which the stockholders may consider to be in their best interests,
thereby possibly depriving holders of the Company's securities of certain
opportunities to sell or otherwise dispose of their securities at above-market
prices, or limit the ability of stockholders to remove incumbent directors as
readily as the stockholders may consider to be in their best interests. See
"Market for Registrant's Common Equity and Related Stockholder Matters-Certain
Business Combinations."

         SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES. Future
sales of shares of Common Stock by the Company and its stockholders could
adversely affect the prevailing market price of the Common Stock and could have
a material adverse effect on the ability of the Company to raise new capital.
There are currently 5,690,027 restricted shares and 9,223,233 shares which are
freely tradable, eligible to have the restrictive legend removed pursuant to
Rule 144(k) promulgated under the Securities Act of 1933, as amended (the

                                       33
<PAGE>

"Securities Act") or are the subject of the pending registration statement or
other registration statements. All of the restricted shares, including 263,701
shares held by affiliates of the Company, are being registered in the pending
registration statement. Further, the Company has granted options to purchase up
to an additional 3,609,379 shares of Common Stock, 2,426,047 of which are
currently exercisable. The shares of Common Stock underlying the Warrants to
purchase up to 2,237,105 shares of Common Stock and Options to purchase up to
200,000 shares of Common Stock are the subject of the pending registration
statement. Sales of substantial amounts of Common Stock in the public market, or
the perception that such sales may occur, could have a material adverse effect
on the market price of the Common Stock. Pursuant to its Certificate of
Incorporation, the Company has the authority to issue additional shares of
Common Stock. The issuance of such shares could result in the dilution of the
voting power of Common Stock purchased in the Offering. See "Market for
Registrant's Common Equity and Related Stockholder Matters-Shares Eligible for
Future Sale."

         LIMITATIONS ON DIRECTOR LIABILITY. The Company's Certificate of
Incorporation provides, as permitted by governing Delaware law, that a director
of the Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, with certain
exceptions. These provisions may discourage stockholders from bringing suit
against a director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by stockholders on behalf of the Company against a
director. In addition, the Company's Certificate of Incorporation and Bylaws
provide for mandatory indemnification of directors and officers to the fullest
extent permitted by Delaware law. See "Management."

         SETTLEMENT ORDER. In 1997, as a result of certain alleged securities
law violations in 1992 and early 1993 under prior management, the Company
entered into a Settlement Order with the Commission, in which it neither
admitted nor denied liability, but consented to the issuance of an injunction
against any future law violations. The alleged events occurred prior to the
Company's Bankruptcy Reorganization and involve events, which occurred prior to
the change in the Company's management and directors. There can be no assurance
that the Settlement Order will not have an adverse effect on the Company's
ability to conduct financings in the future. See "Business-Legal Proceedings."

ITEM 2.  PROPERTIES

         The Company entered into a lease on August 4, 1998, with an
unaffiliated third party consisting of 11,500 square feet of office space,
manufacturing and warehousing located at 2431 Impala Drive, Carlsbad,
California, 92008. The term of the lease is 57 months, commencing December 1,
1998. The lease cost is $8,050 per month. There are two five-year options to
extend the term of the lease, for a total occupancy of approximately 15 years,
if desired by the Company. The performance of this lease is guaranteed by PMG.
The Company's Carlsbad facility houses the Company's headquarters, manufacturing
and development operations for the Company's excimer laser business. Management
of the Company believes that this facility will provide adequate space for such
business over the four years from the date of this Report and that the location
in Carlsbad is convenient for the attraction of skilled personnel in the future,
although no assurance can be given to that effect. See "Certain Relationships
and Related Transactions."

         The Company occupies approximately 1,850 square feet of office space in
Radnor, Pennsylvania, which serves as a satellite office to accommodate those
executive officers of the Company who live near Philadelphia, Pennsylvania. The
Company's corporate headquarters remain at its facilities in Carlsbad,
California. The lease for this property has a 5-year term, commencing April 1,
2000, and provides for a monthly rent ranging from approximately $4,940 per
month to $5,555 per month over the term of the lease.

ITEM 3.  LEGAL PROCEEDINGS

         BANKRUPTCY REORGANIZATION. On May 13, 1994, the Company filed the
Bankruptcy Proceeding. On May 22, 1995, the Bankruptcy Court confirmed the
Company's Plan. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

         SETTLEMENT ORDER. In 1997, the Company entered into a Settlement Order
with the Commission, where it neither admitted nor denied alleged securities law
violations in 1992 and early 1993 under prior management, but consented to the
issuance of an injunction against any future violation of law. The alleged
events occurred prior to the Bankruptcy Reorganization and involve events, which
occurred prior to the change in the Company's management and directors. The
current management and directors have no connection with this proceeding. No
monetary damages were sought.

                                       34
<PAGE>

         DISPUTE WITH THE HARTMANS. On November 19, 1999, the Company's Board of
Directors voted to terminate Jeffrey F. O'Donnell as an officer and employee and
Sandra Hartman, the wife of Raymond Hartman, as an employee of the Company and
of all subsidiaries of the Company. In addition, the Board of Directors of
Acculase terminated Raymond Hartman as an officer and employee and Sandra
Hartman as an employee of Acculase. Finally, the stockholders of Acculase
removed Raymond Hartman as a director of Acculase. Raymond Hartman resigned as a
director of Laser Photonics, as of January 31, 2000. Prior to the terminations,
both Mr. and Ms. Hartman were offered a severance benefit package under which
they would tender resignations, in lieu of the terminations, and enter into
part-time consulting agreements. The Hartmans declined this offer and, through
counsel, alleged wrongful termination by the Company and have threatened legal
action. The Company hopes that this matter can be amicably resolved, although no
assurances to that effect can be given. If settlement is not reached and
litigation is commenced by the Hartmans, the Company will vigorously defend this
matter. Since no proceeding has been initiated and no discovery has taken place,
all relevant factors, which may affect the outcome, are not known to the
Company, and the Company cannot evaluate the likelihood of a favorable or
unfavorable outcome, or to estimate the amount or range of possible gain or
loss.

         LITIGATION BETWEEN BAXTER AND SPECTRANETICS. On August 6, 1999, Baxter
filed suit against The Spectranetics Corporation in the United States District
Court for the District of Delaware, entitled BAXTER HEALTHCARE CORPORATION,
LASERSIGHT PATENT, INC. AND ACCULASE, INC. V. THE SPECTRANETICS CORPORATION,
Civil Action No. 99-512 RRM. On November 12, 1999, Acculase moved to become a
co-plaintiff with Baxter. The Second Amended Complaint ("Complaint"), dated
December 17, 1999, alleges claims for patent infringement against defendant The
Spectranetics Corporation ("Spectranetics"). Specifically, the First Cause of
Action of the Complaint alleges that Acculase is the owner of United States
Patent Number 4,891,818 (the "818 patent") and that Baxter holds an exclusive
license to the 818 patent in the field of cardiovascular and vascular
applications. It further alleges that Spectranetics manufactures, distributes
and sells excimer lasers and related products, including the Spectranetics
CVX-300 excimer laser system, that infringe the 818 patent in the field in which
Baxter holds an exclusive license. It seeks an injunction against such
infringement, damages in an amount to be proven at trial, enhanced damages for
willful infringement, attorneys' fees based upon a finding that this is an
"extraordinary case" and costs. The Second and Third Causes of Action of the
Complaint claim infringement of other patents and do not involve Acculase.

         On January 5, 2000, Spectranetics filed an Answer and Counterclaims in
the United States District Court for the District of Delaware, admitting
issuance of the 818 patent and that Spectranetics manufacturers, distributes and
sells the Spectranetics CVX-300 excimer laser system, but denies that it
infringes the 818 patent. The Answer also raises affirmative defenses. Only the
First Claim of the Counterclaim for declaratory judgment of invalidity,
unenforceability and non-infringement of the 818 patent is directed against
Acculase. It alleges that this is an "exceptional case" supporting an award of
reasonable attorneys' fees, costs and expenses in favor of Spectranetics. The
other patents, which are the subject of the Second and Third Causes of Action of
the Complaint, are also the subject of the First Claim of the Counterclaim and
do not include Acculase. The Counterclaim includes other claims for antitrust
violations, interference with existing economic relationships, interference with
prospective economic advantage and misappropriation and misuse of confidential
information, which are directed against Baxter. A responsive pleading to the
Counterclaim has not yet been filed. Baxter is bearing the legal fees and costs
associated with this action. Acculase bears no responsibility therefore.

         DISPUTE WITH LASER ANALYTICS, INC., A TEXAS CORPORATION. The Company
has received a claim for approximately $232,000, plus interest, from Laser
Analytics, Inc., a Texas corporation ("LAI-Texas"). As of January 4, 1999, the
Company and Laser Analytics, Inc., a Massachusetts corporation, a wholly-owned
subsidiary of the Company, entered into an agreement with LAI-Texas, pursuant to
which LAI-Texas agreed to purchase certain of the assets of the Company
associated with the Company's business operations in Orlando, Florida and
Wilmington, Massachusetts. The principal of LAI-Texas managed these business
operations pending the closing. LAI-Texas failed to close the transaction and
the Company resumed management of these business operations. LAI-Texas claims
that during this period, the Company's operations required cash and that
LAI-Texas loaned over $232,000 to the Company to support these business
operations. The Company is in the process of investigating LAI-Texas' claim and
the Company's rights with respect to the manner in which the operations were
managed by the principal of LAI-Texas, and LAI-Texas' failure to close pursuant
to the agreement. Since the Company does not know all relevant factors, which
may affect the outcome, at this time, the Company is unable to evaluate the
likelihood of a favorable outcome, and the Company is currently unable to
estimate the amount or range of possible gain or loss.

         Except as set forth above, the Company knows of no material legal
actions, pending or threatened, or judgment entered against the Company or any
executive officer or director of the Company, in his capacity as such.

                                       35
<PAGE>

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

         During the year ended December 31, 1999, the Company's stockholders
adopted the following resolutions:

         1.       Approved a form of indemnification agreement between the
                  Company and its directors.

         2.       Approved an amendment to the Company's Certificate of
                  Incorporation to increase the number of authorized shares of
                  Common Stock to 15,000,000.

         3.       Approved an amendment to the Company's Certificate of
                  Incorporation to increase the number of authorized shares of
                  Common Stock to 25,000,000.

         4.       Ratified the appointment of Hein + Associates LLP as
                  independent public accountants of the Company for the year
                  ended December 31, 1999.

PART II

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

         As of the date of this Report, the Company had 14,913,260 shares of
Common Stock issued and outstanding. Further, the Company has issued and
outstanding options to purchase 3,609,379 shares of Common Stock, of which
2,426,047 are vested as of the date of this Report, and Warrants to purchase up
to 2,237,105 shares of Common Stock.

         The Company's Common Stock is listed for trading in the
Over-The-Counter Market under the symbol "LSPT." The Company's Common Stock,
subsequent to the confirmation of Plan on May 22, 1995, has been quoted on the
Electronic Bulletin Board since approximately January 22, 1996 under the stock
symbol "LSPT."

         The following table sets forth quotations for the bid and asked prices
for the Common Stock for the periods indicated below, based upon quotations
between dealers, without adjustments for stock splits, dividends, retail
mark-ups, mark-downs or commissions, and therefore, may not represent actual
transactions:
<TABLE>
<CAPTION>

                                                                        Bid                    Asked
                                                                 High       Low           High         Low
<S>                                                              <C>        <C>           <C>         <C>
YEAR ENDED DECEMBER 31, 1998
1st Quarter..................................................... 4 1/8      2 1/2         4 3/8       2 11/16
2nd Quarter..................................................... 3 3/4      2 1/8         3 7/8       2 3/8
3rd Quarter..................................................... 2 9/16     1 1/8         2 3/4       1 1/4
4th Quarter..................................................... 3 1/16     1 1/4         3 1/4       1 3/8

YEAR ENDED DECEMBER 31, 1999
1st Quarter..................................................... 4 1/4      2 3/8         4 1/2       2 17/32
2nd Quarter..................................................... 6 1/2      4 5/16        6 5/8       4 1/4
3rd Quarter..................................................... 6 1/2      4             6 3/4       4 1/16
4th Quarter..................................................... 10 7/8     4 3/16        11 1/4      4 5/16

YEAR ENDING DECEMBER 31, 2000
1st Quarter..................................................... 18 3/16    11 5/8        18 7/16     11 7/8
</TABLE>

         On April 11, 2000, the closing market price for the Company's Common
Stock in the Over-The-Counter Market was approximately $12.00 per share. As of
March 29, 2000, the Company had 1,047 stockholders of record.

                                       36
<PAGE>

DIVIDEND POLICY

         No dividend has been declared or paid by the Company since inception on
the Company's Common Stock. The Company does not anticipate that any dividends
will be declared or paid in the future on the Company's Common Stock.

CERTAIN BUSINESS COMBINATIONS AND OTHER PROVISIONS OF THE CERTIFICATE OF
INCORPORATION

         As a Delaware corporation, the Company is currently subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law
("Section 203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate, or associate of such person, who is an "interested
stockholder" for a period of three (3) years from the date that such person
became an interested stockholder unless: (i) the transaction resulting in a
person becoming an interested stockholder, or the business combination, s
approved by the Board of Directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquired eighty five
percent (85%) or more of the outstanding voting stock of the corporation in the
same transaction that makes such person an interested stockholder (excluding
shares owned by persons who are both officers and directors of the corporation,
and shares held by certain employee stock ownership plans); or (iii) on or after
the date the person becomes an interested stockholder, the business combination
is approved by the corporation's board of directors and by the holders of at
least sixty-six and two-thirds percent (66-2/3%) of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of fifteen percent (15%) or more of
the outstanding voting stock of the corporations; or (ii) an affiliate or
associate of the corporation and who was the owner of fifteen percent (15%) or
more of the outstanding voting stock of the corporation at any time within the
three (3) year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.

         A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its stockholders to exempt itself from coverage, provided that such bylaw or
certificate of incorporation amendment shall not become effective until twelve
(12) months after the date it is adopted. The Company has not adopted such an
amendment to its Certificate of Incorporation or Bylaws.

SHARES ELIGIBLE FOR FUTURE SALE

         As of the date of this Report, the Company had issued and outstanding
14,913,260 shares of Common Stock. There are currently 5,690,027 shares of
Common Stock, which are restricted shares, and 9,223,233, which are freely
tradable or eligible to have the restrictive legend removed pursuant to Rule
144(k) promulgated under the Securities Act. All of the restricted shares,
including 263,601 shares held by affiliates of the Company, are being registered
in the pending registration statement. Further, the Company has issued and
outstanding options to purchase up to 3,609,379 shares of Common Stock,
2,426,047 of which are currently exercisable, and warrants to purchase up to
2,237,105 shares of Common Stock.

         Holders of restricted securities must comply with the requirements of
Rule 144 in order to sell their shares in the open market. In general, under
Rule 144, as currently in effect, any affiliate of the Company and any person
(or persons whose sales are aggregated) who has beneficially owned his or her
restricted shares for at least one year, may be entitled to sell in the open
market, within any three-month period, in brokerage transactions or to market
makers a number of shares that does not exceed the greater of: (i) 1% of the
then outstanding shares of the Company's Common Stock (approximately 149,133
shares), or (ii) the average weekly trading volume reported in the principal
market for the Company's Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain limitations on
manner of sale, notice requirement and availability of current public
information about the Company. Non-affiliates who have held their restricted
shares for two years are entitled to sell their shares under Rule 144, without
regard to any of the above limitations, provided they have not been affiliates
of the Company for the three months preceding such sale.

         The Company can make no prediction as to the effect, if any, that sales
of shares of Common Stock or the availability of shares for sale will have on
the market price of Common Stock. Nevertheless, sales of significant amounts of
Common Stock could adversely affect the prevailing market price of the Common
Stock, as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities.

                                       37
<PAGE>

ITEM 6   SELECTED FINANCIAL DATA

         The Selected Consolidated Financial Data for the years ended December
31, 1995 through 1999 set forth below are derived from the Consolidated
Financial Statements of the Company and Notes thereto. The Consolidated Balance
Sheets as of December 31, 1999 and 1998 and the related Consolidated Statements
of Operations, Stockholders' Equity, and Cash Flows for each of the years in the
3-year period ended December 31, 1999 appear elsewhere in this Report. The
Selected Consolidated Financial Data are qualified in their entirety by
reference to, and should be read in conjunction with, the Consolidated Financial
Statements and related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Report.
<TABLE>
<CAPTION>


                                          THE PERIOD                  YEAR ENDED DECEMBER 31,
                                     JANUARY 1,   MAY 23, TO
                                     TO MAY 22,  DECEMBER 31,
                                       1995(1)      1995(1)     1996      1997       1998        1999
                                       -------      ------      ----      ----       ----        ----

                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
<S>                                   <C>           <C>        <C>       <C>        <C>         <C>
Revenues..................             $1,242        $1,408     $2,901    $3,815     $2,349      $1,209
Costs and expenses........              2,082         3,351      7,704     5,746      7,746       9,265

Loss from operations......               (840)       (1,942)    (4,802)   (1,931)    (5,397)     (8,057)

Other income (expenses)...                (89)         (181)      (556)     (372)      (508)     (1,859)
Income tax expense                          -             -          -        (4)        (3)         (4)
Extraordinary item-gain
   from reorganization....              5,768             -          -         -          -           -
Net income (loss).........             $4,839(2)    $(2,124)   $(5,358)  $(2,307)   $(5,908)    $(9,920)


Basic and diluted income
   (loss) per share.......               0.75         (0.42)     (0.95)    (0.35)     (0.64)      (0.89)
Weighted average shares(3)              6,312         5,000      5,620     6,531      9,288      11,208

BALANCE SHEET DATA (AT
   PERIOD END):

Working capital (deficit).                (99)         (610)    (1,728)       15     (1,843)         1,529
Total Assets..............              1,715         5,796      3,195     7,808      4,870          9,706
Long-term debt (net of
   current portion).......                  -           867        283       283         70             44
Liabilities subject to
   compromise.............              7,564             -          -         -          -              -
Total stockholders' equity
   (deficit)..............             (7,404)          686     (2,090)    4,929      1,841          5,274
</TABLE>

----------
(1)      In connection with the confirmation of the Bankruptcy Reorganization on
         May 22, 1995, the Company was required to adopt fresh start reporting
         as of May 23, 1995, since the reorganization value (approximate fair
         value at the date of the Bankruptcy Reorganization) was less than the
         total of all post-petition liabilities and allowed claims, and holders
         of existing voting shares before May 23, 1995 received less than 50% of
         the voting shares of the emerging entity. Accordingly, the statement of
         operations for the period January 1, 1995 through May 22, 1995 reflects
         the effects of the forgiveness of debt resulting from the confirmation
         of the Bankruptcy Reorganization and the effects of the adjustments to
         restate assets and liabilities to reflect the reorganization value. In
         addition, the accumulated deficit of the Company was eliminated and the
         Company's capital structure was recast in conformity with the
         Bankruptcy Reorganization. As such, the consolidated financial
         statements of the Company for the period from May 23, 1995 to December
         31, 1995, and the years ended December 31, 1996, 1997, 1998 and 1999,
         reflect that of the Company on and after May 23, 1995, which, in
         effect, is a new entity for financial reporting purposes, with assets,
         liabilities, and a capital structure having carrying values not
         comparable with prior periods. The consolidated financial statements
         for the period from January 1, 1995 to May 22, 1995 reflect that of the
         Company prior to May 23, 1995. See "Business-Business of the Company"
         and "Business-Litigation."

                                       38
<PAGE>

(2)      Includes an extraordinary gain of $5,768,405. See "Management's
         Discussion and Analysis of Financial Condition and Results of
         Operations."

(3)      Common Stock equivalents and convertible issues are antidilutive and,
         therefore, are not included in the weighted shares outstanding during
         the years the Company incurred net losses.

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

         THIS REPORT, INCLUDING THE DISCLOSURES BELOW, CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES.
WHEN USED HEREIN, THE TERMS "ANTICIPATES," "EXPECTS," "ESTIMATES," "BELIEVES"
AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT, ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED
OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH MATERIAL DIFFERENCES INCLUDE THE FACTORS DISCLOSED IN THE
"RISK FACTORS" SECTION OF THIS REPORT, WHICH READERS OF THIS REPORT SHOULD
CONSIDER CAREFULLY.

         THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE
IN THIS REPORT.

OVERVIEW OF BUSINESS OPERATIONS

         The Company is engaged in the development, manufacturing and marketing
of proprietary excimer laser and fiber optic equipment and techniques directed
toward the treatment of psoriasis and cardiovascular and vascular disease. The
Company anticipates developing such equipment and technologies to treat other
medical problems. However, no assurance to this effect can be given.

         The Company's former business strategy consisted of the development of
a wide range of laser products using different solid-state lasers. Between 1986
and the date of this Report, the Company sold over 1,000 lasers, usually on a
private label basis, to other manufacturers. The Company also considered
pursuing a strategy of using its excimer laser technology for a photolithography
product, which was abandoned. The Company's former strategies proved to be
unsuccessful, in the opinion of then current management of the Company. Although
the Company generated revenues from the sale of its products, former management
believed that the Company would never be able to operate profitably in the
markets where the Company was then doing business. The Company currently
believes that its excimer laser technology provides the basis for reliable
cost-effective systems that will increasingly be used in connection with a
variety of applications. Accordingly, the Company has discontinued its business
operations related to the Company's former business strategy and is focused
solely on excimer laser products for various medical applications.

         On May 13, 1994, the Company filed for Bankruptcy Reorganization. The
Company was subsequently authorized to conduct its business operations as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court. On May
22, 1995, the Company's Plan was confirmed by the Bankruptcy Court. The
implementation of the terms of the Plan resulted in the Company's adoption of
"fresh start" accounting. The Plan provided, that in exchange for the
forgiveness of certain unsecured debt, the Company issued to unsecured creditors
shares of the Company's Common Stock such that, following the issuance of all
Common Stock to be issued under the Plan, the unsecured creditors owned
1,000,000 shares of the Company's Common Stock, representing 20% of the issued
and outstanding Common Stock of the Company. The 7,500,000 shares of Common
Stock of the Company's prior existing stockholders were canceled and reissued
into 250,000 shares of Common Stock, which represented 5% of the then total
issued and outstanding shares of Common Stock.

         The Plan further provided that Helionetics transfer to the Company
76.1% of the common stock of Acculase. Further, during the pendency of the
Bankruptcy Proceeding, Helionetics contributed $1,000,000 in cash to the
Company, which funds were utilized for cash payments under the Plan, and
Helionetics loaned the Company $300,000 to fund the cost of research and
development of the Company's excimer lasers, which loan has been repaid. Under
the Plan, Helionetics received 3,750,000 shares of Common Stock of the Company,
which represented 75% of the then total issued and outstanding shares of Common
Stock.

                                       39
<PAGE>

         During April, 1997, Helionetics filed a voluntary petition of
reorganization ("Helionetics Reorganization") with the United States Bankruptcy
Court in the Central District of California for protection under Chapter 11 of
Title 11 of the United States Bankruptcy Code. As a result, the Company wrote
off its $662,775 receivable from Helionetics as of December 31, 1996. In
connection with the Helionetics Reorganization (defined below), Helionetics
disposed of all of its holdings of the Company's Common Stock. No persons who
were stockholders of the Company immediately before the reorganization have at
present any controlling interest in the Company. On September 30, 1997,
Pennsylvania Merchant Group ("PMG"), the Company's investment banker, purchased
from the Helionetics bankruptcy estate, a note payable from Acculase to
Helionetics in the amount of $2,159,708, including accrued interest. During
October, 1997, PMG sold the note to the Company for 800,000 shares of Common
Stock.

         Acculase was founded in 1985 for the purpose of commercializing
products that utilize its proprietary excimer laser and fiber optic
technologies. Acculase has focused primarily on the development of medical
products for the treatment of coronary heart disease.

         The Acculase excimer laser power source was developed to perform a
variety of material processing applications. The Acculase overall system,
designated the pulsed excimer laser, was developed for microsurgical
applications. The first medical application of the overall system, designated
the excimer laser system, was approved by the FDA under IDE No. G920163, for use
in the treatment of occlusive coronary artery disease, as an adjunct to CABG.
Acculase chose not to pursue completion of such IDE due to the lack of funds to
pay the costs of, and to recruit patients into, the necessary studies.

         In connection with the Company's current business plan, the Company's
initial medical applications for its excimer laser technology are intended to be
used in the treatment of psoriasis and cardiovascular disease.

         Between March, 1998 and November, 1999, the Company entered into the
Clinical Trial Agreement with MGH to compare the effect of excimer laser light
using its excimer laser technology to the current UVB treatment being used to
treat psoriasis and other skin disorders. The Company provided prototype laser
equipment for pre-clinical dose response studies. The Company has agreed to
support the clinical trials with research grants of approximately $660,000, of
which $448,000 has been paid, as of the date of this Report. The final data from
the first of these clinical trial agreements was collected in December, 1998,
and formed the basis for a 510(k) submission to the FDA on August 4, 1999. The
four remaining studies are ongoing and have not been completed as of the date of
this Report. On January 27, 2000, FDA issued a 510(k) to the Company,
establishing that the Company's excimer laser psoriasis system has been
determined to be substantially equivalent to currently marketed devices for the
treatment of psoriasis. The Company introduced its psoriasis products for the
purposes of commercial application testing in March, 2000, and intends to
distribute the psoriasis treatment system for commercial use in July, 2000. As
of the date of this Report, the Company has generated no revenues from the
psoriasis treatment system.

         In connection with the cardiovascular and vascular uses of the
Company's excimer laser technology, on August 19, 1997, Acculase and Baxter
executed the Baxter Agreement, which provides for an alliance with Baxter, in
which Acculase granted to Baxter an exclusive worldwide right and license to
manufacture and sell the Company's TMR System, consisting of certain excimer
laser technology products relating to the treatment of cardiovascular and
vascular disease and the disposable products associated therewith. The Company
agreed to manufacture the TMR System to the specifications of Baxter at a
schedule of prices, based upon the volume of TMR Systems purchased by Baxter
from the Company.

         The Company recognized revenue of $1,718,000 from Baxter, which was
equal to 23% of gross revenues for the three-year period ended December 31,
1999. No single customer, other than Baxter, accounted for sales in excess of
10% in 1997, 1998 or 1999.

         Due to the limited financial resources of the Company, the Company's
business strategy changed in 1997 to focus its efforts on excimer laser
technology in order to develop excimer laser and excimer laser delivery products
for medical applications.

         To facilitate the Company's focus on excimer laser technology, the
Company has been attempting to sell certain of its non-excimer laser assets,
which are related to its business operations at its Orlando, Florida and
Wilmington, Massachusetts facilities. The Company did not complete the sale of
certain of its assets related to these operations pursuant to an agreement with

                                       40
<PAGE>

one party. The Company intends to discontinue its Florida business operations on
or before the end of April, 2000, and is in negotiations to sell certain assets
related to these business operations. There can be no assurances that the
Company will be able to complete such a proposed transaction. As of April 7,
2000, all but approximately $465,000 of the debts related to these operations
have been paid from the proceeds of the August 9, 1999 Financing resulting in
gross proceeds of $9,310,374 to the Company and the March 16, 2000 Financing
resulting in net proceeds of approximately $14,570,000 to the Company and the
sale of certain assets related to the Company's non-excimer laser operations.
The Company paid $950,000 in cash to the landlord for the Florida lease in
connection with the satisfaction of a judgment and settlement of certain claims
against the Company in the aggregate amount of $1,114,000. Further, as of April
6, 2000, the Company closed the transactions with respect to the sale of certain
assets and the grant of an exclusive license for certain patents related to
non-excimer lasers related to the Company's Massachusetts business operations to
Laser Components GmbH ("Laser Components"), for a purchase price of $213,000.
Laser Components is unaffiliated with the Company. In addition, Laser Components
assumed the Company's prospective obligations under the Company's Massachusetts
office lease. The Company has discontinued its Massachusetts operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business-Discontinuance of the Company's Non-Excimer Laser
Business Operations."

         Management's decision to suspend these business operations is
consistent with the Company's new business strategy and has resulted in the
intended discontinuance of business operations which generated approximately 76%
of the Company's revenues for 1998 and 1999. The Company has retained accounts
receivable of an aggregate of $176,179 (net of an allowance of $83,000), at
December 31, 1999, from these business operations and certain of its patents
related to its non-excimer laser systems.

         At December 31, 1999 and December 31, 1998, total assets related to the
Company's former non-excimer laser business operations based in Florida and
Massachusetts were $764,179 and $806,335, respectively, and total liabilities
were $2,970,030 and $2,430,414, respectively, at each such date. Revenues from
such operations for the years ended December 31, 1999 and 1998 were
approximately $1,110,000 and $1,580,000, respectively. Losses from operations
during the corresponding annual periods were approximately $1,235,000 and
$996,000, respectively.

BASIS FOR PREPARATION OF FINANCIAL STATEMENTS

         The consolidated financial statements filed elsewhere herein have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business, and, where
applicable, in conformity with Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code," issued in November,
1990, by the American Institute of Certified Public Accountants ("SOP 90-7").

         Under the provisions of SOP 90-7 and in connection with the
confirmation of the Bankruptcy Reorganization on May 22, 1995, the Company was
required to adopt fresh start reporting as of May 23, 1995, since the
reorganization value (approximate fair value at the date of reorganization) was
less than the total of all post-petition liabilities and allowed claims, and
holders of existing voting shares before May 23, 1995 received less than 50% of
the voting shares of the emerging entity. Accordingly, the consolidated
statements of operations for the period from January 1, 1995 to May 22, 1995
reflects the effects of the forgiveness of debt resulting from the confirmation
of the Bankruptcy Reorganization and the adjustments to restate assets and
liabilities to reflect the reorganization value.

         In adopting fresh start reporting, the Company was required to
determine its reorganization value, which represented the fair value of the
Company before considering liabilities and the approximate amount a willing
buyer would pay for the assets of the Company immediately after the Bankruptcy
Reorganization. The reorganization value was based upon the consideration given
by Helionetics to acquire a 75% interest in the Company. The purchase price of
$1,894,122 was determined based upon cash paid and the carrying value of the
76.1% interest in Acculase previously owned by Helionetics, which was
transferred to the Company in connection with the Bankruptcy Reorganization.

         All assets and liabilities were restated to reflect their
reorganization value in accordance with procedures specified in Accounting
Principles Board Opinion 16 "Business Combinations," as required by SOP 90-7.
The portion of the reorganization value that could not be attributed to specific

                                       41
<PAGE>

tangible or identified intangible assets was classified as reorganization value
in excess of amounts allocable to identifiable assets ("Reorganization
Goodwill") and was being amortized over five years. Because of the magnitude of
the Company's losses since emerging from the Bankruptcy Reorganization, the
balance of the Reorganization Goodwill was written off as of December 31, 1996.

         In addition, the accumulated deficit of the Company was eliminated, and
its capital structure was recast in conformity with the Bankruptcy
Reorganization. As such, the consolidated balance sheets of the Company as of
December 31, 1998 and 1999, and the consolidated statements of operations for
the years ended December 31, 1997, 1998, and 1999, reflect in effect, a new
entity for financial reporting purposes, as of May 23, 1995, with assets,
liabilities, and a capital structure having carrying values not comparable with
periods prior to May 23, 1995.

         The Company's consolidated statements of operations for the years ended
December 31, 1997, 1998 and 1999, which form a part of the Company's
consolidated financial statements for such years, reflect the consolidated
results of operations of Laser Photonics, Laser Analytics and Acculase.

RESULTS OF OPERATIONS

         The following table presents selected consolidated financial
information stated as a percentage of revenues for the years ended December 31,
1997, 1998,and 1999:
<TABLE>
<CAPTION>

                                                                          1997     1998     1999
                                                                          ----     ----     ----
                                                                          YEAR ENDED DECEMBER 31,
                                                                          -----------------------
<S>                                                                       <C>     <C>       <C>
Revenues...............................................................   100%     100%     100%
Costs of sales.........................................................   55       77       104


Gross profit...........................................................   45       23       (4)


Selling, general and administrative expenses...........................   57       154      408
Research and development...............................................   18       53       171
Bad debt expense related to related party receivable...................    1       -        -
Depreciation and amortization..........................................   19       46       84


Loss from operations...................................................  (50)     (230)     (667)
Other expense..........................................................  (10)     (21)      (154)


Net loss...............................................................  (60)%    (251)%    (821)%
</TABLE>

         RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998.
Total revenues for the year ended December 31, 1999 decreased approximately
48.5% to $1,208,835 from $2,349,448 for the year ended December 31, 1998. Total
revenues for the years ended December 31, 1999 and 1998 primarily consisted of:
(i) sales of $1,114,929 and $1,580,422, in the respective years, of the
Company's scientific and medical lasers from the operations of the Company's
Florida and Massachusetts facilities, and (ii) revenues of $93,906 and $769,026,
in the respective years, relating to the sale of the Company's excimer lasers to
Baxter and the recognition of payments made by Baxter to commercialize the
Company's excimer lasers in connection with the Baxter Agreement. Revenues on
sales of medical and scientific lasers decreased in the years ended December 31,
1999 from the corresponding period ended December 31, 1998 due to reduced volume
of sales and discounting on sales of medical and scientific lasers in connection
with the Company's focusing its marketing efforts on its excimer laser systems.

         Total costs and expenses during the year ended December 31, 1999
increased approximately 19.6% to $9,265,402 from $7,746,686 during the year
ended December 31, 1998. Total costs and expenses include: (i) cost of sales,
(ii) selling, general and administrative expenses, (iii) research and
development, and (iv) depreciation and amortization, as follows:

         Cost of sales during the year ended December 31, 1999 decreased
approximately 30.3% to $1,257,438 from $1,806,557 during the year ended December
31, 1998. This decrease primarily resulted from reduced sales.

         As a result, cost of sales as a percentage of sales increased to
approximately 104.0% in the year ended December 31, 1999 from 76.9% in the year
ended December 31, 1998.

                                       42
<PAGE>

         Selling general and administrative expenses during the year ended
December 31, 1999 increased approximately 36.6% to $4,930,095 from $3,608,108
during the year ended December 31, 1998. This increase primarily resulted from
increases in consulting and professional fees of an aggregate of $645,783
related to marketing expenses with respect to the Company's excimer laser
systems and legal and accounting expenses, and increases in salaries and related
items of an aggregate of $482,271 related to salaries for newly retained
executive officers and increased personnel and overhead expenses with respect to
the Company's excimer laser operations.

         Research and development during the year ended December 31, 1999
increased to $2,061,241 from $1,243,372 during the year ended December 31, 1998.
This increase primarily related to the increased amount of funds available for
research expenses during 1999. Research and development expenses in the year
ended December 31, 1999 primarily related to the development of the Company's
excimer laser systems for its psoriasis and TMR products. Research and
development expenses in the year ended December 31, 1998 primarily related to
the development of the Company's psoriasis laser systems and also included
expenses related to additional testing to meet CE Mark and Underwriter's
Laboratory ("UL") standards for the Company's excimer lasers.

         Depreciation and amortization during the year ended December 31, 1999
decreased to $1,016,628 from $1,088,649 during the year ended December 31, 1998.
These amounts primarily related to the amortization of the prepaid license fee
from Baxter, the depreciation of newly acquired equipment in 1998 and
amortization of goodwill from the acquisition of Acculase.

         Other expenses increased during the year ended December 31, 1999 to
$1,859,118 from $508,049 during the year ended December 31, 1998. This increase
in other expenses between the respective periods resulted primarily from a
charge to interest expenses of $1,579,296 related to the conversion feature and
amortization of the discount of the Convertible Notes and $420,625 of other
interest expense during the year ended December 31, 1999, as compared to
$510,948 of interest expense during the year ended December 31, 1998.

         As a result of the foregoing, the Company experienced a net loss of
$9,920,067 during the year ended December 31, 1999, as compared to a net loss of
$5,908,587 during the year ended December 31, 1998. The Company also experienced
a net loss from operations of $8,056,567 during the year ended December 31,
1999, as compared to a net loss from operations of $5,397,238 during the year
ended December 31, 1998. See "Liquidity and Capital Resources."

         RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997. Total revenues for the year ended December 31, 1998 decreased
approximately 38% to $2,349,448 from $3,815,330 for the year ended December 31,
1997. Total revenues for the years ended December 31, 1998 and 1997 primarily
consisted of: (i) sales of $1,580,422 and $2,960,330, in the respective years,
of the Company's scientific and medical lasers from the operations of the
Company's Florida and Massachusetts facilities, and (ii) revenues of $769,026
and $855,000, in the respective years, relating to the sale of the Company's
excimer lasers to Baxter and the recognition of certain payments made by Baxter
to commercialize the Company's excimer lasers in connection with the Baxter
Agreement. Revenues on sales of medical and scientific lasers decreased in 1998
due to reduced volume of sales and discounting on sales of medical and
scientific lasers in connection with the Company's focusing its marketing
efforts on its excimer laser systems.

         Total costs and expenses during the year ended December 31, 1998,
increased approximately 35% to $7,746,686 from $5,746,170 during the year ended
December 31, 1997. Total costs and expenses include: (i) cost of sales, (ii)
selling, general and administrative expenses, (iii) research and development,
(iv) depreciation and amortization, and (v) certain bad debt expenses, as
follows:

         Cost of sales during the year ended December 31, 1998, decreased
approximately 14% to $1,806,557 from $2,090,276 during the year ended December
31, 1997. This decrease primarily resulted from reduced sales.

         As a result, cost of sales as a percentage of sales increased to
approximately 77% in 1998 from 55% in
1997.

         Selling, general and administrative expenses during the year ended
December 31, 1998 increased approximately 65% to $3,608,108 from $2,181,304
during the year ended December 31, 1997. This increase primarily resulted from:
(i) compensation recognized in 1998 of $1,318,200 related to the issuance of
warrants to PMG for financial advisory services, including the providing of a
guaranty of the Company's Carlsbad, California lease and the raising of a
$1,000,000 bridge loan for the Company, and (ii) consulting fees of $231,000 to
CSC related to the marketing of the Company's excimer lasers.

                                       43
<PAGE>

         Research and development during the year ended December 31, 1998
increased to $1,243,372 from $685,109 during the year ended December 31, 1997.
This increase primarily related to the availability of funds in 1998 from
financings conducted in the fourth quarter of 1997 and in 1998 as sources of
funding for research and development activities. Research and development
expenses in 1998 primarily related to the development of the Company's psoriasis
laser system and to additional testing related to meet CE Mark and UL standards
for the Company's excimer lasers.

         Bad debt expense related to related party receivables during the year
ended December 31, 1998 was none, as compared to $48,000 during the year ended
December 31, 1997. The Company had incurred a non-recurring bad debt expense of
$48,000 in 1997 related to the write-off of a receivable from Helionetics.

         Depreciation and amortization during the year ended December 31, 1998
increased to $1,088,649 from $741,481 during the year ended December 31, 1997.
This increase related to the amortization of the prepaid license fee from
Baxter, depreciation of newly acquired equipment in 1998 and amortization of
goodwill from the acquisition of Acculase.

         Other expenses increased during the year ended December 31, 1998 to
$508,049 from $372,361 during the year ended December 31, 1997. This increase in
other expenses between the respective years resulted primarily from increased
interest expense of $510,948 in 1998 from $386,069 in 1997.

         As a result of the foregoing, the Company experienced a net loss of
$5,908,587 during the year ended December 31, 1998, as compared to a net loss of
$2,307,101 during the year ended December 31, 1997. The Company also experienced
a net loss from operations of $5,397,238 during the year ended December 31,
1998, as compared to a net loss from operations of $1,930,840 during the year
ended December 31, 1997. See "Liquidity and Capital Resources."

         LIQUIDITY AND CAPITAL RESOURCES. At December 31, 1999, the ratio of
current assets to current liabilities was 1.34 to 1.00 compared to 0.24 to 1.00
at December 31, 1998.

         The Company has historically financed its operations through the use of
working capital provided from operations, loans and equity and debt financing.
The Company's cash flow needs for the year ended December 31, 1999 were
primarily provided from operations, loans and equity financing.

         The Company experienced severe cash flow problems during the first six
(6) months of 1997 and throughout 1996 and 1995. These cash flow problems
limited the Company's ability to purchase materials and parts incorporated in
the Company's laser products, and further restricted the Company's ability to
purchase such materials at volume discounts, thereby reducing gross profits from
concluded sales. New management instituted policies of cost controls, improved
product selection, staff reduction, budgeting and corporate planning in 1997,
which increased the Company's business efficiencies, including decreases in cost
of sales as a percentage of sales, reduction in net losses and losses from
operations and the focusing on a business plan aimed at excimer laser products
which management believes has greater potential of success than the Company's
laser products preceding the Bankruptcy Reorganization.

         Due to the limited financial resources of the Company, the Company's
strategy changed in 1997 to focus its efforts on the Company's excimer laser
technology and expertise in order to develop a broad base of excimer laser and
excimer laser delivery products for both medical and non-medical applications.

         From September, 1997 through March, 2000, the Company issued certain
securities, including shares of Common Stock and other derivative securities
convertible or exercisable into shares of Common Stock, in order to finance the
Company's business operations. All of the shares of Common Stock and the shares
of Common Stock underlying such derivative securities are being registered in
the pending registration statement.

         Cash and cash equivalents were $4,535,557, as of December 31, 1999, as
compared to $174,468, as of December 31, 1998. This increase was primarily
attributable to the receipt of $2,380,000 in cash proceeds from the offering of
the Convertible Notes in March, 1999 and of $9,310,374 from the gross proceeds
of an equity offering of the Company's securities in August, 1999, offset by
$5,890,572 of net cash used in operations during the year ended December 31,
1999.

         As of December 31, 1999, the Company had total debts of $4,431,336 and
an accumulated deficit of $25,617,537.

                                       44
<PAGE>

         As of December 31, 1999, the Company had long-term borrowings in the
aggregate amount of $43,620, less the current portion. As of December 31, 1998,
the Company had long-term borrowings in the aggregate amount of $69,893, less
the current portion. The decrease in long-term borrowings relates to payments of
certain scheduled obligations, including: (a) obligations payable in the total
amount of $282,559, pursuant to the Plan, to former members of the Board of
Directors of the Company. The notes related to those obligations went into
default in the first quarter of 1999. The Company paid these notes from the
proceeds of the $2,380,000 Convertible Note offering received by the Company in
April, 1999, which notes were converted into equity of the Company on August 2,
1999; (b) promissory notes payable in the total principal amount of $165,298,
with accrued pursuant to the Plan, to the former unsecured creditors of the
Company. These promissory notes have been paid in full.; (c) secured promissory
notes payable in the total amount of $127,860 pursuant to the Plan, to Novartis
Corp., formerly known as Ciba-Geigy. Interest accrues at the rate of 10% per
annum and is payable quarterly through May 5, 1997, and, thereafter, with
monthly principal and interest payments of $6,384 through May, 1999. The Company
has paid this promissory note in full; (d) a promissory note payable to the U.S.
Treasury for delinquent taxes in the amount of $14,873. This note bears interest
at the rate of 9% per annum, payable in monthly principal and interest
installments of $5,757 through July, 2000. This promissory note has been paid in
full; (e) unsecured promissory notes payable to various creditors in the
aggregate amount of $17,608. These notes are payable with interest at 9% per
annum, in various monthly principal and interest installments through July,
2000. These promissory notes haven been paid in full.; (f) a secured promissory
note in the amount of $16,670, payable to Laser Center of America, with interest
at the rate of 9% per annum, in monthly installments of principal and interest
of $1,258, through January, 2001. This promissory note is current, as of the
date of this Report; and (g) an unsecured promissory note in the amount of
$55,021, payable to the lessor of the Carlsbad facility, with interest at 10%
per annum, in monthly installments of principal and interest of $1,775 through
December 31, 2002. This promissory note has been paid in full.

         Subsequent to March 16, 2000, the Company paid $950,000 to the landlord
for its Florida facility, and $700,000 to CSC Healthcare Inc., to settle certain
disputes between the Company and such other parties. The Company paid these
amounts from the proceeds of the March 16, 2000 Financing.

         Net cash used in operating activities was $5,890,572, $2,083,230 and
$993,851 for the years ended December 31, 1999, 1998, and 1997, respectively.
Net cash used in operating activities during the years ended December 31, 1999,
1998 and 1997 primarily consisted of net losses, increases in net current
liabilities (1999 and 1997 only) and decreases in net current assets (1999 and
1997 only), offset by depreciation and amortization, increases in interest
related to the conversion features of the Convertible Notes (1999 and 1998
only), amortization of debt issuance costs (1999 only), the payment in the
Company's securities (including Common Stock, options and warrants) of interest,
compensation and fees for services, bad debt expenses with respect to a related
party receivable (1997 only), compensation recognized in lieu of repayment of a
note (1999 only), decreases in net current liabilities (1998 only) and increases
in net current assets (1998 only).

         Net cash used in investing activities was $40,442, $145,758 and
$4,093,293 for the years ended December 31, 1999, 1998 and 1997, respectively.
In the year ended December 31, 1999, the Company utilized $40,442 to acquire
equipment for the Company's excimer laser business operations. In the year ended
December 31, 1998, the Company utilized $116,158 to purchase equipment and for
the construction of a laser to be used as a demonstration model, and to make
advance payments of $29,600 to a former officer and director. In the year ended
December 31, 1997, the Company utilized $4,001,926 to make payments to Baxter to
acquire licenses under the Baxter Agreement, $37,541 to purchase certain
equipment and advance payments of $25,000 to a former officer and director and
$48,000 to Helionetics, which was offset by the receipt of $19,174 from the sale
of certain equipment.

         Net cash provided by financing activities was $10,292,103, $1,177,524
and $6,313,076 during the years ended December 31, 1999, 1998 and 1997,
respectively.

         In the year ended December 31, 1999, the Company received $2,380,000 in
proceeds from the offering of the Convertible Notes, $8,540,544 from the net
proceeds of the issuance of Common Stock in August, 1999, $11,340 from the
proceeds of payments of certain related party notes payable, $112,500 from the
exercise of warrants into 75,000 shares of Common Stock, and $86,485 from the
proceeds of other notes payable, which was offset by the utilization of $524,824
for payment of certain debts, $147,342 for payment of certain related party
notes payable and $166,600 for certain costs related to the issuance of the
Convertible Notes and the Unit Warrants. During 1999, the Company used the
proceeds from those financings as follows: approximately $3,000,000 to Acculase
for operations, and the remainder to pay operating expenses of Laser Photonics,
leaving cash on hand in the amount of $4,535,557, at December 31, 1999.

                                       45
<PAGE>

         In the year ended December 31, 1998, the Company utilized $135,187 to
reduce certain debt obligations, which was offset by the receipt of $35,751 of
proceeds from the sale of Common Stock and $1,276,960 from the proceeds of the
issuance of certain notes, including $1,000,000 of proceeds from a convertible
bridge loan in July and August, 1998, which was converted into 500,000 shares of
Common Stock in December, 1998, $150,000 of proceeds from other convertible
notes, which were converted into 100,000 shares of Common Stock in December,
1998, and $126,900 from the proceeds of certain other notes (all of which are
current, as of the date of this Report). See "Certain Relationships and Related
Transactions."

         In the year ended December 31, 1997, the Company received $6,259,077
from the sale of Common Stock and warrants, $71,094 of proceeds from certain
notes payable and $140,448 as capital contributions from Helionetics, which was
offset by the payment of $157,543 on certain notes payable. The Company used the
proceeds from a financing of approximately $6,260,000 during the year ended
December 31, 1997, as follows: $4,000,000 for acquisition of the Lasersight
license, approximately $500,000 for costs of the financing, and the remainder to
pay current operating expenses.

         As of March 16, 2000, the Company completed a private placement to ten
(10) institutional investors of an aggregate of 1,409,092 shares of Common Stock
at a purchase price of $11.00 per share, resulting in aggregate gross proceeds
to the Company of approximately $15,500,000. The market price of the Common
Stock on the date that the transaction was negotiated was $13.50 and on the
closing date of the transaction was approximately $15.88. The Company paid ING
Barings LLC a commission of 6% of the gross proceeds, or approximately $930,000.
The Company intends use the proceeds of this financing to pay for the marketing
of its products (including its psoriasis treatment products) and research and
development expenses, and to use as working capital. As of March 16, 2000, the
Company had approximately $18,400,000 of cash on hand.

         The Company's ability to expand business operations is currently
dependent on financing from external sources. There can be no assurance that
changes in the Company's manufacturing and marketing research and development
plans or other changes affecting the Company's operating expenses and business
strategy will not result in the expenditure of such resources before such time
or that the Company will be able to develop profitable operations prior to such
date, or at all, or that the Company will not require additional financing at or
prior to such time in order to continue operations. There can be no assurance
that additional capital will be available on terms favorable to the Company, if
at all. To the extent that additional capital is raised through the sale of
additional equity or convertible debt securities, the issuance of such
securities could result in additional dilution to the Company's stockholders.
Moreover, the Company's cash requirements may vary materially from those now
planned because of results of marketing, product testing, changes in the focus
and direction of the Company's marketing programs, competitive and technological
advances, the level of working capital required to sustain the Company's planned
growth, litigation, operating results, including the extent and duration of
operating losses, and other factors. In the event that the Company experiences
the need for additional capital, and is not able to generate capital from
financing sources or from future operations, management may be required to
modify, suspend or discontinue the business plan of the Company.

SEASONAL FACTORS

         Seasonality is not a significant factor in medical laser sales.
Budgetary cycles and funding are spread out in various hospitals, chains and
organizations, so that funding is not as cyclical as in the scientific laser
market.

IMPACT OF INFLATION

         The Company has not operated in a highly inflationary period, and its
management does not believe that inflation has had a material effect on sales or
expenses.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         The Financial Accounting Standards Board ("FASB") recently issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be adopted
as of December 31, 1999. SFAS No. 133 establishes standards for reporting
financial and descriptive information regarding derivatives and hedging
activity. Since the Company does not have any derivative instruments, this
standard will have no impact on the Company's financial position or results of
operations.

                                       46
<PAGE>

         FASB 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" and FASB 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," were issued in 1998 and are not expected to
impact the Company's future financial statement disclosures, results of
operations or financial position.

YEAR 2000

         One of the major challenges facing any company whose products or
services rely on the operation of computers or other equipment containing
computer chips is the issue of Year 2000 compliance. Many existing computer
programs use only two digits to identify a year in the date field. If not
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000.

         During the last eighteen months, the Company has maintained a program
to reduce the risk from Year 2000 computer failures by its suppliers. Under this
program, all key suppliers were contacted, or supplied or made available their
Year 2000 readiness statements. Small vendors offering contract manufacturing
services that were unresponsive to the requests for Year 2000 information are in
each case one of multiple sources for the given service or product.

         The Company has inventory for all current orders, as well as orders
anticipated in the first quarter of 2000. The Company's production methods
require the use of electric power and other municipal provided services, but has
been informed that these are Year 2000 compliant. The loss of power or water
would not significantly impact scheduled production unless the condition exists
for more than a week, although no assurance can be given to that effect.

         The Company's design and development system relies exclusively on a
paper and hardcopy based system. There are documents created by computer aided
systems, but all are subject to design control by hardcopy. Management believes
that this design method protects the Company against catastrophic failure of any
computer system, and although the loss of all of the Company's computer systems
would slow the design process, it would not affect current designs, nor would it
result in a loss of data, although no assurance can be given to that effect. In
some cases, it could be necessary to restore or recreate data in electronic
form, which could take several weeks to accomplish. Management believes that, in
such a circumstance, the impact on the production of machines and on research
and development to be small, although no assurance can be given to that effect.

         Since January 1, 2000, the Company has not experienced any adverse
impact from the transition to the Year 2000, although no assurance can be given
that the Company's suppliers or customers have not been affected in a manner
that is not yet apparent. In addition, some computer programs may not have been
programmed to process the Year 2000 as a leap year, and negative consequences
therefrom remain unknown.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         The Company is not currently exposed to market risks due to changes in
interest rates and foreign currency rates and therefore the Company does not use
derivative financial instruments to address risk management issues in connection
with changes in interest rates and foreign currency rates.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The audited Consolidated Financial Statements and related Notes and
Schedules of Laser Photonics, Inc. and subsidiaries including the consolidated
balance sheets at December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the 3-year period ended December 31, 1999, included elsewhere in this
Report, have been so included in reliance on the report of Hein + Associates
LLP, independent certified public accountants, given on the authority of such
firm as experts in auditing and accounting.

         The financial statements required by this Item 8 are included elsewhere
in this Report and incorporated herein by this reference.

                                       47
<PAGE>

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

         Not Applicable

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

         The directors of the Company currently have terms which will end at the
next annual meeting of the stockholders of the Company or until their successors
are elected and qualify, subject to their prior death, resignation or removal.
There is no familial relationship among any of the officers or directors of the
Company. The following reflects certain biographical information on the current
directors and executive officers of the Company:
<TABLE>
<CAPTION>

NAME                                      POSITION                                                        AGE
----                                      --------                                                        ---
<S>                              <C>                                                                       <C>
Warwick Alex Charlton........... Non-Executive Chairman of the Board of Directors                          40
Jeffrey F. O'Donnell............ Director, President and Chief Executive Officer                           40
Dennis McGrath.................. Chief Financial Officer and Vice President-Finance and Administration     43
Michael Allen................... Vice President-Sales and Marketing                                        45
John J. McAtee, Jr.............. Director                                                                  62
Alan R. Novak................... Director                                                                  65
Harry Mittelman, M.D............ Director                                                                  58
Steven Girgenti................. Director                                                                  54
Samuel E. Navarro............... Director                                                                  44
</TABLE>

         WARWICK ALEX CHARLTON was appointed to the Board of Directors and
became the Non-Executive Chairman of the Board of Directors on March 8, 1999.
Mr. Charlton is the Managing Director of True North Partners LLC, a venture
capital firm with a specialty in the health care field. Mr. Charlton has 19
years of business experience, consisting of ten years of line management
experience and nine years in the consulting profession (previously with Booz
Allen & Hamilton and the Wilkerson Group). Mr. Charlton received an honors
degree in Marketing from the University of Newcastle and an MBA form Cranfield
Institute of Technology. Mr. Charlton was formerly a Vice President of CSC
Healthcare, Inc. "Compensation of Executive Officers and Directors-Compensation
of Directors" and "Certain Relationships and Related Transactions."

         JEFFREY F. O'DONNELL has served as a director of the Company and the
Company's President and Chief Executive Officer since November, 1999. Mr.
O'Donnell served as the President of X-SITE Medical from March, 1999 to
November, 1999. From 1995 to March, 1999, he filled several senior positions at
Radiance Medical Systems, Inc., including serving as Vice-President-Sales and
Marketing from November, 1995 until October, 1997, and President and Chief
Executive Officer from October, 1997 to March, 1999. From January, 1994 to May,
1995, Mr. O'Donnell was the President and Chief Executive Officer of Kensey Nash
Corporation, a medical device manufacturer of cardiology products. Mr. O'Donnell
is currently a director of Radiance Medical Systems, Escalon Medical Corporation
and X-SITE Medical, Inc. Mr. O'Donnell graduated from La Salle University with a
B.S. in business administration.

         DENNIS MCGRATH was appointed Chief Financial Officer and Vice
President-Finance and Administration in January, 2000. From September, 1999 to
January, 2000, Mr. McGrath served as the Chief Financial Officer of the Think
New Ideas division of AnswerThink Consulting Group, Inc., a public company
specializing in installing and managing computer systems and software. Mr.
McGrath was the Chief Financial Officer and Executive Vice-President-Operations
of triSpan Internet Commerce Solutions, Inc., a technology consulting company,
from September, 1996 until February, 1999, at which time AnswerThink acquired
triSpan. Following the acquisition and until January, 2000, Mr. McGrath served
as the Chief Operating Officer of AnswerThink's Internet practice. Mr. McGrath
is a certified public accountant and graduated with a B.S. in accounting from La
Salle University in 1979. Mr. McGrath holds a license from the states of
Pennsylvania and New Jersey as a Certified Public Accountant.

                                       48
<PAGE>

         MICHAEL ALLEN was appointed Vice President-Sales and Marketing in
January, 2000. From September, 1998 to December, 1999, Mr. Allen was Director of
North American Sales for KaraVision, Inc., a public company, which manufactures
intra-stromal corneal rings. From October, 1990 to September, 1998, Mr. Allen
was a distributor for the New Jersey area for Smith and Nephew PLC, a public
U.K. company, selling orthopedic spine trauma and joint reconstruction products
to hospitals and surgeons. Mr. Allen received a B.S. from the University of
Wisconsin in 1977.

         JOHN J. MCATEE, JR., has been a member of the Board of Directors of the
Company since March 4, 1998. From March 4, 1998 until March 8, 1999, Mr. McAtee
served as the Non-Executive Chairman of the Board of Directors. From 1990 to
1996, Mr. McAtee was Vice Chairman of Smith Barney, Inc. (now Salomon Smith
Barney), one of the world's largest banking and brokerage firms. Before that, he
was a partner in the New York law firm of Davis Polk & Wardwell for more than
twenty years. Mr. McAtee is a graduate of Princeton University and Yale Law
School. Mr. McAtee is also a director of U.S. Industries, Inc., a diversified
industrial corporation.

         ALAN R. NOVAK was appointed to the Board of Directors of the Company in
October, 1997. Mr. Novak is Chairman of Infra Group, L.L.C., an international
project finance and development company. He is also Chairman of Lano
International, Inc., a real estate development company. Mr. Novak is a graduate
of Yale University, Yale Law School, and Oxford University, as a Marshall
Scholar. Mr. Novak practiced law at Cravath, Swaine & Moore and Swidler &
Berlin, Chartered. His public service includes three years as an officer in the
United States Marine Corp., a U.S. Supreme Court clerkship with Justice Potter
Stewart, Senior Counsel, Senator E. M. Kennedy, Senior Executive Assistant to
Undersecretary of State, Eugene Rostow, and the Executive Director of President
Johnson's Telecommunications Task Force. Mr. Novak was appointed by President
Carter and served for five years as Federal Fine Arts Commissioner.

         HARRY MITTELMAN, M.D., was appointed to the Board of Directors on April
20, 1999. Dr. Mittelman graduated from the University of Kansas, School of
Medicine in 1967. Dr. Mittelman practices medicine as a Cosmetic and Plastic
Surgeon and Otolaryngologist. Dr. Mittelman was a Foundation Board Member of the
American Academy of Facial Plastic and Reconstruction Surgery, 1997-1998, and
was the Chairman of the Laser Surgery and Safety Committee; American Academy of
Cosmetic Surgery, 1991-1993. Dr. Mittelman also is an Associate Clinical
Professor of Medicine at Stanford University Hospital and Medical Center.

         STEVEN GIRGENTI was appointed to the Board of Directors on April 20,
1999. Mr. Girgenti has served as Chairman of the Board and Chief Executive
Officer of Healthworld Corporation, a public company ("Healthworld") since
August, 1997. Mr. Girgenti co-founded Girgenti, Hughes, Butler & McDowell, Inc.,
a wholly-owned subsidiary of Healthworld, in April, 1986, and has served as its
President and Chief Executive Officer since 1986. In 1969, Mr. Girgenti began
working in the pharmaceutical industry for advertising companies specializing in
medical communications, including William Douglas McAdams. Prior to that, Mr.
Girgenti held a variety of positions with pharmaceutical companies, including
Director of Marketing Research and Product Manager for DuPont pharmaceuticals
and Manager of Commercial Development for Bristol-Myers Squibb Company.

         SAMUEL E. NAVARRO has been a director of the Company since January,
2000. Mr. Navarro is an acknowledged authority on the medical device and health
care business. Since 1999, he has served as the Global Head of Health Care
Corporate Finance at ING Barings LLC. Mr. Navarro joined ING Barings LLC in 1993
and has served as Associate Director of Americas Equity Research and Global Head
of Medical Technology Equity Research. Prior to joining ING Barings, Mr. Navarro
was managing director of equity research for the medical technology sector for
the Union Bank of Switzerland. Mr. Navarro holds a B.S. in engineering from the
University of Texas, an M.S. degree in engineering from Stanford University and
an M.B.A. from the Wharton School.

         SCIENTIFIC ADVISORY BOARD. In May, 1999, the Company established a
Scientific Advisory Board, to consist of persons experienced in the use of
advanced treatment for various types of psoriasis. The Scientific Advisory Board
members consist of:

                                       49
<PAGE>

         R. ROX ANDERSON, M.D., was appointed to the Advisory Board on May 21,
1999 and serves as its Chairman. One of his tasks will be the identification and
recruitment of other knowledgeable members. Dr. Anderson is the Research
Director of the Massachusetts General Hospital Laser Center. Dr. Anderson has
performed extensive research and written scholarly papers on various areas of
dermatology, including treatment by laser irradiation procedures. Dr. Anderson
holds a B.S. from the Massachusetts Institute of Technology and a Medical Doctor
degree from the Harvard Medical School. See "Business-Excimer Laser System for
the treatment of Psoriasis" and "Certain Relationships and Related
Transactions."

         FRANZ HILLENKAMP, PH.D., was appointed to the Advisory Board in
January, 2000. He is currently the Director of the Institute for Medical Physics
and Biophysics, Medical Faculty of the Westfalische Wilhelms Universitat in
Munster, German Federal Republic. Professor Hillenkamp has performed extensive
research and served as chairman of a number of symposia on the applications of
lasers for various medical treatments. Professor Hillenkamp holds a Ph.D. in
Engineering from the Technische Universitat in Munich and has served as a
visiting professor at the University of Maryland (Munich campus), Goethe
University (Frankfurt), and Harvard Medical School.

         KENNETH ARNDT, M.D., was appointed to the Advisory Board in January,
2000. He is a Co-Director, Cosmetic Surgery and Laser Center, Harvard Medical
Faculty Physicians at the Beth Israel Deaconess Medical Center in Boston. Dr.
Arndt is a Professor of Dermatology at Harvard Medical School, where an endowed
professorship of dermatology has been established in his name. Dr. Arndt has
published nearly 200 scholarly articles and books on various aspects of
dermatology. Dr. Arndt has received a Presidential Citation from the American
Society for Lasers in Surgery and Medicine. Dr. Arndt received his M.D. from
Yale Medical School.

         PETER WHITTAKER, PH.D., was appointed to the Advisory Board in January,
2000. He is the Director of Laser Research at the Heart Institute of Good
Samaritan Hospital in Los Angeles. Dr. Whittaker has published approximately 150
articles and book chapters on the treatment of cardiovascular disease. Dr.
Whittaker received a Bachelor of Science in Physics from the University of
Nottingham and a Ph.D. in Biophysics from the University of Western Ontario.

         WARRICK L. MORRISON, M.D., was appointed to the Advisory Board in
January, 2000. He is a Professor of Dermatology at Johns Hopkins School of
Medicine and a practicing dermatologist at the Greater Baltimore Medical Center.
Dr. Morrison has served as a visiting professor at approximately 15 medical
centers, including Columbia University, Harvard University, and Yale University.
He has published between 150 and 200 articles, books and book chapters on
various aspects of dermatology, including radiation treatment. Dr. Morrison
received his Bachelor of Medicine and Bachelor of Surgery from the University of
Sydney.

         JOHN Y. M. KOO, M.D., was appointed to the Advisory Board in January,
2000. He is the Vice Chairman and Associate Clinical professor in the Department
of Dermatology at the University of California, San Francisco Medical Center.
Dr. Koo has published more than 100 articles and book chapters in the psoriasis
field. Dr. Koo holds a B.S. degree from University of California, Berkeley and
an M.D. from Harvard Medical School.

         COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") requires the Company's directors and executive officers and beneficial
holders of more than 10% of the Company's Common Stock to file with the
Commission initial reports of ownership and reports of changes in ownership and
reports of changes in ownership of such equity securities of the Company. As of
the date of this Report, the Company believes that all reports needed to be
filed have been filed in a timely manner for the year ended December 31, 1999.

         LIMITATION ON DIRECTORS' LIABILITIES. Pursuant to the Company's
Certificate of Incorporation and under Delaware law, directors of the Company
are not liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty, except for liability in connection with a breach of
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit.

                                       50
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table sets forth certain information concerning
compensation of certain of the Company's executive officers, including the
Company's Chief Executive Officer and all executive officers (the "Named
Executives") whose total annual salary and bonus exceeded $100,000, for the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>

                                     ANNUAL COMPENSATION         LONG TERM COMPENSATION AWARDS      PAYOUTS
                                 ------------------------   --------------------------------------  -------
                                                                               SECURITIES
                                                            OTHER               UNDER
                                                            ANNUAL  RESTRICTED    ING                 OTHER
                                                            COMPEN    STOCK     OPTIONS     LTIP     COMPEN
                                                            SATION    AWARDS     /SARS     PAYOUTS   SATION
NAME AND PRINCIPAL POSITION      YEAR  SALARY($)  BONUS($)    ($)      ($)        (#)        ($)      ($)
---------------------------      ----  ---------  --------    ---      ---        ---        ---      ---

<S>                              <C>    <C>             <C><C>           <C>    <C>            <C>   <C>
Jeffrey O'Donnell(1).........    1999    35,632         0    2,000       0      650,000        0       0

Raymond A. Hartman (CEO)(2)..    1999   248,546         0   12,000       0            0        0       0
                                 1998   125,008         0        0       0            0        0       0
                                 1997   125,000         0        0       0      250,000        0     270

Chaim Markheim (CFO)(3)......    1999   227,962         0  137,100       0      180,000        0       0
                                 1998   125,008         0   12,000       0      250,000        0       0
                                 1997         0         0        0       0            0        0       0

-----------
</TABLE>

(1)      Mr. O'Donnell began serving as the Company's Chief Executive Officer on
         November 19, 1999.

(2)      Mr. Hartman served as the Company's Chief Executive Officer from
         October, 1997 to November, 1999. Includes paid and accrued salary for
         each such fiscal year.

(3)      Mr. Markheim served as the Company's Chief Financial Officer and Chief
         Operating Officer until January 15, 2000. Includes $77,000 paid in 1999
         as past-due salary from prior years and $137,100 as additional
         compensation in 1999 (which includes, among others: (i) a car allowance
         of $12,000, and (ii) $54,600 which had been advanced to Mr. Markheim at
         December 31,1998 and which was recognized as additional compensation in
         lieu of repayment for 1999).

         EMPLOYMENT AGREEMENT WITH JEFFREY F. O'DONNELL. As of November 19,
1999, the Company entered into a three-year employment agreement with Jeffrey F.
O'Donnell to serve as the Company's President and Chief Executive Officer. Mr.
O'Donnell's base salary is $265,000 per year, subject to upward adjustment from
time to time by the Board of Directors. In addition, Mr. O'Donnell was granted
options to acquire up to 650,000 shares of the Company's Common Stock at an
exercise price of $4.625. Of these options, 216,667 are currently vested,
216,667 will vest on November 19, 2000, and 216,666 will vest on November 19,
2001, so long as Mr. O'Donnell remains employed by the Company. Under the
employment agreement and the option agreement, if the Company terminates Mr.
O'Donnell, other than for "cause" (which definition includes nonperformance of
duties or competition of the employee with the Company's business), then he will
receive severance pay ranging from one to two years' compensation, and 100% of
all unvested options will vest immediately.

         EMPLOYMENT AGREEMENT WITH DENNIS MCGRATH. As of November 24, 1999, the
Company entered into a three-year employment agreement with Dennis M. McGrath to
serve as the Company's Chief Financial Officer and Vice President of Finance and
Administration, replacing Chaim Markheim who now acts as a Consultant to the
Company. Mr. McGrath's base salary is $200,000 per year, subject to upward
adjustment from time to time by the Board of Directors. In addition, Mr. McGrath
was granted, as of November 24, 1999, options to acquire up to 350,000 shares of
the Company's Common Stock at an exercise price of $5.50. Of these options,
116,667 are currently vested, 116,667 will vest on November 24, 2000, and
116,666 will vest on November 24, 2002, so long as Mr. McGrath remains employed
by the Company. Under the employment agreement and the option agreement, if the
Company terminates Mr. McGrath, other than for "cause" (which definition
includes nonperformance of duties or competition of the employee with the
Company's business), then he will receive severance pay ranging from one to two
years' compensation, and 100% of all unvested options will vest immediately.

         EMPLOYMENT AGREEMENT WITH MICHAEL ALLEN. As of January 28, 2000, the
Company entered into an employment agreement with Michael Allen to serve as the
Company's Vice President of Sales and Marketing. Mr. Allen's base salary is
$140,000 per year, subject to upward adjustment from time to time by the Board
of Directors. In addition, Mr. Allen was granted, as of January 28, 2000,
options to acquire up to 150,000 shares of the Company's Common Stock at an
exercise price of $13.50. Of these options, 50,000 are currently vested, 50,000
will vest on January 28, 2001, and 50,000 will vest on January 28, 2002, so long
as Mr. Allen remains employed by the Company. OPTION/SAR GRANTS TABLE

                                       51
<PAGE>

         The following table sets forth certain information concerning grants of
stock options to certain of the Company's executive officers, including the
Named Executives for the year ended December 31, 1999:

<TABLE>
<CAPTION>
                                                                                Potential Realizable
                                                                                Value at Assumed
                                                                                Annual Rate of
                                                                                Stock Price Appreciation
                           Individuals Grants                                           For Option Term (1)
------------------------------------------------------------------------------------------------------------
(a)                      (b)           (c)             (d)             (e)          (f)           (g)
                         Number of     % of
                         Securities    Total
                         Underlying    Options/
                         Options/      SARs            Exercise
                         SARs          Granted to      Or Base
                         Granted       Employees       Price           Expiration
Name                     (#)           In Fiscal Year  ($/Share) (1)   Date (1)     5% ($)        10%($)
------------------------------------------------------------------------------------------------------------
<S>                      <C>              <C>             <C>            <C>       <C>          <C>
Jeffrey O'Donnell        650,000          55%             4.625          11/04     5,704,372    7,985,481
Chaim Markheim           180,000          15%             2.875           8/044    1,894,672    2,526,364
-------------
</TABLE>

(1)      This chart assumes a market price of $10.50 for the Common Stock, the
         closing price for the Company's Common Stock in the Over-The-Counter
         Market as of December 31, 1999, as the assumed market price for the
         Common Stock with respect to determining the "potential realizable
         value" of the shares of Common Stock underlying the options described
         in the chart, as reduced by any lesser exercise price for such options.
         Further, the chart assumes the annual compounding of such assumed
         market price over the relevant periods, without giving effect to
         commissions or other costs or expenses relating to potential sales of
         such securities. The Company's Common Stock has a very limited trading
         history. These values are not intended to forecast the possible future
         appreciation, if any, price or value of the Common Stock.

OPTION EXERCISES IN 1999

         No Named Executive exercised any stock option in 1999.

1995 NON-QUALIFIED OPTION PLAN

         On January 2, 1996, the Company adopted the Company's 1995
Non-Qualified Option Plan for key employees, officers, directors and
consultants, and reserved up to 500,000 options to be granted thereunder. The
option exercise price is not less than 100% of market value on the date granted;
40% of granted options vest immediately; 30% vest beginning one year after
grant; and the remaining 30% vest and may be exercised beginning two (2) years
from grant.

         No options may be exercised more than ten (10) years after grant,
options are not transferable (other than at death), and in the event of complete
termination "for cause" (other than death or disability) or "voluntary"
termination, all "unvested" options automatically terminate.

         On January 2, 1996, the Company granted a total of 335,000 options at
an exercise price of $1.50 per share to certain directors, employees and
consultants.

                                       52
<PAGE>

LIMITATION ON DIRECTORS' LIABILITIES; INDEMNIFICATION OF OFFICERS AND DIRECTORS

         The Company's Certificate of Incorporation and Bylaws designate the
relative duties and responsibilities of the Company's officers, establish
procedures for actions by directors and stockholders and other items. The
Company's Certificate of Incorporation and Bylaws also contain extensive
indemnification provisions, which will permit the Company to indemnify its
officers and directors to the maximum extent, provided by Delaware law. Pursuant
to the Company's Certificate of Incorporation and under Delaware law, directors
of the Company are not liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty, except for liability in connection with a
breach of duty of loyalty, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for dividend
payments or stock repurchases illegal under Delaware law or any transaction in
which a director has derived an improper personal benefit.

         The Company has adopted a form of indemnification agreement (the
"Indemnification Agreement"), which provides the Indemnitee with the maximum
indemnification allowed under applicable law. Since the Delaware statutes are
non-exclusive, it is possible that certain claims beyond the scope of the
statute may be indemnifiable. The Indemnification Agreement provides a scheme of
indemnification, which may be broader than that specifically provided by
Delaware law. It has not yet been determined, however, to what extent the
indemnification expressly permitted by Delaware law may be expanded, and
therefore the scope of indemnification provided by the Indemnification Agreement
may be subject to future judicial interpretation.

         The Indemnification Agreement provides that the Company shall indemnify
an Indemnitee who is or was a party or becomes a party or is threatened to be
made a party to any threatened, pending or completed action or proceeding
whether civil, criminal, administrative or investigative by reason of the fact
that the Indemnitee is or was a director, officer, key employee or agent of the
Company or any subsidiary of the Company. The Company shall advance all
expenses, judgments, fines, penalties and amounts paid in settlement (including
taxes imposed on Indemnitee on account of receipt of such payouts) incurred by
the Indemnitee in connection with the investigation, defense, settlement or
appeal of any civil or criminal action or proceeding as described above. The
Indemnitee shall repay such amounts advanced only if it shall be ultimately
determined that he or she is not entitled to be indemnified by the Company. The
advances paid to the Indemnitee by the Company shall be delivered within 20 days
following a written request by the Indemnitee. Any award of indemnification to
an Indemnitee, if not covered by insurance, would come directly from the assets
of the Company, thereby affecting a stockholder's investment.

         At present, there is no pending litigation or proceeding involving an
Indemnitee where indemnification would be required or permitted under the
Indemnification Agreements.

TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS

         Except for the compensation plans covering Jeffrey O'Donnell and Dennis
McGrath, the Company has no compensatory plans or arrangements which relate to
the resignation, retirement or any other termination of an executive officer or
key employee with the Company, a change in control of the Company or a change in
such executive officer's or key employee's responsibilities following a change
in control. See "Compensation of Executive Officers and Directors- Employment
Agreement with Jeffrey O'Donnell" and "Compensation of Executive Officers and
Directors- Employment Agreement with Dennis McGrath."

COMPENSATION AND AUDIT COMMITTEES; COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION

         The Board has a Compensation Committee comprised of John J. McAtee, Jr.
and Alan R. Novak, and an Audit Committee comprised of Jeffrey F. O'Donnell,
John J. McAtee, Jr. and Alan R. Novak. Messrs. McAtee and Novak may be deemed to
be outside/non-employee directors. The Board has a standing committee on
nominations consisting of Messrs. O'Donnell, Charlton and McAtee.

         The Compensation Committee reviews and approves the annual salary and
bonus for each executive officer (consistent with the terms of any applicable
employment agreement), reviews, approves and recommends terms and conditions for
all employee benefit plans (and changes thereto) and administers the Company's
stock option plans and such other employee benefit plans as may be adopted by
the Company from time to time.

                                       53
<PAGE>

         The Audit Committee reports to the Board regarding the appointment of
the independent public accountants of the Company, the scope and fees of the
prospective annual audit and the results thereof, compliance with the Company's
accounting and financial policies and management's procedures and policies
relative to the adequacy of the Company's system of internal accounting
controls.

COMPENSATION OF DIRECTORS

         On April 10, 1998, the Company's Board of Directors adopted a
resolution creating a stock option plan for outside/non-employee members of the
Board of Directors. Pursuant to the stock plan, each outside/non-employee
director is to receive an annual grant of options, in addition to any other
consideration they may receive, to purchase up to 20,000 shares of Common Stock
as compensation, at an exercise price equal to the market price of the Common
Stock on the last trading day of the preceding year (the "Option Plan for
Outside Directors"). The options granted pursuant to the Option Plan for Outside
Directors vest at the rate of 5,000 options per quarter during each quarter in
which such person has served as a member of the Board of Directors. See "Certain
Relationships and Related Transactions."

         The Company has obtained directors' and officers' liability insurance
with a $5,000,000 limit of liability. The policy period expires on February 25,
2001 and has an annual premium of $110,000. The Company intends to renew such
policy or obtain comparable coverage after the expiration of such policy.
However, there can be no assurances to this effect.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table reflects, as of April 11, 2000 the beneficial
Common Stock ownership of: (a) each director of the Company, (b) each Named
Executive (See "Compensation of Executive Officer and Directors"), (c) each
person known by the Company to be a beneficial holder of five percent (5%) or
more of its Common Stock, and (d) all executive officers and directors of the
Company as a group:
<TABLE>
<CAPTION>

                                                                        NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER                                    SHARES #         PERCENTAGE
------------------------------------                                    --------         ----------
<S>                                                                     <C>              <C>
Warwick Alex Charlton(1).............................................   175,000          1.16
Jeffrey F. O'Donnell(2)..............................................   226,667          1.50
Dennis McGrath(3)....................................................   116,667             *
Michael Allen(4).....................................................   50,000              *
Alan R. Novak(5).....................................................   145,000             *
John J. McAtee, Jr.(6)...............................................   224,000          1.49
Steven Girgenti(7)...................................................   244,500          1.61
Harry Mittelman(8)...................................................   384,014          2.55
Samuel E. Navarro(9).................................................   43,334              *
Joseph E. Gallo, Trustee(10).........................................   987,943          6.60
Pennsylvania Merchant Group, Ltd.(11)................................   1,234,104        7.88
Calvin Hori, Hori Capital Management, Inc. and Platinum Partners LP(12) 933,100          6.26
All directors and officers as a group (9 persons)(13)................   1,608,682        9.96
</TABLE>

-----------

#        Pursuant to the rules of the Commission, shares of Common Stock which
         an individual or group has a right to acquire within 60 days pursuant
         to the exercise of options or warrants are deemed to be outstanding for
         the purpose of computing the percentage ownership of such individual or
         group, but are not deemed to be outstanding for the purpose of
         computing the percentage ownership of any other person shown in the
         table.

*        Less than 1%.

                                       54
<PAGE>

(1)      Includes options to purchase 175,000 shares of Common Stock. Does not
         include options to acquire up to 15,000 shares of Common Stock, which
         may vest during 2000. Mr. Charlton's address is 65 Broadway, 7th Floor,
         New York, NY 10006. See "Certain Relationships and Related
         Transactions."

(2)      Includes 10,000 shares registered in the name of 531 E. Lancaster Ave.
         LLC, of which Mr. O'Donnell is a partner, and options to purchase
         216,667 shares of Common Stock. Does not include options to purchase up
         to 433,333 shares of Common Stock, which vest over the next two years.
         Mr. O'Donnell's address is Five Radnor Corporate Center, Suite 470,
         Radnor, Pennsylvania 19087. See "Certain Relationships and Related
         Transactions."

(3)      Includes options to purchase 116,667 shares of Common Stock. Does not
         include options to purchase up to 233,333 shares of Common Stock, which
         vest over the next two years. Mr. McGrath's address is Five Radnor
         Corporate Center, Suite 470, Radnor, Pennsylvania 19087. See "Certain
         Relationships and Related Transactions."

(4)      Includes options to purchase 50,000 shares of Common Stock. Does not
         include options to purchase up to 100,000 shares of Common Stock, which
         vest over the next two years. Mr. Allen's address is Five Radnor
         Corporate Center, Suite 470, Radnor, Pennsylvania 19087. See "Certain
         Relationships and Related Transactions."

(5)      Includes 28,601 shares of Common Stock, which are being registered in
         the pending registration statement and options to purchase up to
         116,399 shares of Common Stock. Does not include options to purchase up
         to 15,000 shares of Common Stock, which may vest during 2000. Mr.
         Novak's address is 3050 K Street, NW, Suite 105, Washington, D.C.
         20007. See "Certain Relationships and Related Transactions."

(6)      Includes 84,000 shares, which are being registered in the pending
         registration statement and options to purchase up to 140,000 shares of
         Common Stock. Does not include options to purchase up to 15,000 shares
         of Common Stock, which may vest during 2000. Mr. McAtee's address is
         Two Greenwich Plaza, Greenwich, Connecticut 06830. See "Certain
         Relationships and Related Transactions."

(7)      Includes options to purchase 70,000 shares of Common Stock issued to
         Mr. Girgenti and Warrants to purchase 174,000 shares of Common Stock,
         issued to Healthworld, of which Mr. Girgenti is Chairman and Chief
         Executive Officer. Does not include options to purchase up to 15,000
         shares of Common Stock, which may vest during 2000. Mr. Girgenti's
         address is Healthworld Corporation, 100 Avenue of the Americas, 8th
         Floor, New York, New York 10013. See "Certain Relationships and Related
         Transactions."

(8)      Includes 251,014 shares of Common Stock, Warrants to purchase 63,000
         shares and options to purchase 70,000 shares of Common Stock
         beneficially owed by Dr. Mittelman, including shares and Warrants
         registered in the name of certain trusts of which he serves as the
         trustee, his IRA and pension profit sharing plan, his wife, jointly
         with his wife and in his own name. Does not include options to purchase
         up to 15,000 shares of Common Stock, which may vest during 2000. A
         total of 204,100 shares and shares underlying the Warrants are being
         registered in the pending registration statement. Dr. Mittelman's
         address is 2200 Sand Hill Road, Suite 110, Menlo Park, California
         94025. See "Certain Relationships and Related Transactions."

(9)      Includes options to purchase 43,334 shares of Common Stock. Does not
         include options to purchase up to 66,661 shares of Common Stock, which
         may vest over the next two years. Does not include options to purchase
         up to 15,000 shares of Common Stock, which may vest during 2000. Mr.
         Navarro's address is 55 East 52nd St., 33rd Floor, New York, New York
         10055. See "Certain Relationships and Related Transactions."

(10)     Includes 925,443 shares of Common Stock and 62,500 Warrants to purchase
         shares of Common Stock. Mr. Gallo is the Trustee of four (4) trusts,
         which own these securities. All of the shares of Common Stock and the
         shares underlying the Warrants are being registered in the pending
         registration statement. Mr. Gallo's address is 600 Yosemite Blvd.,
         Modesto, California 95354. See "Certain Relationships and Related
         Transactions."

                                       55
<PAGE>

(11)     Pennsylvania Merchant Group, Ltd. is the registered owner of Warrants
         to purchase up to 668,104 shares of Common Stock. Richard A. Hansen is
         the President and a director of PMG. Mr. Hansen is the registered owner
         of 75,000 shares of Common Stock and options to purchase 75,000 shares
         of Common Stock, and his wife, Penelope S. Hansen is the registered
         owner of 25,000 shares of Common Stock. Frank A. Abruzzese, Frank J.
         Campbell and Peter S. Rawlings are directors of PMG. Mr. Abruzzese is
         the beneficial owner of 11,000 shares. Mr. Campbell is the beneficial
         owner of 165,000 shares and Warrants to purchase 25,000 shares. Mr.
         Rawlings is the registered owner of 160,000 shares of Common Stock, and
         his wife Sarah P. Rawlings is the registered owner of 40,000 shares of
         Common Stock. All of these shares are being registered in the pending
         registration statement. The address of PMG and each of such persons is
         Four Falls Corporate Center, West Conshohocken, Pennsylvania 19428. See
         "Certain Relationships and Related Transactions-Convertible Debt and
         Conversion of Convertible Debt."

(12)     Includes 300,000 shares of Common Stock, options to purchase 75,000
         shares of Common Stock and 250,000 warrants to purchase shares of
         Common Stock. 50,000 shares and 250,000 shares underlying the warrants
         are being registered in the pending registration statement. Mr. Kalista
         is employed by PMG. His address is Four Falls Corporate Center, West
         Conshohocken, Pennsylvania 19428. See "Certain Relationships and
         Related Transactions."

(12)     The listed persons, Calvin Hori ("Hori"), Hori Capital Management, Inc.
         ("Hori Capital") and Platinum Partners, LP ("Platinum") have jointly
         filed an Amendment No. 1 to Schedule 13D (the "Schedule 13D"), dated
         December 1, 1997, with respect to 933,100 shares of Common Stock. The
         Schedule 13D provides, in pertinent part, that: (a) Hori, Hori Capital
         and Platinum may be deemed to be the beneficial owners of 759,000 of
         these shares, and (b) Hori and Hori Capital may be deemed to be the
         beneficial owners of an additional 174,100 of these shares. The address
         for each of the listed persons is One Washington Mall, Boston,
         Massachusetts 02108.

(13)     Includes 388,615 shares of Common Stock and Options and Warrants to
         purchase up to 1,220,067 shares of Common Stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CONVERTIBLE DEBT AND CONVERSION OF CONVERTIBLE DEBT

         During July and August, 1998, Acculase issued $1,000,000 of the
promissory notes (the "Acculase Notes"), to three accredited investors. The
Acculase Notes were guaranteed by the Company. Interest was payable annually and
could be paid in cash or in the Company's Common Stock at the Company's option.
All of the funds received by the Company from issuance of the Acculase Notes
were applied to fund current operations and to pay current obligations. The
entire amount of principal was automatically converted to 500,000 shares of the
Company's Common Stock, at a conversion price of $2.00 per share, on December
31, 1998. As of December 31, 1998, the price of the Company's Common Stock was
$2.81. In addition, the Company issued 37,443 shares in payment of accrued
interest as of April 30, 1999. The shares issued in conversion of the Acculase
Notes are being registered in the pending registration statement.

         In March, 1999, the Company issued to 38 accredited investors
$2,380,000 of units of its securities (the "Units"), each Unit consisting of:
(i) $10,000 principal amount of convertible promissory notes (the "Convertible
Notes"); and (ii) common stock purchase warrants to purchase up to 2,500 shares
of Common Stock (the "Unit Warrants"). On August 2, 1999, the Convertible Note
holders converted the Convertible Notes and accrued and unpaid interest thereon
into 1,190,819 shares of Common Stock at a conversion price of $2.00 per share.
In March, 1999, the price of the Company's Common Stock in the Over The Counter
market ranged from $2.625 to $4.50 per share. On March 29, 1999, the price of
the Common Stock was $3.875. The Company used the proceeds of this financing to
fund marketing, research and development expenses, the purchase of equipment
relating to the manufacture of the Company's excimer lasers, other operating
activities, and the payment of certain liabilities. The shares issued from the
conversion of the Convertible Notes are being registered in the pending
registration statement.

         The Unit Warrants are exercisable into an initial 1,250 shares of
Common Stock at any time after purchase until March 31, 2004. The balance of the
Unit Warrants are exercisable into an additional 1,250 shares of Common Stock
(the "Contingent Shares") if the Unit holder voluntarily converted at least a
portion of the principal amount of the Convertible Note, that make up a portion
of the Unit, into shares of Common Stock. As of the date of this Report, all of
the Unit holders converted their Convertible Notes into shares of Common Stock,
aggregating 1,190,819 shares of Common Stock, including 819 shares of Common
Stock to convert accrued and unpaid interest. As such, each Unit holder has a
fully vested Unit Warrant to purchase 2,500 shares of Common Stock at $2.00 per
share. The Unit Warrants provide that they may be adjusted in the event that the
Company issues shares of Common Stock for consideration of less than $2.00 per
share. In such event, the per share exercise price of the Unit Warrants will be
adjusted to the issue price of such additionally issued shares of Common Stock.

                                       56
<PAGE>

ISSUANCES OF SHARES, OPTIONS AND WARRANTS

         On April 10, 1998, the Company issued options to Chaim Markheim, who
was the Chief Financial Officer, Chief Operating Officer and a director of the
Company, to purchase up to 250,000 shares of Common Stock, at an exercise price
of $2.875 per share, with a five (5) year term. On the date of this issuance of
securities, the price of the Company's Common Stock was $2.875.

         On April 10, 1998, the Company issued options to purchase up to 100,000
shares of Common Stock, at an exercise price of $2.875 per share, with a
five-year term, to an officer of the Company, and 20,000 shares of Common Stock,
to certain consultants for legal services rendered, computed at a $1.00 per
share. On the date of this issuance of securities, the price of the Company's
Common Stock was $2.875.

         In conformity with the provisions of the Option Plan for Outside
Directors, on April 10, 1998, the Company granted to John J. McAtee and Alan R.
Novak options to purchase up to 20,000 shares of Common Stock at an exercise
price of $2.875 per share for services rendered during 1998. On the date of
grant of these stock options, the price of the Company's Common Stock was
$2.875.

         On March 8, 1999, the Company granted to Messrs. McAtee and Novak an
additional 20,000 options under the Option Plan for Outside Directors to
purchase a like number of shares of Common Stock, at an exercise price of
$2.8125 per share for services as outside members of the Board of Directors to
be rendered during 1999. All of these options are vested, as of the date of this
Report. On the date of grant of these stock options, the price of the Company's
Common Stock was $2.875.

         Upon Warwick Alex Charlton's joining the Company's Board of Directors,
on March 8, 1999, Mr. Charlton was granted options under the Option Plan for
Outside Directors, to purchase up to 20,000 shares of Common Stock at an
exercise price of $2.8125 per share for services to be rendered during 1999. On
the date of grant of these stock options, the price of the Company's Common
Stock was $2.875. Of these options all are vested, as of the date of this
Report.

         On March 8, 1999, the Company granted to Mr. Charlton, outside of the
Option Plan for Outside Directors, options to acquire 150,000 shares of Common
Stock, at $3.00 per share. On the date of this issuance of securities, the price
of the Company's Common Stock was $2.875. All of such options are vested, as of
the date of this Report.

         Upon Steve Girgenti's and Harry Mittelman's joining the Company's Board
of Directors, on April 20, 1999, each was granted options to purchase up to
15,000 shares of Common Stock, at an exercise price of $2.8125 per share, for
services to be rendered during 1999. On the date of grant of these stock
options, the price of the Company's Common Stock was $4.63. As of the date of
this Report, all of these options are vested.

         On April 20, 1999, the Company granted to Mr. Girgenti and Dr.
Mittelman options, outside of the Option Plan for Outside Directors, all of
which are vested, to acquire up to 50,000 shares of Common Stock, at $4.75 per
share. On the date of grant of these stock options, the price of the Company's
Common Stock was $4.63. All of such options are vested, as of the date of this
Report.

         In 1999, in respect of the period August, 1998, through October 31,
1999, the Company granted to its current legal counsel, Matthias & Berg LLP
("M&B"), options to acquire an aggregate of 32,230 shares of the Company's
Common Stock, at exercise prices between $1.50 and $5.10 per share, in each case
equal to 85% of the trading price of the Company's Common Stock on the last day
of the month in respect of which the options were granted. The options are
exercisable for a period of 120 months from the date of grant. These options
were issued as a part of a fee agreement between the Company and M&B, whereby
M&B received options having an exercise price equal to 20% of its monthly fees
in the form of Common Stock of the Company, valued at the closing bid price on
the last day of each month. M&B agreed to forego collection of such fees in
cash, and use the uncollected fees against exercise price of the options.

                                       57
<PAGE>

         On April 5, 1999, the Company issued to a non-executive employee
options to purchase 50,000 shares of the Company's Common Stock, at an exercise
price of $3.1875. Such options vest, pursuant to a schedule, over a period of
five (5) years. On the date of this issuance of securities, the price of the
Company's Common Stock was $4.56.

         On August 9, 1999, the Company issued to 96 investors 2,068,972 shares
of the Company's Common Stock in connection with the August 9, 1999 Financing.
The Company paid PMG a commission of 8% of the gross proceeds, or $744,000,
$25,000 for reimbursement of expenses and, for each $1,000,000 of gross proceeds
received by the Company, warrants to purchase 10,000 shares of Common Stock at
$4.50 per share (an aggregate of 93,104 warrants). On the date of the closing of
the August 9, 1999 Financing, the price of the Company's Common Stock was $5.19.
The 2,068,972 shares of Common Stock sold in the August 9, 1999 Financing are
being registered in the pending registration statement.

         On May 11, 1999, the Company, in exchange for various marketing
services to be provided by Healthworld at a discounted rate of $104 per person
hour, which is materially less then the normal hourly rate charged by
Healthworld for such services, granted the Healthworld Warrants to purchase
174,000 shares of the Company's Common Stock at an exercise price of $4.69 per
share. On the date of grant of the Healthworld Warrants, the price of the Common
Stock was $4.69. The Warrants have a term of ten years and are fully vested.

         On August 26, 1999, the Company issued options to Chaim Markheim to
purchase up to 180,000 shares of Common Stock, at an exercise price of $5.25 per
share, with a five (5) year term. Of these options, 100,000 are vested, and the
remaining 80,000 vest over two (2) years, so long as Mr. Markheim continues to
be retained by the Company as a consultant. On the date of this issuance of
securities, the price of the Company's Common Stock was $5.25.

         On November 19, 1999, Jeffrey F. O'Donnell, the Company's President and
Chief Executive Officer, was granted options to acquire up to 650,000 shares of
the Company's Common Stock at an exercise price of $4.625. Of these options,
216,667 are currently vested, 216,667 vest on November 19, 2000, and 216,666
vest on November 19, 2002, so long as Mr. O'Donnell remains employed by the
Company. If the Company terminates Mr. O'Donnell, other than for "cause" (which
definition includes nonperformance of duties or competition of the employee with
the Company's business), all unvested options will vest immediately. On the date
of grant of the options, the price of the Company's Common Stock was $4.625.

         As of November 24, 1999, Dennis McGrath, the Company's Chief Financial
Officer, was granted options to acquire up to 350,000 shares of the Company's
Common Stock at an exercise price of $5.50. Of these options, 116,667 are
currently vested, 116,667 vest on November 24, 2000, and 116,666 vest on
November 24, 2002, so long as Mr. McGrath remains employed by the Company. If
the Company terminates Mr. McGrath, other than for "cause" (which definition
includes nonperformance of duties or competition of the employee with the
Company's business), all unvested options will vest immediately. On the date of
grant of the options, the price of the Company's Common Stock was $5.50 per
share.

         On December 7, 1999, the Company granted to Samuel E. Navarro options
to acquire up to 100,000 shares of Common Stock at an exercise price of $5.9375
per share. Of these options, 33,334 are currently vested, 33,333 vest on
December 7, 2000, and 33,333 vest on December 7, 2002, so long as Mr. Navarro
remains a director of the Company. On the date of grant, the price of the
Company's Stock was $5.9375.

         On December 7, 1999, the Company granted to Mr. Navarro options, all of
which are vested, to acquire up to 5,000 shares of Common Stock, at $2.8125 per
share. On the date of grant of these stock options, the price of the Company's
Common Stock was $5.9375. All of such options are vested, as of the date of this
Report.

         Michael Allen was granted, as of January 28, 2000, options to acquire
up to 150,000 shares of the Company's Common Stock at an exercise price of
$13.50. Of these options, 50,000 are currently vested, 50,000 vest on January
28, 2001, and 50,000 vest on January 28, 2002, so long as Mr. Allen remains
employed by the Company. On the date of the grant, the price of the Company's
Common Stock was $14.125.

         As of January 1, 2000, in connection with the Option Plan for Outside
Directors, the Company granted to Messrs. Charlton, McAtee, Novak, Girgenti,
Mittelman and Navarro options to acquire 20,000 shares of Common Stock at $10.50
per share, for services to be rendered during 2000. On the date of grant of
these stock options, the price of the Company's Common Stock was $10.50. As of
the date of this Report, 5,000 of these options are vested for each beneficiary
of the Option Plan for Outside Directors.

                                       58
<PAGE>

         As of February 10, 2000, the Company issued to two employees options to
acquire up to 30,000 shares of Common Stock at a price of $17.75 per share.
These options will vest to the extent of 25% after one year, then ratably each
month thereafter.

         As of February 10, 2000, the Company granted each member of the
Scientific Advisory Board options to acquire up to 3,000 shares of the Company's
Common Stock at an exercise price of $17.75 per share. All such options are
fully vested.

CERTAIN ISSUANCES OF SECURITIES

         In July, 1998, the Company granted warrants to acquire 300,000 shares
of Common Stock to PMG at an exercise price of $2.00 per share in consideration
for the guarantee, by PMG, of a lease of office space in Carlsbad, California
for the Company and the raising of a bridge loan of $1,000,000. Such warrants
are exercisable at any time until July 15, 2003. The price of the Company's
Common Stock on July 15, 1998 was $2.125.

         On December 31, 1998, Mr. and Mrs. Richard A. Hansen converted an
outstanding obligation of $150,000 into an aggregate of 100,000 shares of the
Company's restricted Common Stock, at $1.50 per share. The price of the Common
Stock at December 31, 1998, was $2.8125 per share. Mr. Hansen is the President
of PMG, one of the Company's investment bankers. These shares are being
registered pursuant to the pending registration statement.

         On August 9, 1999, the Company completed the August 9, 1999 Financing
of 2,068,972 shares of Common Stock at a price of $4.50 per share, resulting in
aggregate gross proceeds to the Company of $9,310,374. The Company paid PMG a
commission of 8% of the gross proceeds, or $744,830, plus $25,000 for
reimbursement of offering expenses, and issued to PMG warrants to purchase
93,104 shares of Common Stock at an exercise price of $4.50 per share. On the
date of the closing of the August 9, 1999 Financing, the price of the Company's
Common Stock was $5.19 per share. The Company has used part of the proceeds of
this financing to pay marketing expenses, research and development expenses and
for working capital. As of March 16, 2000, the Company had $18,400,000 of cash
on hand.

         The Company entered into an agreement, dated as of February 2, 2000,
with ING Barings LLC for the provision of financial advisory and investment
banking services, on an exclusive basis. The term of the agreement is through
September 30, 2000. Pursuant to this agreement, ING acted as placement agent in
connection with a private offering to 10 institutional investors an aggregate of
1,409,092 shares of the Company's Common Stock at a price of $11.00 per share,
for which we paid ING customary fees. Sam Navarro, a director of the Company is
also the Global Head of Health Care Corporate Finance at ING. At the close of
the placement on March 16, 2000, the Company received net proceeds of
$14,570,000. In addition, with the exception of Jeffrey F. O'Donnell and Dennis
McGrath, all of the executive officers and directors of the Company signed
lock-up agreements for a period of 90 days from March 16, 2000, as to all
securities of the Company they may own. Messrs. O'Donnell and McGrath reserved
the right to sell 65,000 and 35,000 shares, respectively, during such 90-day
period. The Company will use the proceeds of this financing to pay certain
debts, including monies owed to the Company's Orlando, Florida landlord, and for
marketing expenses and working capital.

OTHER TRANSACTIONS

         As of May 11, 1999, the Company entered into the agreement with
Healthworld, of which Steven Girgenti, a director of the Company, is Chairman
and Chief Executive Officer, for provision of various services relating to the
marketing of the Company's products. The services include: (i) advertising and
promotion; (ii) development of market research and strategy; and (iii)
preparation and consulting on media and publicity. The term of the agreement is
indefinite, but may be terminated by either party on ninety days' notice.
Compensation for these services is approximately $40,000 per month, plus
reimbursement of expenses and payment of a 15% commission on media buys.
Services beyond those budgeted by the parties are to cost $104 per person hour.
Under a separate agreement, Healthworld has agreed to provide, as of October 1,
1999: (i) two fulltime managed-care specialists to make calls on potential
customers for a period of seven months at a cost of $30,000 per month; (ii) 20
fulltime sale representatives to market among dermatologists for a period of
four months at a cost of $125,000 per month; and (iii) certain general
management services for a period of seven months at $10,000 per month. Under
separate agreements, Healthworld will provide certain medical education and
publishing services (approximately $700,000 in fees and costs over a period in
excess of one year) and general public relations services ($10,000 per month).
See "Management."

                                       59
<PAGE>

         As of May 21, 1999, the Company granted Rox Anderson, M.D., options to
acquire up to 250,000 shares of Common Stock, exercisable at $5.16 per share, of
which 100,000 are currently vested. The remainder will vest ratably over a
three-year period and, in addition, are contingent on either approval by the FDA
of a 510(k) submission by the Company or the FDA's approval of the Company's
excimer laser to be regulated as a Class II device for the treatment of
psoriasis. See "Business-Excimer Laser System for the Treatment of Psoriasis"
and "Management."

         The Company had agreed to pay Raymond A. Hartman, the former President
and Director of the Company, for commissions earned in connection with the
Baxter Agreement. In 1998, the company recognized $72,000 of commission expenses
related to this agreement. At December 31, 1998, the Company owed $136,002 to
Mr. Hartman. All amounts due to Mr. Hartman were paid during the year ended
December 31, 1999. At December 31, 1998, the Company had made advances of
approximately $54,600 to Chaim Markheim, former Chief Operating Officer and
director of the Company. During 1999, these advance payments were recognized as
compensation to Mr. Markheim in lieu of repayment. In the year ended December
31, 1997, the Company made advance payments in the amount of $48,000 to
Helionetics, which were subsequently written off on the Company's financial
statements.

         FORMER AGREEMENT WITH CSC HEALTHCARE, INC.. On October 29, 1998, the
Company and CSC entered into an agreement ("the CSC Agreement"), under which CSC
is to develop a commercial strategy and to define and obtain the required
resources for the commercial exploitation of the Company's excimer laser
technology. Under the CSC Agreement, CSC was to provide consulting services to
various businesses, including the Company, regarding the introduction of medical
technology for commercialization. Subsequently, CSC filed a complaint against
the Company, alleging the failure to pay for professional services performed by
CSC, plus expenses. The dispute was resolved by a settlement in which the
Company paid CSC the sum of $700,000. Warwick Alex Charlton, a former Vice
President of CSC, is also the Non-Executive Chairman of the Board of Directors
of the Company. See "Management."

         The Company believes that all such transactions with affiliates of the
Company have been entered into on terms no less favorable to the Company than
could have been obtained from independent third parties. The Company intends
that any transactions and loans with officers, directors and five percent (5%)
or greater stockholders, following the date of this Report, will be on terms no
less favorable to the Company than could be obtained from independent third
parties and will be approved by a majority of the independent, disinterested
directors of the Company.

PART IV

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

A.       Financial Statements
         --------------------

         Consolidated balance sheet of Laser Photonics, Inc. and subsidiaries as
of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
3-year period ended December 31, 1999.

         Financial Statement Schedules
         -----------------------------

         The following schedules have been filed as part of this Report.

         Schedule II Valuation and Qualifying Accounts
         ---------------------------------------------

         All other schedules have been omitted because they are not required,
not applicable, or the information is otherwise set forth in the financial
statements or notes thereto.

B.       Reports on Form 8-K
         -------------------

         Not Applicable


                                       60
<PAGE>

C.       Other Exhibits
         --------------

3.1(a)   Certificate of Incorporation (1)
3.1(b)   Amendment to Certificate of Incorporation dated as of June 10, 1999 (1)
3.1(c)   Amendment to Certificate of Incorporation dated as of June 23, 1999 (1)
3.2      Bylaws (1)
10.1     Lease Agreement (Andover, Massachusetts) (2)
10.2     Lease Agreement (Orlando, Florida) (1)
10.3     Lease Agreement (San Diego, California) (3)
10.4(a)  Lease Agreement (Carlsbad, California) dated August 4, 1998 (1)
10.4(b)  Guarantee of Lease by PMG (1)
10.5     Patent License Agreement between the Company and Patlex Corporation (4)
10.6     Master Technology Agreement between the Company and Baxter Healthcare
         Corporation, dated July 28, 1997 (5)
10.7     License Agreement between the Company and Baxter Healthcare
         Corporation, dated August 19, 1997 (5)
10.8     Manufacturing Agreement between the Company and Baxter Healthcare
         Corporation, dated August 19, 1997 (6)
10.9     Clinical Trial Agreement between Massachusetts General Hospital, R. Rox
         Anderson and Laser Photonics dated
10.10    Consulting Agreement dated as of January 21, 1998 between Laser
         Photonics and Rox Anderson, M.D. (1)
10.11(a) Asset Purchase Agreement dated January 4, 1999 between the Company and
         Laser Analytics, Inc. (2)
10.11(b) Amendment No. 1 to Asset Purchase Agreement. (2)
10.12    Employment Agreement with Jeffrey F. O'Donnell, dated November 19, 1999
         (1)
10.13    Employment Agreement with Dennis M. McGrath, dated November 24, 1999
         (1)
10.14    Employment Agreement with Michael Allen, dated January 28, 2000 (1)
10.15    Lease between the Company and Radnor Center Associates, dated April 1,
         2000 (1)
10.16    Healthworld Agreement, dated May 11, 1999 (1)
10.17    Clinical Trial Agreement, dated July 27, 1999 (Scalp Psoriasis) (1)
10.18    Clinical Trial Agreement, dated July 27, 1999, and Amendment dated
         March 1, 2000 (Plaque Psoriasis) (1)
10.19    Clinical Trial Agreement, dated July 27, 1999 (High Fluence) (1)
10.20    Clinical Trial Agreement, dated November 15, 1999 (Vitiligo) (1)
10.21    MGH License Agreement, dated November 26, 1997 (1)
10.22    Asset Purchase Agreement with Laser Components GmbH, dated February
         29,2000 (1)
22.1     List of subsidiaries of the Company (2)
24.1     Consent of Hein + Associates LLP
27       Financial Data Schedules
99.1     Registrant's Third Amended Plan of Reorganization (3)
99.2     Order Confirming Registrant's Third Amended Plan of Reorganization, as
         modified (3)
99.3     Letter of March 22, 1995 from Coopers & Lybrand, directed to Laser
         Photonics, Inc.(3)

-----------

(1)      Previously as part of the Company's Registration Statement on Form S-1,
         filed with the Commission on January 28, 1998, and as amended.

(2)      Filed as part of the Company's Annual Report on Form 10-K for the year
         ended December 31, 1994.

(3)      Filed as part of the Company's Annual Report on Form 10-K for the year
         ended December 31, 1995.

(4)      Filed as part of the Company's Annual Report on Form 10-K for the year
         ended December 31, 1987.

(5)      Incorporated by reference as part of the Company's Annual Report on
         Form 10-K for the year ended December 31, 1996. This document has been
         granted Confidential Treatment by the Commission.

(6)      The terms of this Agreement are confidential commercial information,
         which the Commission has determined need not be disclosed.

                                       61
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

         The Company is currently subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549; at its New York
Regional Office, Suite 1300, 7 World Trade Center, New York, New York 10048; and
its Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661,and copies of such materials can be obtained from the Public
Reference Section of the Commission at its principal office in Washington, D.C.,
at prescribed rates. In addition, such materials may be accessed electronically
at the Commission's site on the World Wide Web, located at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports containing
audited financial statements and such other periodic reports as the Company may
determine to be appropriate or as may be required by law.

         Certain documents listed above, as exhibits to this Report on Form
10-K, are incorporated by reference from other documents previously filed by the
Company with the Commission as follows:



                                       62
<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                           LASER PHOTONICS, INC.



Date: April 13, 2000                       By: /s/ Jeffrey F. O'Donnell
                                              ---------------------------------
                                              Jeffrey F. O'Donnell
                                              President, Chief Executive Officer
                                              and Director

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

         Signature                     Capacity in Which Signed                      Date
         ---------                     ------------------------                      ----
<S>                                    <C>                                         <C>

/s/ Warwick Alex Charlton              Chairman of the Board of Directors          April 13, 2000
------------------------------
    Warwick Alex Charlton


/s/ Jeffrey F. O'Donnell               President, Chief Executive Officer and      April 13, 2000
------------------------------         Director
    Jeffrey F. O'Donnell


/s/ Alan R. Novak                      Director                                    April 13, 2000
------------------------------
    Alan R. Novak


/s/ John J. McAtee, Jr.                Director                                    April 13, 2000
------------------------------
    John J. McAtee, Jr.


/s/ Steven Girgenti                    Director                                    April 13, 2000
------------------------------
    Steven Girgenti


/s/ Harry Mittleman, M.D.              Director                                    April 13, 2000
------------------------------
    Harry Mittelman, M.D.


/s/ Samuel Navarro                     Director                                    April 13, 2000
------------------------------
    Samuel Navarro

</TABLE>




                                       63
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----

INDEPENDENT AUDITOR'S REPORT.................................................F-2

CONSOLIDATED BALANCE SHEETS - December 31, 1999 and 1998.....................F-3

CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years ended
     December 31, 1999, 1998 and 1997........................................F-4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - For the Years
     ended December 31, 1999, 1998 and 1997..................................F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years ended
     December 31, 1999, 1998 and 1997........................................F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-7

                                       F-1
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT



To the Stockholders and Board of Directors
Laser Photonics, Inc. and Subsidiaries
Carlsbad, California

We have audited the accompanying consolidated balance sheets of Laser Photonics,
Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Laser Photonics,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.

Our audits referred to above include audits of the financial statement schedule
listed under Item 14(a)(2) of Form 10-K. In our opinion, the financial statement
schedule presents fairly, in all material respects, in relation to the financial
statements taken as a whole, the information required to be stated therein.



/s/ HEIN + ASSOCIATES LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California

February 23, 2000, except for the last
paragraph of Note 9 which is dated as of
March 16, 2000

                                       F-2
<PAGE>
<TABLE>

                                         LASER PHOTONICS, INC. AND SUBSIDIARIES

                                               CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                                                            DECEMBER 31,
                                                                                  ------------------------------
                                                                                       1999            1998
                                                                                  --------------  --------------

                                               ASSETS
                                               ------
<S>                                                                               <C>             <C>
CURRENT ASSETS:
     Cash and cash equivalents                                                    $   4,535,557   $     174,468
     Accounts receivable, net of allowance for doubtful accounts of
         $83,000 and $68,000 in 1999 and 1998, respectively                             176,179         174,676
     Receivable from related party                                                            -          54,600
     Inventories                                                                      1,170,472         458,343
     Prepaid expenses and other assets                                                   34,685          38,120
                                                                                  --------------  --------------
              Total current assets                                                    5,916,893         900,207

PROPERTY AND EQUIPMENT, net                                                             152,965         127,190

PATENT COSTS, net of accumulated amortization of $40,671 and
     $32,318 in 1999 and 1998, respectively                                              44,127          52,480

PREPAID LICENSE FEE, net of accumulated amortization of
     $1,041,667 and $541,667 in 1999 and 1998, respectively                           2,958,333       3,458,333

EXCESS OF COST OVER NET ASSETS OF ACQUIRED COMPANY, net
     of accumulated amortization of $2,338,569 and $1,862,296 in
     1999 and 1998, respectively                                                              -         476,273

OTHER ASSETS                                                                             45,346          48,246

ASSETS HELD FOR SALE                                                                    588,000         613,901
                                                                                  --------------  --------------

TOTAL ASSETS                                                                      $   9,705,664   $   5,676,630
                                                                                  ==============  ==============

                                LIABILITIES AND STOCKHOLDERS' EQUITY
                                ------------------------------------
CURRENT LIABILITIES:
     Current portion of notes payable and long-term debt                          $     353,710   $     748,441
     Payable to related party                                                                 -         136,002
     Accounts payable                                                                 2,034,371       1,214,938
     Accrued payroll and related expenses                                               376,967         437,115
     Other accrued liabilities                                                        1,372,668         884,944
     Deferred revenues                                                                  250,000         343,906
                                                                                  --------------  --------------

              Total current liabilities                                               4,387,716       3,765,346

NOTES PAYABLE AND LONG-TERM DEBT, less current portion                                   43,620          69,893
                                                                                  --------------  --------------

              Total liabilities                                                       4,431,336       3,835,239
                                                                                  --------------  --------------

COMMITMENTS AND CONTINGENCIES (Notes 3, 8 and 12)                                             -               -

STOCKHOLDERS' EQUITY:
     Common stock, $.01 par value; 25,000,000 shares authorized,
         13,267,918 and 9,895,684 shares issued and outstanding in
         1999 and 1998, respectively                                                    132,679          98,957
     Additional paid-in capital                                                      30,759,186      17,439,904
     Accumulated deficit                                                            (25,617,537)    (15,697,470)
                                                                                  --------------  --------------
              Total stockholders' equity                                              5,274,328       1,841,391
                                                                                  --------------  --------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                        $   9,705,664   $   5,676,630
                                                                                  ==============  ==============

                    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

</TABLE>

                                                          F-3
<PAGE>

<TABLE>
                                         LASER PHOTONICS, INC. AND SUBSIDIARIES

                                          CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                  ----------------------------------------------
                                                                      1999             1998             1997
                                                                  --------------  --------------  --------------
<S>                                                               <C>             <C>             <C>
REVENUES:
   Sales                                                          $   1,114,929   $   1,580,422   $   2,960,330
   Other                                                                 93,906         769,026         855,000
                                                                  --------------  --------------  --------------
                                                                      1,208,835       2,349,448       3,815,330
                                                                  --------------  --------------  --------------

COSTS AND EXPENSES
   Cost of sales                                                      1,257,438       1,806,557       2,090,276
   Selling, general and administrative                                4,930,095       3,608,108       2,181,304
   Research and development                                           2,061,241       1,243,372         685,109
   Bad debt expense related to related party
     receivable                                                               -               -          48,000
   Depreciation and amortization                                      1,016,628       1,088,649         741,481
                                                                  --------------  --------------  --------------
                                                                      9,265,402       7,746,686       5,746,170
                                                                  --------------  --------------  --------------

LOSS FROM OPERATIONS                                                 (8,056,567)     (5,397,238)     (1,930,840)
                                                                  --------------  --------------  --------------

OTHER INCOME (EXPENSE):
   Interest expense                                                  (1,999,921)       (510,948)       (386,069)
   Interest income                                                      127,221           8,907          52,280
   Other                                                                 13,582          (6,008)        (38,572)
                                                                  --------------  --------------  --------------

LOSS BEFORE INCOME TAX                                               (9,915,685)     (5,905,287)     (2,303,201)

INCOME TAX EXPENSE                                                       (4,382)         (3,300)         (3,900)
                                                                  --------------  --------------  --------------

NET LOSS                                                          $  (9,920,067)  $  (5,908,587)  $  (2,307,101)
                                                                  ==============  ==============  ==============


BASIC AND DILUTED LOSS PER SHARE                                  $       (0.89)  $       (0.64)  $       (0.35)
                                                                  ==============  ==============  ==============

WEIGHTED AVERAGE SHARES                                              11,207,727       9,287,507       6,531,190
                                                                  ==============  ==============  ==============

                    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                                           F-4
<PAGE>

<TABLE>
                                         LASER PHOTONICS, INC. AND SUBSIDIARIES

                                     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<CAPTION>
                                                              COMMON STOCK              ADDITIONAL
                                                      ------------------------------     PAID-IN        ACCUMULATED
                                                          SHARES          AMOUNT         CAPITAL          DEFICIT          TOTAL
                                                      --------------  --------------  --------------  --------------  --------------
<S>                                                      <C>          <C>             <C>             <C>             <C>
BALANCES, January 1, 1997                                 6,162,583   $      61,626   $   5,330,228   $  (7,481,782)  $  (2,089,928)
     Sale of stock and warrants, net of expenses          2,179,500          21,795       6,237,282               -       6,259,077
     Stock issued for services                              105,000           1,050          94,575               -          95,625
     Stock issued to purchase debt and accrued
         interest                                           800,000           8,000       2,151,708               -       2,159,708
     Capital contributions from Helionetics, Inc.                 -               -         140,448               -         140,448
     Compensation recognized upon issuance of stock
         options                                                  -               -         671,323               -         671,323
     Net Loss                                                     -               -               -      (2,307,101)     (2,307,101)
                                                      --------------  --------------  --------------  --------------  --------------
BALANCES, December 31, 1997                               9,247,083          92,471      14,625,564      (9,788,883)      4,929,152
     Conversion of convertible notes payable                600,000           6,000       1,144,000               -       1,150,000
     Sale of stock                                           28,601             286          35,465               -          35,751
     Warrants issued for services                                 -               -       1,318,200               -       1,318,200
     Stock issued for services                               20,000             200          19,800               -          20,000
     Allocation of proceeds from notes payable due
         to beneficial conversion feature                         -               -         296,875               -         296,875
     Net Loss                                                     -               -               -      (5,908,587)     (5,908,587)
                                                      --------------  --------------  --------------  --------------  --------------
BALANCES, December 31, 1998                               9,895,684          98,957      17,439,904     (15,697,470)      1,841,391
     Allocation of proceeds from notes payable due
         to beneficial conversion feature                         -               -       1,115,625               -       1,115,625
     Proceeds from issuance of warrants                           -               -         368,900               -         368,900
     Compensation  recognized upon issuance of stock
        options                                                   -               -          78,125               -          78,125
     Stock options issued for services                            -               -         679,947               -         679,947
     Stock issued to pay interest                            38,262             382         148,810               -         149,192
     Conversion of convertible debentures, net
        of unamortized debt issuance costs                1,190,000          11,900       2,296,271               -       2,308,171
     Sale of stock, net of expenses                       2,068,972          20,690       8,519,854               -       8,540,544
     Proceeds from exercise of warrants                      75,000             750         111,750               -         112,500
     Net loss                                                     -               -               -      (9,920,067)     (9,920,067)
                                                      --------------  --------------  --------------  --------------  --------------
BALANCES, December 31, 1999                              13,267,918   $     132,679   $  30,759,186   $ (25,617,537)  $   5,274,328
                                                      ==============  ==============  ==============  ==============  ==============

                    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                                           F-5
<PAGE>

<TABLE>
                                         LASER PHOTONICS, INC. AND SUBSIDIARIES

                                          CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>

                                                                              YEAR ENDED DECEMBER 31,
                                                                  ----------------------------------------------
                                                                       1999            1998            1997
                                                                  --------------  --------------  --------------
<S>                                                               <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                     $  (9,920,067)  $  (5,908,587)  $  (2,307,101)
     Adjustments to reconcile net loss to net cash used in
         operating activities:
         Depreciation and amortization                                1,016,628       1,088,649         741,481
         Interest expense related to beneficial conversion
              feature and amortization of discount on
              convertible notes                                       1,512,292         296,875               -
         Amortization of debt issuance costs                             67,004               -               -
         Bad debt expense related to related party receivable                 -               -          48,000
         Allowance for doubtful accounts                                 14,415               -         (25,000)
         Stock issued to pay interest                                   149,192               -         168,268
         Warrants and options issued for services                       679,947       1,318,200               -
         Stock issued for services                                            -          20,000          95,625
         Compensation recognized upon issuance of stock
              options                                                    78,125               -         671,323
         Compensation recognized in lieu of repayment of
              note                                                       54,600               -               -
         Changes in operating assets and liabilities:
              Accounts receivable                                       (15,918)        168,790          64,970
              Inventories                                              (687,783)         40,105         (60,198)
              Prepaid expenses and other assets                           7,890          (1,576)        (63,350)
              Accounts payable                                          819,433         355,379         161,373
              Accrued payroll and related expenses                      (16,372)         36,893        (270,259)
              Other accrued liabilities                                 443,948         253,136        (313,983)
              Deferred revenues                                         (93,906)        248,906          95,000
                                                                  --------------  --------------  --------------
         Net cash used in operating activities                       (5,890,572)     (2,083,230)       (993,851)
                                                                  --------------  --------------  --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisitions of property and equipment                             (40,442)       (116,158)        (37,541)
     Proceeds from disposal of property and equipment                         -               -          19,174
     Acquisition of patents and licenses                                      -               -      (4,001,926)
     Advances to related parties                                              -         (29,600)        (73,000)
                                                                  --------------  --------------  --------------
         Net cash used in investing activities                          (40,442)       (145,758)     (4,093,293)
                                                                  --------------  --------------  --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from sale of stock and warrants                         8,540,544          35,751       6,259,077
     Proceeds from convertible notes payable                          2,380,000       1,276,960          71,094
     Payments for debt and warrant issuance costs                      (166,600)              -               -
     Proceeds from notes payable                                         86,485               -               -
     Payments on notes payable                                         (524,824)       (135,187)       (157,543)
     Payments on related party notes payable                           (147,342)              -               -
     Advances from related parties                                       11,340               -               -
     Capital contributions from Helionetics, Inc.                             -               -         140,448
     Proceeds from exercise of warrants                                 112,500               -               -
                                                                  --------------  --------------  --------------
         Net cash provided by financing activities                   10,292,103       1,177,524       6,313,076
                                                                  --------------  --------------  --------------

NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                                                       4,361,089      (1,051,464)      1,225,932

CASH AND CASH EQUIVALENTS, beginning of period                          174,468       1,225,932               -
                                                                  --------------  --------------  --------------

CASH AND CASH EQUIVALENTS, end of period                          $   4,535,557   $     174,468   $   1,225,932
                                                                  ==============  ==============  ==============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash paid during the year for:
         Interest                                                 $      82,719   $     137,572   $     158,939
                                                                  ==============  ==============  ==============
         Income taxes                                             $       5,732   $           -   $           -
                                                                  ==============  ==============  ==============
     Non-cash transactions:
         Conversion of convertible debentures to common
            stock                                                 $   2,308,171   $   1,150,000   $           -
                                                                  ==============  ==============  ==============
         Note payable issued to acquire leasehold
            improvements                                          $           -   $      70,000   $           -
                                                                  ==============  ==============  ==============
         Note payable issued to acquire property and
            equipment                                             $      17,335   $           -   $           -
                                                                  ==============  ==============  ==============
         Stock issued to purchase debt and accrued interest       $           -   $           -   $   2,159,708
                                                                  ==============  ==============  ==============

                    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

</TABLE>

                                                          F-6
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       ORGANIZATION AND NATURE OF OPERATIONS:
         -------------------------------------

         NATURE OF OPERATIONS - Laser Photonics, Inc. and subsidiaries (the
         "Company") operates in one industry segment and is principally engaged
         in the development, manufacture and marketing of laser systems and
         accessories for medical and scientific applications and, through its
         approximately 76.1% owned subsidiary, AccuLase, Inc., is developing
         excimer laser and fiber optic equipment and techniques directed toward
         the treatment of coronary heart disease and psoriasis.

         BANKRUPTCY FILING AND PLAN OF REORGANIZATION - On May 13, 1994, the
         Company filed a voluntary petition of reorganization with the U.S.
         Bankruptcy Court in the Middle District of Florida for protection under
         Chapter 11 of Title 11 of the U.S. Bankruptcy Code. Out of the
         reorganization, Helionetics, Inc. (Helionetics) acquired a 75% interest
         in the Company in exchange for cash and the contribution of its 76.1%
         interest in AccuLase, Inc. Helionetics has since filed for bankruptcy
         and sold its interests such that it is no longer a shareholder of the
         Company.

         The acquisition of AccuLase has been accounted for as a purchase and
         the results of operations of AccuLase have been included in these
         consolidated financial statements since May 23, 1995.

         After emerging from the reorganization, all assets and liabilities of
         the Company were restated to reflect their reorganization value in
         accordance with procedures specified in Accounting Principles Board
         Opinion 16 "BUSINESS COMBINATIONS" (APB16) as required by SOP 90-7,
         "Financial Reporting by Entities in Reorganization Under the Bankruptcy
         Code." The portion of the reorganization value that could not be
         attributed to specific tangible or identified intangible assets was
         classified as reorganization value in excess of amounts allocable to
         identifiable assets ("Reorganization Goodwill") and was being amortized
         over five years. Because of the magnitude of the Company's losses since
         emerging from bankruptcy, the balance was considered impaired and
         written off as of December 31, 1996.


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
         ------------------------------------------

         PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
         statements include the accounts of the Company and its subsidiaries,
         Laser Analytics, Inc. and AccuLase, Inc. All significant intercompany
         balances and transactions have been eliminated in consolidation.

         STATEMENT OF CASH FLOWS - For purposes of the statements of cash flows,
         the Company considers all highly liquid debt instruments purchased with
         an original maturity of three months or less to be cash equivalents.

         IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and
         circumstances indicate that the cost of long lived assets may be
         impaired, an evaluation of recoverability would be performed. If an
         evaluation is required, the estimated future undiscounted cash flows
         associated with the asset would be compared to the asset's carrying
         amount to determine if a write-down to market value or discounted cash
         flow value is required.

                                       F-7
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         STOCK BASED COMPENSATION - The Company has elected to follow Accounting
         Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
         EMPLOYEES" (APB25) and related interpretations in accounting for its
         employee stock options. In accordance with FASB Statement No. 123
         "ACCOUNTING FOR STOCK-BASED COMPENSATION" (FASB123), the Company will
         disclose the impact of adopting the fair value accounting of employee
         stock options. Transactions in equity instruments with non-employees
         for goods or services have been accounted for using the fair value
         method as prescribed by FASB123.

         REVENUE RECOGNITION - Revenues are recognized upon shipment of products
         to customers. Deferred revenue relates to payments received under the
         Baxter Agreement (See Note 12) in advance of delivery of related
         product.

         INVENTORIES - Inventories are stated at the lower of cost or market,
         determined by the first-in, first-out method.

         PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
         Depreciation of property and equipment is calculated using the
         straight-line method over the estimated useful lives (ranging from 3 to
         7 years) of the respective assets. The cost of normal maintenance and
         repairs is charged to operating expenses as incurred. Material
         expenditures that increase the life of an asset are capitalized and
         depreciated over the estimated remaining useful life of the asset. The
         cost of properties sold, or otherwise disposed of, and the related
         accumulated depreciation or amortization are removed from the accounts,
         and any gains or losses are reflected in current operations.

         INTANGIBLE ASSETS - Patents and license fees are carried at cost less
         accumulated amortization which is calculated on a straight-line basis
         over the estimated useful lives of the assets, which range from eight
         to twelve years.

         Excess of cost over net assets of acquired company represents the
         goodwill recorded by Helionetics for its purchase of AccuLase that has
         been "pushed down" to the Company. The balance is being amortized using
         the straight-line basis over 5 years.

         ACCRUED WARRANTY COSTS - Estimated warranty costs are provided for at
         the time of sale of the warranted product. The Company generally
         extends warranty coverage for one year from the date of sale.

         USE OF ESTIMATES - The preparation of the Company's consolidated
         financial statements in conformity with generally accepted accounting
         principles requires the Company's management to make estimates and
         assumptions that affect the amounts reported in these financial
         statements and accompanying notes. Actual results could differ from
         those estimates.

         The Company's financial statements are based upon a number of
         significant estimates, including the allowance for doubtful accounts,
         obsolescence of inventories, the estimated useful lives selected for
         property and equipment and intangible assets, realizability of deferred
         tax assets, estimated future warranty costs, and penalties and interest
         for delinquent payroll taxes. Due to the uncertainties inherent in the

                                       F-8
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         estimation process, it is at least reasonably possible that these
         estimates will be further revised in the near term and such revisions
         could be material.

         RESEARCH AND DEVELOPMENT - Research and development costs are charged
         to operations in the period incurred.

         CONCENTRATIONS OF CREDIT RISK - Credit risk represents the accounting
         loss that would be recognized at the reporting date if counterparties
         failed completely to perform as contracted. Concentrations of credit
         risk (whether on or off balance sheet) that arise from financial
         instruments exist for groups of customers or counterparties when they
         have similar economic characteristics that would cause their ability to
         meet contractual obligations to be similarly affected by changes in
         economic or other conditions described below. In accordance with FASB
         Statement No. 105, "DISCLOSURE OF INFORMATION ABOUT FINANCIAL
         INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH
         CONCENTRATIONS OF CREDIT RISK" the credit risk amounts shown do not
         take into account the value of any collateral or security.

         The Company operates in one industry segment and a geographic
         concentration exists because the Company's customers are generally
         located in the United States. Financial instruments that subject the
         Company to credit risk consist principally of accounts receivable.

         FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
         financial instruments under FAS No. 107, "DISCLOSURES ABOUT FAIR VALUE
         OF FINANCIAL INSTRUMENTS", are determined at discrete points in time
         based on relevant market information. These estimates involve
         uncertainties and cannot be determined with precision. The fair value
         of cash is based on its demand value, which is equal to its carrying
         value. The fair values of notes payable are based on borrowing rates
         that are available to the Company for loans with similar terms,
         collateral, and maturity. The estimated fair values of notes payable
         approximate their carrying values.

         INCOME TAXES - The Company accounts for income taxes in accordance with
         Statement of Financial Accounting Standards No. 109, "ACCOUNTING FOR
         INCOME TAXES". Under the asset and liability method of Statement 109,
         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. Under Statement 109, the effect on deferred tax assets and
         liabilities of a change in tax rates is recognized in income in the
         period that includes the enactment date.

         LOSS PER SHARE - Basic earnings per share excludes dilution and is
         calculated by dividing income available to common stockholders by the
         weighted-average number of common shares outstanding for the period.
         Diluted earnings per share reflects the potential dilution that could
         occur if securities or other contracts to issue common stock were
         exercised or converted into common stock or resulted in the issuance of
         common stock that then shared in the earnings of the entity. Common
         stock equivalents as of December 31, 1999, 1998 and 1997 were
         anti-dilutive and excluded in the computation of basic earnings per
         share.

                                      F-9
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         IMPACT OF RECENTLY ISSUED STANDARDS - In June 1998, the Financial
         Accounting Standards Board issued Statement of Financial Accounting
         Standards No. 133 (FASB133), "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
         HEDGING ACTIVITIES," This statement is effective for fiscal years
         beginning after June 15, 1999. Earlier application is encouraged;
         however, the Company does not anticipate adopting FASB133 until the
         fiscal year beginning January 1, 2000. FASB133 requires that an entity
         recognize all derivatives as assets or liabilities in the statement of
         financial position and measure those instruments at fair value. The
         Company does not believe the adoption of FASB133 will have a material
         impact on assets, liabilities or equity. The Company has not yet
         determined the impact of FASB133 on the income statement or the impact
         on comprehensive income.

         RECLASSIFICATIONS - Certain reclassifications have been made to prior
         year's consolidated financial statements to conform with the current
         presentation. Such reclassifications had no effect on net loss.


3.       BASIS OF PRESENTATION:
         ---------------------

         As shown in the accompanying financial statements, the Company has
         reported significant net losses for the years ended December 31, 1999,
         1998 and 1997 resulting in an accumulated deficit of $25,617,537 as of
         December 31, 1999.

         During 1997, 1998 and 1999, the Company took steps to mitigate the
         losses and enhance its future viability, as follows. AccuLase entered
         into a Master Technology Agreement with Baxter Healthcare Corporation
         (see Note 12) under which AccuLase has received $1,968,000 and will
         receive additional purchase commitments and future royalty payments.
         During 1998, the Company received proceeds of $1,150,000 through the
         issuance of convertible debentures, which were converted into 600,000
         shares of the Company's common stock on December 31, 1998. The
         Company's board of directors authorized management to pursue the sale
         of certain assets of Laser Photonics, Inc.'s Florida operations and
         Laser Analytics, Inc., or consider the closure of their operations.

         Additionally, during March 1999, the Company issued convertible notes
         generating gross proceeds of approximately $2,300,000 to the Company.
         Also, the Company anticipates delivering certain lasers to Baxter under
         its agreement with them during the first quarter of 2000, which will
         generate additional cash of $350,000 to the Company. The Company also
         raised net proceeds of approximately $8,500,000 in the third quarter of
         1999 from the sale of common stock. Finally, management expects to
         raise additional working capital through the issuance of debt and
         equity securities (See Note 13). Management believes that these actions
         will allow the Company to continue as a going concern.

                                      F-10
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.       INVENTORIES:
         -----------

         Inventories are as follows:

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                  ------------------------------
                                                                                       1999            1998
                                                                                  --------------  --------------
                  <S>                                                             <C>             <C>
                  Raw materials                                                   $     633,032   $     229,199
                  Work-in-progress                                                      557,440         249,144
                  Finished goods                                                              -               -
                                                                                  --------------  --------------
                                                                                      1,190,472         478,343
                  Allowance for obsolescence                                            (20,000)        (20,000)
                                                                                  --------------  --------------
                                                                                  $   1,170,472   $     458,343
                                                                                  ==============  ==============
</TABLE>

5.       PROPERTY AND EQUIPMENT:
         ----------------------

         Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                  ------------------------------
                                                                                       1999            1998
                                                                                  --------------  --------------
                  <S>                                                             <C>             <C>
                  Machinery and equipment                                         $      23,981   $      18,434
                  Furniture and fixtures                                                100,190          49,988
                  Leasehold improvements                                                 78,716          76,688
                                                                                  --------------  --------------
                                                                                        202,887         145,110
                  Accumulated depreciation and amortization                             (49,922)        (17,920)
                                                                                  --------------  --------------
                                                                                  $     152,965   $     127,190
                                                                                  ==============  ==============
</TABLE>

         Depreciation expense amounted to $18,038, $60,615 and $171,777 in 1999,
1998 and 1997, respectively.

6.       OTHER ACCRUED LIABILITIES:
         -------------------------

         Other accrued liabilities consists of the following:

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                  ------------------------------
                                                                                       1999            1998
                                                                                  --------------  --------------
                  <S>                                                             <C>             <C>
                  Accrued consulting fees                                         $     739,000   $     291,000
                  Accrued interest                                                      141,110         163,983
                  Accrued property taxes                                                 88,360         153,880
                  Accrued royalty                                                        64,282          62,020
                  Accrued warranty                                                       32,331          50,000
                  Customer deposits                                                      49,875             957
                  Accrued group insurance                                                99,222          55,173
                  Other accrued liabilities                                             158,488         107,931
                                                                                  --------------  --------------
                                                                                  $   1,372,668   $     884,944
                                                                                  ==============  ==============
</TABLE>

                                      F-11
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.       CONVERTIBLE NOTES PAYABLE:
         -------------------------

         On March 31, 1999, the Company issued to various investors securities
         consisting of: (i) $2,380,000 principal amount of 7% Series A
         Convertible Subordinated Notes (the "Subordinated Notes"); and (ii)
         common stock purchase warrants to purchase up to 595,000 shares of
         Common Stock (the "Unit Warrants"). On August 2, 1999, the convertible
         notes were voluntarily converted into common stock at $2.00 per share
         plus a warrant for every two shares of common stock.

         The Unit Warrants are exercisable into an initial 297,500 shares of
         Common Stock at any time until March 31, 2004. The balance of the Unit
         Warrants are exercisable into an additional 297,500 shares of Common
         Stock (the "Contingent Shares") if the Unit holder voluntarily converts
         at least a portion of the principal amount of the Subordinated Note
         that make up a portion of the Unit into shares of Common Stock. Since
         the notes were voluntarily converted on August 2, 1999, the Contingent
         warrants are fully vested and exercisable into an additional 297,500
         shares of Common Stock. The exercise price of the Unit Warrants is
         $2.00 per share of Common Stock. The Unit Warrants provide that they
         may be adjusted in the event that the Company issues shares of Common
         Stock for consideration of less than $2.00 per share. In such event,
         the per share exercise price of the Unit Warrants will be adjusted to
         the issue price of such additionally issued shares of Common Stock.

         Gross proceeds from the sale of the securities were $2,380,000. Since,
         the convertible debt and the warrants have similar terms and the same
         in-the-money value, the fair values were assumed to be the same and the
         proceeds were allocated on a pro rata basis. Of the proceeds, $396,667
         was allocated to the warrants. The market price of the Company's common
         stock on the commitment date was $2.75 per share, resulting in a
         beneficial conversion of $0.75 per share. The aggregate amount of the
         beneficial conversion was $1,115,625. The discount on the notes related
         to the beneficial conversion and warrants was charged to interest
         expense on the date of issuance since they were immediately
         convertible.

                                      F-12
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.       NOTES PAYABLE AND LONG-TERM DEBT:
         --------------------------------

         Notes payable and long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                  ------------------------------
                                                                                       1999            1998
                                                                                  --------------  --------------
         <S>                                                                      <C>             <C>
         Notes payable - unsecured creditors, interest at prime rate,
         quarterly interest only payments beginning October 1, 1995,
         principal due October 1, 1999, unsecured.                                $           -   $     282,559

         Notes payable - unsecured creditors, interest at prime rate,
         quarterly interest only payments beginning October 1, 1995,
         principal due October 1, 1999, unsecured. Payments past due.                   165,298         165,298

         Note payable - creditor, interest at 10%, monthly interest
         only payments through May 5, 1997, thereafter monthly
         interest and principal payments of $6,384 through May 1999,
         unsecured. Payments past due.                                                  127,860         127,860

         Note payable - U.S. Treasury, interest at 9%, payable in monthly
         principal and interest installments through July 2000, unsecured.               14,873          58,554

         Notes payable - various creditors, interest at 9%, payable in various
         monthly principal and interest installments through July
         2000, unsecured. Payments past due.                                             10,101          85,250

         Note payable - creditor, interest at 9%, payable in monthly principal
         and interest installments of $1,258 through January 2001,
         collateralized by personal property of the Company.                             16,670          28,813

         Note payable - lessor, interest at 10%, payable in monthly principal
         and interest installments of $1,775 through December 31, 2002,
         unsecured.                                                                      55,021          70,000

         Note payable - creditor, interest at 13.5%, payable in monthly
         principal and interest installments of $1,552 through May 2000.
                                                                                          7,507               -
                                                                                  --------------  --------------
                                                                                        397,330         818,334
         Less current maturities                                                       (353,710)       (748,441)
                                                                                  --------------  --------------
                                                                                  $      43,620   $      69,893
                                                                                  ==============  ==============
</TABLE>

                                      F-13
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The prime rate of interest as of December 31, 1999, 1998 and 1997 was
         8.50%, 7.75% and 8.50%, respectively.

         As a result of the past due payments on some of the notes listed above,
         the notes are callable at the option of the holder. Therefore, these
         notes have been classified as current. Aggregate maturities required on
         notes payable and long-term debt at December 31, 1999 are due in future
         years as follows:

                  2000                                            $     353,710
                  2001                                                   23,426
                  2002                                                   20,194
                                                                  --------------
                                                                  $     397,330
                                                                  ==============

9.       STOCKHOLDERS' EQUITY:
         --------------------

         On January 2, 1996, the Company adopted the 1995 Non-Qualified Option
         Plan (the Plan) for key employees, officers, directors, and
         consultants, and provided for up to 500,000 options to be issued
         thereunder. The option exercise price shall not be less than 100% of
         market value on the date granted, 40% of granted options vest
         immediately and may be exercised immediately; 30% vest and may be
         exercised beginning 12 months after grant; and the remaining 30% vest
         and may be exercised beginning 24 months from grant. No options may be
         exercised more than 10 years after grant, options are not transferable
         (other than at death), and in the event of complete termination "for
         cause" (other than death or disability) or "voluntary" termination, all
         "unvested" options automatically terminate.

         During May 1997, the Board granted options to purchase 250,000 shares
         of common stock at $0.50 per share to the Company's president. The
         options vest immediately and expire in May 2002. The Company has
         recognized $62,500 in compensation expense related to these options for
         the year ended December 31, 1997.

         On July 1, 1997, the Board approved the grant of options to certain
         employees and consultants to purchase 108,500 shares of common stock at
         an exercise price of $1.00 per share. The options vest immediately and
         expire in July 2007. The Company has recognized $56,030 in compensation
         expense related to these options for the year ended December 31, 1997.

         During August 1997, the Board granted options to purchase 211,899
         shares of common stock at $1.25 per share to certain officers and
         directors of the Company. The options vest immediately and expire in
         August 2002. The Company has recognized $172,168 in compensation
         expense related to these options for the year ended December 31, 1997.

         In August 1997, the Company's board of directors authorized the sale of
         750,000 shares of common stock at $1.25 per share through an investment
         banker ("the investment banker") pursuant to Regulation D under the
         Securities Act of 1933. In 1997, the Company sold 679,500 shares of
         common stock for $849,375. In 1998, the Company sold 28,601 shares of
         common stock for $35,751.

                                      F-14
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         On September 30, 1997, an investment banker purchased from the
         Helionetics bankruptcy estate the note payable from AccuLase to
         Helionetics in the amount of $2,159,708 including accrued interest.
         During October 1997, the investment banker sold such note to the
         Company for 800,000 shares of the Company's common stock.

         On October 10, 1997, the Board granted options to a former director to
         purchase 100,000 shares of common stock at an exercise price of $0.75.
         On October 31, 1997, the Board granted options to a former director to
         purchase 20,000 shares of common stock at an exercise price of $1.00.
         These options vest immediately and expire in October 2004. The Company
         has recognized $380,625 as compensation expense related to these
         options for the year ended December 31, 1997.

         In October 1997, the Company's board of directors authorized the sale
         of 1,500,000 shares of common stock at $4.00 per share through an
         investment banker ("the investment banker") pursuant to Regulation D
         under the Securities Act of 1933. Each share issued had attached a
         share purchase warrant to purchase a share of common stock for each two
         shares purchased in the offering for a period of five years at $4.00
         per share. In the event these warrants are exercised, then the Company
         must issue the investment banker one additional warrant for every ten
         warrants exercised, exercisable for a period of five years at an
         exercise price equal to the average closing bid price for the common
         stock for the ten trading days preceding the date of exercise. As of
         December 31, 1997, the Company sold 1,500,000 shares of common stock
         for $6,000,000. In connection with this sale, the Company granted the
         investment banker warrants to purchase 150,000 at $4.00 per share for a
         period of five years. The warrants provide that they may be adjusted in
         the event that the Company issues shares of common stock for
         consideration of less than $4.00 per share. In such event, the per
         share exercise price will be adjusted to the issue price of such
         additionally issued shares of common stock. In December 1998, the
         Company issued shares of its common stock at $1.50 per share. The
         effect of such issuance was to reduce the exercise price of these
         900,000 warrants to $1.50 per share.

         In April 1998, the Company issued 20,000 shares of common stock in
         exchange for legal services of $20,000.

         In April 1998, the Board granted options to purchase 390,000 shares of
         common stock to certain officers and directors of the Company. The
         options are exercisable at $2.88 per share, which was the market price
         on the date of grant. The options were fully vested at December 31,
         1998 and expire in April 2003.

         During July and August 1998, the Company arranged to have AccuLase,
         issue $1,000,000 of 10% convertible promissory notes to various
         investors. The convertible notes were guaranteed by the Company.
         Interest was payable annually in cash or in the Company's common stock
         at the Company's option. The entire principal was due and payable in
         one payment on or before December 31, 1998. The holders of the
         convertible notes may convert any or all outstanding balances into the
         Company's common stock at a conversion price of $2.00 per share at any
         time. The market price of the Company's common stock on the date the
         convertible notes were issued was $2.59 per share. The Company recorded
         $296,875 as a deferred financing cost, which was recorded as expense in
         1998. All balances outstanding as of the maturity date of the
         convertible notes, if not paid, automatically convert into shares of
         the Company's common stock at a conversion price of $2.00 per share.

                                      F-15
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The holders of convertible notes converted the notes into 500,000
         shares. During 1999, 37,443 shares were issued in exchange for accrued
         but unpaid interest.

         In December 1998, the Company issued a note payable to the President of
         the Company's investment banker for $150,000 in cash. The note is
         convertible to shares of the Company's restricted common stock at $1.50
         per share at the option of the holder of the note. The note was
         converted to 100,000 shares of stock in December 1998.

         In 1998, the Company issued warrants to acquire 600,000 shares of the
         Company's common stock at $2.00 per share to its investment banker for
         services provided. The Company recognized expense of $1,318,200 upon
         issuance of the warrants.

         In March 1999, the Company granted options to purchase 150,000 shares
         of common stock to a director of the Company. The options are
         exercisable at $3.00 per share, which was the market price on the date
         of grant. The options were fully vested at December 31, 1999 and expire
         in March 2004.

         In April 1999, the Company issued options to purchase 50,000 shares of
         common stock to a non-executive employee of the Company. The options
         are exercisable at $3.19 per share. The options vest ratably over a
         period of five years. As of December 31, 1999, 12,500 options had
         vested. The Company has recognized $11,875 in compensation expense
         related to these options for the year ended December 31, 1999.

         In April 1999, the Company issued options to purchase 100,000 shares of
         common stock to two outside directors of the Company. The options are
         exercisable at $4.75, which was the market price on the date of grant.
         The options were fully vested at December 31, 1999 and expire in April
         2004.

         In May 1999, the Company issued 250,000 options to purchase shares of
         common stock at an exercise price of $5.16 per share. The options vest
         as follows: 100,000 vest immediately and the remaining 150,000 vest
         over a three year period and are contingent upon receiving certain FDA
         approvals. Compensation expense of $299,650 was recorded during May
         1999 as required under FASB 123.

         In May 1999, the Company issued warrants to purchase 174,000 shares of
         common stock to Healthworld for various marketing services. The
         warrants are exercisable at $4.69 per share. The options vest ratably
         over a twelve month period. At December 31, 1999 101,500 warrants were
         vested. Compensation expense of $278,722 was recorded as required under
         FASB123.

         On August 9, 1999, the Company completed an offering of 2,068,972
         shares of common stock at a price of $4.50 per share for gross proceeds
         of $9,310,374. In connection with the offering, the Company paid a
         commission to Pennsylvania Merchant Group (PMG) of 8% of the gross
         proceeds raised plus $25,000 for expenses. In addition, for each
         $1,000,000 of gross proceeds, PMG received a warrant to purchase 10,000
         shares of common stock at $4.50 per share. The warrants issued to PMG
         are being treated as offering costs of the private placement. As a
         result, there has been no value assigned to the warrants as the amount
         would be charged against the gross proceeds of the offering and would
         have no effect on equity.

                                      F-16
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         In August 1999, the Company issued options to purchase 180,000 shares
         of common stock to an officer of the Company. The options are
         exercisable at $5.25 per share, which was the market price on the date
         of grant. At December 31, 1999, 100,000 options are vested and the
         remaining 80,000 vest monthly over a two year period. The options
         expire in August 2004.

         In November and December 1999, the Board issued options to purchase
         1,100,000 shares of common stock to two officers and one director of
         the Company. The options are exercisable at prices ranging from $4.63
         to $5.94. The exercise prices represented the fair market value of the
         Company's common stock on the date of grant. At December 31, 1999,
         366,667 options were vested and the remaining 733,333 vest over a two
         year period. The options expire in November and December 2004.

         During 1999, the Company granted options to purchase 95,000 shares of
         common stock to outside directors of the Company. The options are
         exercisable at $2.81 per share. The options were fully vested at
         December 31, 1999 and expire in 2004. The Company has recognized
         $66,251 in compensation expense related to these options for the year
         ended December 31, 1999.

         During 1999, the Board issued options to purchase 32,230 shares of
         common stock to legal counsel as payment for legal services rendered.
         The options are exercisable at prices ranging from $1.50 to $5.10. The
         exercise prices represent 85% of the trading price of the Company's
         common stock on the last day of the month in respect of which the
         options were granted. The Company has recognized compensation expense
         of $90,804 during 1999 as required by FASB123.

                                      F-17
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         A summary of option transactions during 1997, 1998, and 1999 under the
Plan follows:

<TABLE>
<CAPTION>
                                                                                                     WEIGHTED
                                                                                     NUMBER OF       AVERAGE
                                                                                      SHARES      EXERCISE PRICE
                                                                                  --------------  --------------
         <S>                                                                            <C>       <C>
         Outstanding at January 1, 1997                                                 397,500   $        1.66
              Granted                                                                         -               -
              Expired/canceled                                                          (62,500)           2.50
                                                                                  --------------  --------------
         Outstanding at December 31, 1997                                               335,000            1.50
              Granted                                                                         -               -
              Expired/canceled                                                                -               -
                                                                                  --------------  --------------
         Outstanding at December 31, 1998                                               335,000            1.50
              Granted                                                                         -               -
              Expired/canceled                                                                -               -
                                                                                  --------------  --------------
         Outstanding at December 31, 1999                                               335,000   $        1.50
                                                                                  ==============  ==============
</TABLE>

         At December 31, 1999, all plan options to purchase shares were
exercisable at $1.50 per share.

         If not previously exercised, the outstanding plan options will expire
as follows:

<TABLE>
<CAPTION>
                                                                                                     WEIGHTED
                                                                                     NUMBER OF       AVERAGE
              YEAR ENDED DECEMBER 31,                                                 SHARES      EXERCISE PRICE
              -----------------------                                             --------------  --------------
                       <S>                                                              <C>       <C>
                       2006                                                             335,000   $        1.50
                                                                                  --------------  --------------

                                                                                        335,000   $        1.50
                                                                                  ==============  ==============
</TABLE>

         A summary of non-plan option transactions during 1997, 1998, and 1999
follows:

<TABLE>
<CAPTION>
                                                                                                     WEIGHTED
                                                                                     NUMBER OF       AVERAGE
                                                                                      SHARES      EXERCISE PRICE
                                                                                  --------------  --------------
         <S>                                                                          <C>         <C>
         Outstanding at January 1, 1997                                                  10,000   $        1.05
              Granted                                                                   690,399            0.86
              Expired/canceled                                                                -               -
                                                                                  --------------  --------------
         Outstanding at December 31, 1997                                               700,399            0.87
              Granted                                                                   390,000            2.88
              Expired/canceled                                                                -               -
                                                                                  --------------  --------------
         Outstanding at December 31, 1998                                             1,090,399            1.59
              Granted                                                                 1,957,230            4.70
              Expired/canceled                                                                -               -
                                                                                  --------------  --------------
         Outstanding at December 31, 1999                                             3,047,629   $        3.59
                                                                                  ==============  ==============
</TABLE>

                                      F-18
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         At December 31, 1999, all non-plan options to purchase shares were
exercisable at prices ranging from $0.50 to $5.94.

         If not previously exercised the outstanding non-plan options will
expire as follows:

<TABLE>
<CAPTION>
                                                                                                     WEIGHTED
                                                                                     NUMBER OF       AVERAGE
              YEAR ENDED DECEMBER 31,                                                 SHARES      EXERCISE PRICE
              -----------------------                                             --------------  --------------
                       <S>                                                            <C>         <C>
                       2002                                                             570,399   $        0.87
                       2003                                                             390,000            2.88
                       2004                                                           2,045,000            4.50
                       2006                                                              10,000            1.50
                       2009                                                              32,230            2.82
                                                                                  --------------  --------------

                                                                                      3,047,629   $        3.59
                                                                                  ==============  ==============
</TABLE>

         As stated in Note 2, the Company has not adopted the fair value
         accounting prescribed by FASB123 for employees. Had compensation cost
         for stock options issued to employees been determined based on the fair
         value at grant date for awards in 1999, 1998 and 1997 consistent with
         the provisions of FASB123, the Company's net loss and net loss per
         share would have increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                                                                   DECEMBER 31,
                                                                  ----------------------------------------------
                                                                       1999            1998            1997
                                                                  --------------  --------------  --------------
                  <S>                                             <C>             <C>             <C>
                  Net loss                                        $ (11,989,030)  $  (6,784,686)  $  (2,965,259)
                                                                  ==============  ==============  ==============
                  Net loss per share                              $       (1.07)  $       (0.73)  $       (0.45)
                                                                  ==============  ==============  ==============
</TABLE>

         The fair value of each option is estimated on the date of grant using
         the present value of the exercise price and is pro-rated based on the
         percent of time from the grant date to the end of the vesting period.
         The weighted average fair value of the options granted during 1999,
         1998 and 1997 was $2.53, $1.97 and $1.75, respectively. The following
         assumptions were used for grants in 1999; risk-free interest rate equal
         to the yield on government bonds and notes with a maturity equal to the
         expected life for the month the options were granted; expected lives of
         two years; dividend yield of 0%; and expected volatility of 98%. The
         following assumptions were used for grants in 1998; risk-free interest
         rate of 5.6%; expected lives of two years; dividend yield of 0%; and
         expected volatility of 137%. The following assumptions were used for
         grants in 1997: risk-free interest rate equal to the yield on
         government bonds and notes with a maturity equal to the expected life
         for the month the options were granted; expected lives of two years;
         dividend yield of 0%, and expected volatility of 134%.

         AccuLase has reserved 800,000 shares of its common stock for issuance
         under a noncompensatory employee stock option plan. Options are
         exercisable over a period of up to ten years from the date of grant.
         During 1992, 28,500 options were granted at an exercise price of $2.80
         per share. In 1995, options for 14,500 were canceled. At December 31,
         1999, the remaining 14,000 options are exercisable.

         In January and February 2000, the Company issued stock options to
         purchase 345,000 shares of common stock at exercise prices ranging from
         $8.00 to $17.75.

         On March 16, 2000, the Company completed a private offering of
         1,409,092 shares of its common stock at $11.00 per share for gross
         proceeds of approximately $15,500,000. In connection with the offering,
         the Company paid a commission to ING Baring of $930,000.

                                      F-19
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.      INCOME TAXES:
         ------------

         Income tax expense (benefit) is comprised of the following:

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                  ----------------------------------------------
                                                                       1999            1998            1997
                                                                  --------------  --------------  --------------
         <S>                                                      <C>             <C>             <C>
         CURRENT
              Federal                                             $           -   $           -   $           -
              State                                                       4,382           3,300           3,900
                                                                  --------------  --------------  --------------
                                                                          4,382           3,300           3,900
                                                                  --------------  --------------  --------------

         DEFERRED
              Federal                                                         -               -               -
              State                                                           -               -               -
                                                                  --------------  --------------  --------------
                                                                              -               -               -
                                                                  --------------  --------------  --------------
         INCOME TAX EXPENSE                                       $       4,382   $       3,300   $       3,900
                                                                  ==============  ==============  ==============
</TABLE>

         The tax effect of temporary differences that give rise to significant
         portions of the deferred tax assets and liabilities are presented
         below:

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                  ------------------------------
                                                                                       1999            1998
                                                                                  --------------  --------------
         <S>                                                                      <C>             <C>
         Current deferred tax assets:
              Accounts receivable, principally due to allowances
                  for doubtful accounts                                           $      32,000   $      27,000
              Compensated absences, principally due to accrual
                  for financial reporting purposes                                       22,000          21,000
              Warranty reserve, principally due to accrual for
                  financial reporting purposes                                           13,000          19,000
              Inventory obsolescence reserve                                            457,000         409,000
              Stock option compensation                                               1,080,000         769,000
              Accrued expenses                                                           48,000          63,000
              UNICAP                                                                     35,000          34,000
                                                                                  --------------  --------------
                                                                                      1,687,000       1,342,000
              Less valuation allowance                                               (1,687,000)     (1,342,000)
                                                                                  --------------  --------------
                  Net current deferred tax assets                                 $           -   $           -
                                                                                  ==============  ==============
</TABLE>

                                      F-20
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                  ------------------------------
                                                                                       1999            1998
                                                                                  --------------  --------------
         <S>                                                                      <C>             <C>
         Noncurrent deferred tax assets:
              Tax credit carryforwards                                            $     413,000   $     334,000
              Net operating loss carryforwards                                        9,727,000       6,534,000
              Depreciation and amortization                                             144,000         101,000
              Capitalized research and development costs                                351,000         339,000
                                                                                  --------------  --------------
                                                                                     10,635,000       7,308,000
              Less valuation allowance                                              (10,635,000)     (7,308,000)
                                                                                  --------------  --------------
                  Net noncurrent deferred tax assets                              $           -   $           -
                                                                                  ==============  ==============
</TABLE>

         At December 31, 1999, the Company has net operating loss carryforwards
         of approximately $24,197,000, which expire in various years through
         2019. These net operating losses are subject to annual limitations
         imposed by the Internal Revenue Code due to change in control of the
         Companies.

         Total income tax expense differed from the amounts computed by applying
         the U.S. federal statutory tax rates to pre-tax income as follows:

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                  ----------------------------------------------
                                                                       1999            1998            1997
                                                                  --------------  --------------  --------------
         <S>                                                             <C>             <C>             <C>
         Total expense (benefit) computed by
              applying the U.S. statutory rate                           (34.0%)         (34.0%)         (34.0%)
         Nondeductible interest                                           20.5               -               -
         Permanent differences                                             0.4            14.6            25.7
         State income taxes                                                  -               -             0.2
         Effect of valuation allowance                                    13.1            19.4             8.3
                                                                  --------------  --------------  --------------
                                                                             -%              -%            0.2%
                                                                  ==============  ==============  ==============
</TABLE>

11.      RELATED PARTY TRANSACTIONS:
         --------------------------

         During April 1997, Helionetics filed a voluntary petition of
         reorganization with the U.S. Bankruptcy Court in the Central District
         of California for protection under Chapter 11 of Title 11 of the U.S.
         Bankruptcy Code. As a result, the Company wrote off its $662,775
         receivable from Helionetics as of December 31, 1996.

         The Company also advanced $48,000 to Helionetics during 1997, which was
         subsequently written off.

         The Company has agreed to pay commissions to an officer of the Company
         for efforts in securing the Baxter Agreement (See Note 12). In 1998,
         the Company recognized $72,000 of commission expense related to this
         agreement. In addition, the Company has received advances from the
         officer for operating expenditures. At December 31, 1998, the amounts

                                      F-21
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         due to the officer were $136,002. All amounts due were paid during the
         year ended December 31, 1999.

         At December 31, 1998, the Company had $54,600 due from an officer of
         the Company for advances made. During 1999, in lieu of repayment, the
         advances were recognized as compensation.

12.      COMMITMENTS AND CONTINGENCIES:
         -----------------------------

         LEASES - The Company leases its facility in the Orlando, Florida area
         under a month-to-month operating lease, which requires monthly payments
         of $11,000. AccuLase leases its facility under a non-cancelable
         operating lease, which expires during 2003. The Company's other
         subsidiary leases its facility under a non-cancelable operating lease,
         which expires during 2001. Rental expense for these leases amounted to
         $319,897, $298,287 and $346,260 for the years ended December 31, 1999,
         1998 and 1997, respectively. The future annual minimum payments under
         the non-cancelable leases are as follows:

               YEAR ENDED DECEMBER 31,
               -----------------------
                        2000                                      $     170,000
                        2001                                            170,000
                        2002                                             97,000
                        2003                                             64,000
                                                                  --------------
               Minimum lease payments                             $     501,000
                                                                  ==============


         LITIGATION - On April 21, 1998, City National Bank of Florida, Trustee
         ("Landlord") filed suit against the Company for unpaid rent for the
         Company's facility in Orlando. City National Bank of Florida, Trustee
         received a final judgment as of January 4, 1999 of approximately
         $695,000, with interest thereafter until paid at the rate of 18% per
         annum. As of December 31, 1999, the Company has accrued for the
         judgement. (Additionally, see Note 13.)

         On November 19, 1999, the Company's Board of Directors voted to
         terminate Raymond A. Hartman as an officer and employee and Sandra
         Hartman, the wife of Raymond Hartman, as an employee of the Company and
         of all subsidiaries of the Company. In addition, the Board of Directors
         of AccuLase terminated Raymond Hartman as an officer and employee and
         Sandra Hartman as an employee of AccuLase. Finally, the shareholders of
         AccuLase removed Raymond Hartman as a director of AccuLase. Prior to
         the terminations, both Mr. and Ms. Hartman were offered a severance
         benefit package under which they would tender resignations in lieu of
         the terminations, and enter into part-time consulting agreements.
         Raymond Hartman's proposed agreement provided for the payment over two
         years of a fee equal to 125% of his most recent annual salary. Sandra
         Hartman's proposed agreement provided for the payment over six months
         of a fee equal to 75% of her most recent semi-annual salary. The
         Hartmans declined this offer and, through counsel, alleged wrongful
         termination by the Company and have threatened legal action. The
         Company hopes that this matter can be amicably resolved, although no
         assurances to that effect can be given. If settlement is not reached
         and litigation is commenced by the Hartmans, the Company will
         vigorously defend this matter. Since no proceeding has been initiated
         and no discovery has taken place, all relevant factors which may affect

                                      F-22
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         the outcome are not known to the Company, and the Company cannot
         evaluate the likelihood of a favorable or unfavorable outcome, or to
         estimate the amount or range of possible gain or loss.

         LITIGATION BETWEEN BAXTER AND SPECTRANETICS - On August 6, 1999, Baxter
         filed suit against The Spectranetics Corporation in the United States
         District Court for the District of Delaware, entitled BAXTER HEALTHCARE
         CORPORATION, LASERSIGHT PATENT, INC. AND ACCULASE, INC. v. THE
         SPECTRANETICS CORPORATION, Civil Action No. 99-512 RRM. On November 12,
         1999, Acculase moved to become a co-plaintiff with Baxter. The Second
         Amended Complaint ("Complaint"), dated December 17, 1999, alleges
         claims for patent infringement against defendant The Spectranetics
         Corporation ("Spectranetics"). Specifically, the First Cause of Action
         of the Complaint alleges that Acculase is the owner of United States
         Patent Number 4,891,818 (the "818 patent") and that Baxter holds an
         exclusive license to the 818 patent in the field of cardiovascular and
         vascular applications. It further alleges that Spectranetics
         manufactures, distributes and sells excimer lasers and related
         products, including the Spectranetics CVX-300 excimer laser system,
         that infringe the 818 patent in the field in which Baxter holds an
         exclusive license. It seeks an injunction against such infringement,
         damages in an amount to be proven at trial, enhanced damages for
         willful infringement, attorneys' fees based upon a finding that this is
         an "extraordinary case" and costs. The Second and Third Causes of
         Action of the Complaint claim infringement of other patents and do not
         involve Acculase.

         On January 5, 2000, Spectranetics filed an Answer and Counterclaims in
         the United States District Court for the District of Delaware,
         admitting issuance of the 818 patent and that Spectranetics
         manufacturers, distributes and sells the Spectranetics CVX-300 excimer
         laser system, but denies that it infringes the 818 patent. The Answer
         also raises affirmative defenses. Only the First Claim of the
         Counterclaim for declaratory judgment of invalidity, unenforceability
         and non-infringement of the 818 patent is directed against Acculase. It
         alleges that this is an "exceptional case" supporting an award of
         reasonable attorneys' fees, costs and expenses in favor of
         Spectranetics. The other patents, which are the subject of the Second
         and Third Causes of Action of the Complaint, are also the subject of
         the First Claim of the Counterclaim and do not include Acculase. The
         Counterclaim includes other claims for antitrust violations,
         interference with existing economic relationships, interference with
         prospective economic advantage and misappropriation and misuse of
         confidential information, which are directed against Baxter. A
         responsive pleading to the Counterclaim has not yet been filed. Baxter
         is bearing the legal fees and costs associated with this action.
         Acculase bears no responsibility therefore.

         DISPUTE WITH LASER ANALYTICS, INC., A TEXAS CORPORATION - The Company
         has received a claim for approximately $232,000, plus interest, from
         Laser Analytics, Inc., a Texas corporation ("LAI-Texas"). As of January
         4, 1999, the Company and Laser Analytics, Inc., a Massachusetts
         corporation, a wholly-owned subsidiary of the Company, entered into an
         agreement with LAI-Texas, pursuant to which LAI-Texas agreed to
         purchase certain of the assets of the Company associated with the
         Company's business operations in Orlando, Florida and Wilmington,
         Massachusetts. The principal of LAI-Texas managed these business
         operations pending the closing. LAI-Texas failed to close the
         transaction and the Company resumed management of these business
         operations. LAI-Texas claims that during this period, the Company's
         operations required cash and that LAI-Texas loaned over $232,000 to the
         Company to support these business operations. The Company is in the
         process of investigating LAI-Texas' claim and the Company's rights with
         respect to the manner in which the operations were managed by the
         principal of LAI-Texas, and LAI-Texas' failure to close pursuant to the

                                      F-23
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         agreement. Since the Company does not know all relevant factors, which
         may affect the outcome, at this time, the Company is unable to evaluate
         the likelihood of a favorable outcome, and the Company is currently
         unable to estimate the amount or range of possible gain or loss.

         CSC HEALTHCARE - In November 1998 the Company entered into a consulting
         agreement with CSC Healthcare ("CSC") to assist the Company in its
         commercialization efforts of its Excimer technologies. For the year
         ended December 31, 1998, the Company incurred expense with CSC of
         $157,600 for services under the agreement and $73,500 for expenses. At
         December 31, 1998, these amounts were accrued. For the year ended
         December 31, 1999, the Company incurred expense with CSC of
         approximately $790,000. Included in this amount is consideration of
         $157,600 since the Company raised more than $6,000,000 in subsequent
         financing. At December 31, 1999, approximately $700,000 was accrued.

         On or about December 13, 1999, CSC Healthcare, Inc. ("CSC") filed a
         Complaint against the Company alleging the failure to pay for
         professional services allegedly performed by CSC, plus expenses, and
         seeking compensatory damages of $1,520,246, interest, attorneys' fees
         and costs of suit. The Company's Chairman of the Board of Directors was
         formerly a Vice-President of CSC. The Company has paid substantial sums
         to CSC for services and expenses and believes that the amount claimed
         by CSC in the Complaint to be substantially overstated. (Additionally,
         see Note 13.)

         The Company is involved in certain other legal actions and claims
         arising in the ordinary course of business. The lawsuits are in the
         discovery stage. Management believes, based on discussions with legal
         counsel, that such litigation and claims will be resolved without a
         material effect on the Company's financial position or results of
         operations.

         BAXTER AGREEMENT - On August 19, 1997, AccuLase executed a series of
         Agreements with Baxter Healthcare Corporation ("Baxter"). These
         Agreements provided among other things for the following:

         1.       AccuLase granted to Baxter an exclusive world-wide right and
                  license to manufacture and sell the AccuLase Laser and
                  disposable products associated therewith, for the purposes of
                  treatment of cardiovascular and vascular diseases.

         2.       In exchange Baxter agreed to:

                  a)       Pay AccuLase $700,000 in cash at closing, agreed to
                           pay AccuLase an additional $250,000 in cash three
                           months after closing, and agreed to pay an additional
                           $600,000 upon delivery of the first two commercial
                           excimer lasers. The Company was recognizing the
                           amount receivable from Baxter on the percent complete
                           method as costs were incurred. As of March 31, 1999,
                           the Company had fulfilled its commitment for the
                           development of the demonstration lasers and the
                           revenues under this section of the Agreement have
                           been fully recognized.

                  b)       To pay AccuLase a royalty equal to 10% of the "End
                           User Price" for each disposable product sold, or if
                           the laser equipment is sold on a per treatment basis,
                           the "imputed" average sale price based on "non" per

                                      F-24
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                           procedure sales. Royalty revenues will be recognized
                           as Baxter begins selling product covered by the
                           agreement and the Company is entitled to receipt of
                           the royalties.

                  c)       To purchase from AccuLase excimer laser systems for
                           cardiovascular and vascular disease. Revenues for the
                           sale of excimer laser systems will be recognized upon
                           shipment by the Company.

                  d)       To fund the total cost of obtaining regulatory
                           approvals world-wide for the use of the AccuLase
                           laser and delivery systems for the treatment of
                           cardiovascular and vascular disease. Baxter has
                           funded a portion of the cost of obtaining regulatory
                           approvals world-wide. The Company has recognized
                           revenue under this provision as reimbursable costs
                           have been incurred.

                  e)       To fund all sales and marketing costs related to the
                           cardiovascular and vascular business. The Company
                           does not anticipate any revenues. The costs of sales
                           and marketing the excimer lasers will be incurred and
                           expensed by Baxter in the generation of its revenue
                           from the sale of the excimer products. The Company
                           will receive its compensation through the royalty
                           revenues provided under 2 (b) above.

         3.       AccuLase agreed to manufacture the excimer laser system to
                  specifications for Baxter. Baxter agreed to pay a fixed price
                  per laser for the first 8 lasers to be manufactured by
                  AccuLase, and thereafter to pay unit prices on a reducing
                  scale of from $75,000 to $45,000 per laser, based upon the
                  annual number of lasers sold to Baxter.

         4.       AccuLase agreed for a period of five years not to engage in
                  any business competitive with the laser products for
                  cardiovascular and vascular applications licensed to Baxter.

         5.       AccuLase has granted Baxter a security interest in all of its
                  patents to secure performance under the Baxter Agreement. The
                  agreement expires upon the expiration of the last to expire
                  license patent; however, Baxter may terminate the agreement at
                  any time.

         Revenues recognized on the Baxter Agreement for the years ended
         December 31, 1999, 1998 and 1997 were $93,906, $769,000, and $855,000
         respectively, and represented 8%, 33%, and 22% respectively, of total
         revenues.

         LICENSE AGREEMENT WITH BAXTER AND LASER SIGHT - On September 23, 1997,
         Baxter purchased from a third party patent rights to related patents
         for the use of an excimer laser to oblate tissue in vascular and
         cardiovascular applications for $4,000,000. The oblation technology
         underlying the patents has been successfully used in other applications
         for many years. In December 1997, the Company acquired a license to the
         patent rights from Baxter entitling the Company to sell an excimer
         laser and related products for use in cardiovascular procedures. A
         prepaid license fee was recorded on the Company's books based on the
         $4,000,000 cash payment made by the Company to Baxter to acquire the
         license.

                                      F-25
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         LICENSE AGREEMENT WITH GENERAL HOSPITAL - On November 26, 1997, the
         Company entered into a license agreement with The General Hospital
         Corporation ("General") whereby General grants the Company an
         exclusive, worldwide, royalty-bearing license pertaining to
         Phototherapy Methods and Systems. The license entitles the Company to
         commercially develop, manufacture, use and distribute products using
         the Phototherapy Methods and Systems. In consideration for the use of
         the license, the Company has agreed to pay General $12,500 for costs
         incurred prior to the effective date of the agreement, $25,000 upon
         execution of the agreement, $50,000 upon issuance by the U.S. Patent
         and Trademark Office of any Patent right, and $50,000 upon approval by
         the U.S. Food and Drug Administration of the First NDA 510(k), PMA or
         PMA Supplement. The Company has agreed to pay royalties of 4% of the
         net sales price on products that are covered by a valid claim of any
         patent right licensed exclusively to the Company, 2% of net sales price
         on products covered by a valid claim of any patent right licensed
         non-exclusively to the Company, 1% of net sales of products on which no
         royalty is payable for the next ten years following the first
         commercial sale and 25% of all non-royalty income. To date, payments
         under the agreement have been expensed. The remaining payments under
         the agreement will be evaluated when due to determine if the payments
         should be capitalized as acquired license agreements. This
         determination will be dependent on evaluation of technological
         feasibility at that time.

         CLINICAL TRIAL AGREEMENT WITH MASSACHUSETTS GENERAL HOSPITAL - On March
         17, 1998, the Company entered into a clinical trial agreement with
         Massachusetts General Hospital. The Company has agreed to support the
         clinical trials with a research grant of approximately $160,000,
         payable $50,000 upon execution of the agreement, $60,000 upon
         collection of final data from the study (which was completed in
         December 1998) and $50,000 upon delivery of the final report to serve
         as the basis for a 510 (k) submission to the FDA. At December 31, 1998,
         $60,000 was accrued and payable under the agreement. During 1999, the
         study was completed and all amounts under the agreement were paid.

         On July 27, 1999, the Company entered into three clinical trial
         agreements with Massachusetts General Hospital. The Company has agreed
         to support the clinical trials with research grants of approximately
         $453,000, payable $273,000 upon execution of the agreement, $67,000
         upon collection of final data from the study, and $113,000 upon
         completion of the study and delivery of the final report. As of
         December 31, 1999, the Company had paid $288,000.

         On November 15, 1999, the Company entered a separate clinical trial
         agreement with Massachusetts General Hospital. The Company has agreed
         to support the clinical trial with a research grant of approximately
         $48,000, payable $24,000 upon execution of the agreement, $12,000 upon
         collection of final data from the study, and $12,000 upon completion of
         the study and delivery of the final report. As of December 31, 1999,
         the Company has accrued $24,000 for the initial payment.

         MARKETING AGREEMENT WITH HEALTHWORLD CORPORATION - In May 1999, the
         Company entered in an agreement with Healthworld Corporation
         ("Healthworld"), of which Steven Girgenti, a director of the Company,
         is Chairman and Chief Executive Officer, for provision of various
         services relating to the marketing of the Company's products for a
         monthly fee of $40,000, plus reimbursement of expenses and payment of a
         15% commission on advertising purchases. Services beyond those budgeted

                                      F-26
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         by the parties are to cost $104 per person hour, which is generally
         less then the normal hourly rate charged by Healthworld for such
         services. In lieu of a higher hourly rate, the Company on May 11, 1999
         issued to Healthworld warrants to purchase 174,000 shares of the
         Company's Common Stock at an exercise price of $4.69 per share. These
         Warrants have a term of ten years and vest to the extent of 14,500
         shares of Common Stock on the eleventh day of each month, beginning
         June 11, 1999. The warrants have been valued at fair value as
         determined using the Black-Scholes model. The Company has recognized
         compensation expense of $278,722 during 1999 as required by FASB123.
         Under a separate agreement, Healthworld provides: (i) two full-time
         managed-care specialists to make calls on potential customers for a
         period of seven months at a cost of $30,000 per month; (ii) 20
         full-time sale representatives to market among dermatologists for a
         period of four months at a cost of $125,000 per month; and (iii)
         certain general management services for a period of seven months at
         $10,000 per month. Under separate agreements, Healthworld will provide
         certain medical education and publishing services (approximately
         $700,000 in fees and costs over a period in excess of one year) and
         general public relations services ($10,000 per month). For the year
         ended December 31, 1999, the Company incurred expense with Healthworld
         of approximately $750,000 under these agreements. At December 31, 1999,
         $450,000 was accrued and payable under the agreements.

         EMPLOYMENT AGREEMENTS - In November and December 1999, the Company
         entered into two three -year employment agreements with a combined base
         salary of $465,000 per year, as well as severance payments upon
         termination.

         PROPOSED SALE OF ASSETS - In December 1998, the Company entered into a
         letter of intent with a third party to sell certain assets of its
         non-excimer laser business operations, subject to the assumption of
         certain liabilities. At December 31, 1998, the net assets attributed to
         this transaction were classified in the consolidated balance sheet as
         assets held for sale. The closing of the sale was delayed due to
         difficulties experienced by the Buyer in finding financing to complete
         the purchase. In January 2000, this transaction was abandoned and the
         Company began pursuing other alternatives. The Company is currently
         negotiating two separate agreements to sell certain assets of its
         non-excimer laser business operations for a purchase price of $588,000
         and the assumption of certain liabilities. At December 31, 1999 and
         1998, the assets and liabilities attributable to the new transactions
         have been classified in the consolidated balance sheet as assets held
         for sale. The amounts are stated at their carrying amounts, which are
         less than their fair value as estimated, based on the expected proceeds
         from the proposed sale. The amounts included in the financial
         statements at December 31, 1999 and 1998 consists of the following:

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                  ------------------------------
                                                                                       1999            1998
                                                                                  --------------  --------------
              <S>                                                                 <C>             <C>
              ASSETS:
                  Inventories                                                     $     428,415   $     452,761
                  Prepaid expenses and other assets                                      19,800          21,355
                  Property and equipment, net                                           139,785         139,785
                                                                                  --------------  --------------
              ASSETS HELD FOR SALE                                                $     588,000   $     613,901
                                                                                  ==============  ==============
</TABLE>

                                      F-27
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Revenues of the related operations were $1,110,000, $1,580,000 and
         $2,960,000 for 1999, 1998 and 1997, respectively. Loss from the related
         operations was $1,235,000, $996,000 and $647,000 in 1999, 1998 and
         1997, respectively.

         ING BARINGS LLC - On February 2, 2000, the company entered into a
         financial advisory and investment banking services agreement with ING
         Barings LLC ("ING Barings") whereby ING Barings will use its best
         efforts to complete a financing or series of financings in an amount of
         up to $20,000,000. As compensation for such services, ING Barings will
         receive a cash placement fee equal to 6% of the gross proceeds raised
         from the sale of securities and out-of-pocket expenses.

13.      SUBSEQUENT EVENTS (Unaudited):
         -----------------------------

         Subsequent to March 16, 2000, the Company paid $950,000 to the landlord
         for its Florida facility and $700,000 to CSC Healthcare, Inc., to
         settle certain disputes between the Company and such other parties. At
         December 31, 1999, such amounts had been accrued in the accompanying
         consolidated financial statements.

         In March 2000, the Company settled certain notes payable recorded at
         approximately $410,000 for approximately $133,000, resulting in a gain
         from extinguishment of approximately $277,000.

                                      F-28
<PAGE>

                     LASER PHOTONICS, INC. AND SUBSIDIARIES

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                           ADDITIONS
                                                      BALANCE AT           CHARGED TO                                BALANCE AT
                                                       BEGINNING           COSTS AND                                   END OF
                    CLASSIFICATION                     OF PERIOD            EXPENSES            DEDUCTIONS             PERIOD
                ----------------------             -----------------    -----------------    -----------------    -----------------
<S>                                                <C>                  <C>                  <C>                  <C>
For the year ended December 31, 1999:
     Accumulated amortization - patent costs       $         32,318     $          8,353     $              -     $         40,671
                                                   =================    =================    =================    =================
     Accumulated amortization - prepaid license
         fee                                       $        541,667     $        500,000     $              -     $      1,041,667
                                                   =================    =================    =================    =================
     Accumulated amortization - excess of cost
         over net assets of acquired companies     $      1,862,296     $        476,273     $              -     $      2,338,569
                                                   =================    =================    =================    =================
     Allowance for doubtful accounts               $         68,000     $         15,000     $              -     $         83,000
                                                   =================    =================    =================    =================
     Allowance for inventory obsolescence          $      1,059,300     $        104,311     $              -     $      1,163,611
                                                   =================    =================    =================    =================

For the year ended December 31, 1998:
     Accumulated amortization - patent costs       $         23,965     $          8,353     $              -     $         32,318
                                                   =================    =================    =================    =================
     Accumulated amortization - prepaid license
         fee                                       $         41,667     $        500,000     $              -     $        541,667
                                                   =================    =================    =================    =================
     Accumulated amortization - excess of cost
         over net assets of acquired companies     $      1,342,614     $        519,682     $              -     $      1,862,296
                                                   =================    =================    =================    =================
         Allowance for doubtful accounts           $         75,000     $              -     $          7,000     $         68,000
                                                   =================    =================    =================    =================
     Allowance for inventory obsolescence          $        819,524     $        239,776     $              -     $      1,059,300
                                                   =================    =================    =================    =================

For the year ended December 31, 1997:
     Accumulated amortization - patent costs       $         15,612     $          8,353     $              -     $         23,965
                                                   =================    =================    =================    =================
     Accumulated amortization - prepaid license
         fee                                       $              -     $         41,667     $              -     $         41,667
                                                   =================    =================    =================    =================
     Accumulated amortization - excess of cost
         over net assets of acquired companies     $        822,830     $        519,784     $              -     $      1,342,614
                                                   =================    =================    =================    =================
     Allowance for doubtful accounts               $        100,000     $              -     $         25,000     $         75,000
                                                   =================    =================    =================    =================
     Allowance for inventory obsolescence          $        996,299     $              -     $        176,775     $        819,524
                                                   =================    =================    =================    =================
</TABLE>

                                      F-29