<PAGE>
 
                                   FORM 10-Q

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  (Mark One)
[X]            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) 
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended December 31, 1998

                                       OR

[_]               TRANSITION REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
              For the transition period from ________ to ________

                        Commission file number 0-13966
                                               -------

                          PREMIER LASER SYSTEMS, INC.
                          ---------------------------
             (Exact name of registrant as specified in its charter)


             CALIFORNIA                                  33-0472684
             ----------                                  ----------
   (State or other jurisdiction of          (I.R.S. Employer Identification No.)
    incorporation or organization)


                      3 Morgan, Irvine, California 92618
                      ----------------------------------
                   (Address of principal executive offices)


                                 (949) 859-0656
                                 --------------
              (Registrant's telephone number including area code)


                     _____________________________________
             (Former name, former address and former fiscal year, 
                         if changed since last report)

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

               APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

     Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [_]       No [_]

                     APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicated the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (December 31, 1998):

                Class A Common Stock:         14,712,278 Shares
                Class E-1 Common Stock:        1,257,461 Shares
                Class E-2 Common Stock:        1,257,461 Shares
<PAGE>
 
                         PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

                          PREMIER LASER SYSTEMS, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
                                                                      December 31,      March 31,
                                                                          1998            1998
                                                                      ------------    ------------
                                                                      (Unaudited)
<S>                                                                   <C>             <C>
                             Assets                                    
Current assets:                                                       
    Cash and cash equivalents                                         $    349,022    $  9,722,514
    Short-term investments                                               1,159,426       9,666,918
    Restricted cash                                                         50,000       2,150,000
    Accounts receivable, net of allowance for sales returns           
      and doubtful accounts of $1,475,625 at December 31,             
      1998 and $1,169,164 at March 31, 1998                              2,261,413       4,952,892
    Inventories                                                          6,980,049       4,482,698
    Prepaid expenses and other current assets                            1,308,042       2,528,996
                                                                      ------------    ------------
Total current assets                                                    12,107,952      33,504,018
Property and equipment, net                                              2,360,700       1,778,423
Intangibles, net                                                        12,056,866      11,991,679
Other assets                                                                 6,432         434,300
                                                                      ------------    ------------
Total assets                                                          $ 26,531,950    $ 47,708,420
                                                                      ============    ============
                                                                      
               Liabilities and shareholders' equity                      
                                                                      
Current liabilities:                                                  
    Accounts payable                                                  $  2,572,042    $  5,510,692
    Line of credit                                                         139,700       2,068,163
    Accrued compensation and related costs                                 692,497         964,691
    Other current liabilities                                            4,501,940       5,943,685
                                                                      ------------    ------------
Total current liabilities                                                7,906,179      14,487,231
                                                                      ------------    ------------

Minority interest                                                        1,445,839       1,764,736
                                                                      ------------    ------------
Shareholders' equity:                                                 
  Preferred stock, no par value:                                      
    Authorized shares--8,850,000                                       
    Issued and outstanding shares--none                                
  Common stock, Class A, no par value:                                
    Authorized shares--35,600,000                                      
    Issued and outstanding shares--16,962,278 at December 31,          
      1998, which includes 2,250,000 subject to issuance
      for shareholder litigation settlement, and 14,649,421 at
      March 31, 1998                                                    91,550,135      83,546,913
  Common stock, Class E-1, no par value:                              
    Authorized shares--2,200,000                                       
    Issued and outstanding shares--1,257,461 at December 31, 1998      
      and March 31, 1998                                                 4,769,878       4,769,878
  Common stock, Class E-2, no par value:                              
    Authorized shares--2,200,000                                       
    Issued and outstanding shares--1,257,461 at December 31, 1998      
      and March 31, 1998                                                 4,769,878       4,769,878
  Warrants and options                                                   1,723,842       1,723,842
  Accumulated deficit                                                  (85,633,801)    (63,354,058)
                                                                      ------------    ------------
Total shareholders' equity                                              17,179,932      31,456,453
                                                                      ------------    ------------
Total liabilities and shareholders' equity                            $ 26,531,950    $ 47,708,420
                                                                      ============    ============
</TABLE>
            See notes to condensed consolidated financial statements
<PAGE>
 
                          PREMIER LASER SYSTEMS, INC.

     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                       Three Months Ended              Nine Months Ended
                                                           December 31,                   December 31,
                                                   ---------------------------    ----------------------------
                                                       1998           1997            1998            1997
                                                                    (Restated)                     (Restated)
                                                   ------------    -----------    ------------    ------------
<S>                                                <C>             <C>            <C>             <C>
Net sales                                          $  3,467,974    $ 3,568,956    $ 10,274,645    $  8,726,170
Cost of sales                                         3,343,549      2,305,366      10,314,851       5,390,809
                                                   ------------    -----------    ------------    ------------
Gross profit (loss)                                     124,425      1,263,590         (40,206)      3,335,361

Selling and marketing expenses                        2,446,185      1,474,385       6,516,347       3,183,717
Research and development expenses                     1,205,208        832,835       3,853,120       2,015,907
General and administrative expenses                   1,054,867        843,923       4,650,980       1,848,165
Shareholder litigation settlement expense             7,831,770            -         7,831,770             -
In-process research and development acquired
  in the EyeSys Technologies acquisition                    -              -               -         9,200,000
Merger related and integration costs                        -              -               -         2,146,912
                                                   ------------    -----------    ------------    ------------
Loss from operations                                (12,413,605)   (11,887,553)    (22,892,423)    (15,059,340)
Minority interest in loss of consolidated
  subsidiary                                            150,752            -           318,897             -
Interest income, net                                    237,079        224,824         293,783         726,346
                                                   ------------    -----------    ------------    ------------
Net loss                                            (12,025,774)    (1,662,729)    (22,279,743)    (14,332,994)
Other comprehensive income                                  -              -               -               -
                                                   ------------    -----------    ------------    ------------
Comprehensive loss                                 $(12,025,774)   $(1,662,729)   $(22,279,743)   $(14,332,994)
                                                   ============    ===========    ============    ============
Basic and diluted net loss per share               $      (0.76)   $     (0.14)   $      (1.48)   $      (1.34)
                                                   ============    ===========    ============    ============
Weighted average shares used in the
  computation of net loss per share                  15,788,666     12,219,786      15,061,581      10,725,769
                                                   ============    ===========    ============    ============
</TABLE>

            See notes to condensed consolidated financial statements
<PAGE>
 
                          PREMIER LASER SYSTEMS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
 
                                                                                  Nine Months Ended
                                                                                     December 31,
                                                                             ----------------------------
                                                                                 1998            1997
                                                                                              (Restated)
                                                                             ------------    ------------
<S>                                                                          <C>             <C> 
Operating Activities
Net loss                                                                     $(22,279,743)   $(14,332,994)
Adjustments to reconcile net loss to net cash used in
  operating activities:
    Depreciation and amortization                                               1,333,875         955,095
    Purchased research and development                                                          9,200,000
    Stock options issued to advisors and others                                   345,000       1,010,200
    Shareholder litigation settlement, excluding legal fees                     7,447,500             -
    Minority interest in loss of consolidated subsidiary                         (318,897)            -
    Changes in operating assets and liabilities:
      Accounts receivable                                                       2,691,479      (2,185,517)
      Inventories                                                              (2,497,351)     (4,499,442)
      Prepaid expenses and other current assets                                 1,220,954      (4,897,036)
      Accounts payable                                                         (2,938,650)        598,295
      Accrued liabilities                                                      (1,713,939)        486,282
                                                                             ------------    ------------
Net cash used in operating activities                                         (16,709,772)    (13,665,117)
                                                                             ------------    ------------

Investing activities
Sale (Purchase) of short-term investments                                       8,507,492      (4,886,999)
Restricted cash used to retire (secure) credit line                             2,100,000      (1,100,000)
Investment in Ophthalmic Imaging Systems                                              -          (882,642)
Purchase of property and equipment                                               (904,030)       (249,880)
Cash acquired in purchase of EyeSys Technologies, Inc.                                -            51,355
Purchase of intangibles                                                          (649,441)       (103,305)
                                                                             ------------    ------------
Net cash provided (used) by investing activities                                9,054,021      (7,171,471)
                                                                             ------------    ------------

Financing activities
Net repayments under line of credit                                            (1,928,463)       (811,195)
Proceeds from exercise of stock options and warrants, net                         210,722      28,724,819
Proceeds from notes payable and capital lease obligations                             -           231,669
                                                                             ------------    ------------
Net cash (used) provided by financing activities                               (1,717,741)     28,145,293
                                                                             ------------    ------------
Net (decrease) increase in cash and cash equivalents                           (9,373,492)      7,308,705
Cash and cash equivalents at beginning of period                                9,722,514         173,610
                                                                             ------------    ------------
Cash and cash equivalents at end of period                                   $    349,022    $  7,482,315
                                                                             ============    ============

Supplemental disclosure of non cash activities (business acquisition):
    Fair value of tangible assets                                                     -         9,154,500
    Purchased research and development                                                -         9,200,000
    Liabilities assumed                                                               -        (5,869,500)
    Stock issued                                                                      -       (12,015,000)
                                                                             ------------    ------------
    Cash paid                                                                         -      $    470,000
                                                                             ============    ============
</TABLE>

           See notes to condensed consolidated financial statements
<PAGE>
 
                          PREMIER LASER SYSTEMS, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   UNAUDITED

NOTE 1:  General

     In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements include all adjustments (which
include only normal recurring adjustments) necessary for a fair presentation of
the financial position of the Company at December 31, 1998 and the results of
operations and cash flows for the three and nine month periods ended December
31, 1998 and 1997. Although the Company believes the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. Results of operations for interim
periods are not necessarily indicative of results of operations to be expected
for the full year.

     The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly and majority owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
 
     The financial information in this quarterly report should be read in
conjunction with the March 31, 1998 consolidated financial statements and notes
thereto included in the Company's Annual Report filed on Form 10-K (as amended)
for the fiscal year ended March 31, 1998.

     The Company has suffered recurring losses from operations and may continue
to incur losses for the foreseeable future due to the significant costs
anticipated to be incurred in connection with manufacturing, marketing and
distributing its products. In addition, the Company intends to conduct
continuing research and development activities, including regulatory submittals
and clinical trials to develop additional applications for its technology. The
Company operates in a highly competitive environment and is subject to all of
the risks inherent in new business enterprises. The Company's ability to meet
its working capital needs will be dependent on its ability to achieve sales
targets, profitability, and a positive cash flow from operations.

     The Company believes that its present liquid assets and cash to be
generated by sales of its inventories (including substantial amounts of reserved
inventory) will be sufficient to meet its working capital requirements through
at least March 31, 1999. Any significant uninsured settlement or judgment
associated with the class action litigation (see Note 2) would seriously affect
the Company's ability to satisfy its working capital requirements.
<PAGE>
 
NOTE 2:  Litigation

     The Company entered into an agreement with Infrared Fiber Systems, Inc.
(IFS), as a supplier of certain fiber optics, that expires in the fiscal year
ending March 31, 2002. The agreement requires the supplier to sell exclusively
to the Company fiber optics for medical and dental applications as long as the
Company purchases defined minimum amounts.

     In March 1994, the Company initiated litigation against IFS in the United
States District Court for the Central District of California. The Company's
complaint alleges that IFS and two of its officers misrepresented IFS' ability
to supply optical fibers, and that IFS breached its supply agreement and certain
warranties. In April 1994, IFS filed a cross-complaint alleging breach of
contract and intentional interference with prospective economic advantage,
seeking declaratory relief that the contract has been terminated and that IFS is
free to market its fiber optics to others. In July 1994, Coherent, Inc. a major
shareholder of IFS and a manufacturer of medical lasers which employ IFS optical
fibers, joined the lawsuit for the express purpose of defending their rights to
the IFS optical fibers. In May 1995, the Company instituted litigation
concerning this dispute in Orange County, California Superior Court against
Coherent, Westinghouse Electric Corporation ("Westinghouse") and an individual
employee of Westinghouse who was an officer of IFS from 1986 to 1993, when the
events involved in the federal action against IFS took place and while
Westinghouse owned a substantial minority interest in IFS. The complaint charges
that Coherent conspired with IFS in the wrongful conduct which is the subject of
the federal lawsuit and interfered with the Company's contracts and relations
with IFS and with prospective contracts and advantageous economic relations with
third parties. The complaint asserts that Westinghouse is liable for its
employee's wrongful acts as an IFS executive while acting within the scope of
his employment at Westinghouse. The lawsuit seeks injunctive relief and
compensatory damages. In October 1995, the federal action was stayed by order of
the court in favor of the California state court action, in which the pleadings
have been amended to include all claims asserted by the Company in the federal
action.

     In July 1996, the court in the California state court action granted
demurrers by Westinghouse and the employee of Westinghouse to all causes of
action against them, as well as all but one of the Company's claims against
Coherent. As a result, the claims that were the subject of the granted demurrers
have been dismissed, subject to the Company's right to appeal. The Company has
filed an appeal of these decisions as they relate to Westinghouse and the
Westinghouse employee, and briefs have been submitted. No date has been set for
a hearing of this appeal. No trial date has been set as to the remaining
outstanding causes of action.

     The Company and certain of its officers and directors have been named in a
number of securities class action lawsuits which allege violations of the
Securities Exchange Act or the California Corporations Code. The plaintiffs seek
damages on behalf of classes of investors who purchased the Company's stock
between May 7, 1997 and April 15, 1998. The complaints allege that the Company
misled investors by failing to disclose material information and making material
misrepresentations regarding the Company's business operations and projections.
The Company has 
<PAGE>
 
been successful in having all of such securities class actions lawsuits
consolidated into a single action in the federal court and a single action in
the state court. The Company has also been named in a shareholder derivative
action purportedly filed on its behalf against certain officers and directors
arising out of the same alleged acts. The Company has reached an agreement in
principle with lead plaintiffs and their counsel to settle the class and
derivative actions. Under the terms of the agreement in principle, in exchange
for a release of all claims, the Company would pay 2,250,000 shares of common
stock and $4,600,000 in cash. The cash portion of the settlement would be paid
by the Company's insurance carrier. Completion of the settlement is subject to
execution of the final settlement agreement, court approval and certain other
conditions. If the settlement is not completed, is not approved or is not
consummated for any reason, the parties would continue to litigate the actions.
Although the Company intends to vigorously defend itself in the actions, the
ultimate outcome is uncertain and no provision for any alternative form of
settlement or other adverse resolution of the actions has been reflected in the
accompanying financial statements. Any significant adverse resolution of the
actions would seriously impact the Company's financial condition. The Company
maintains insurance coverage for these types of actions and has filed claims
with the carrier. The policy has a limit of $5 million and a $250,000 deductible
amount.

     In accordance with the terms of the agreement in principle to settle class
and derivative actions, the Company established a reserve during the three
months ended December 31, 1998 for the issuance of 2,250,000 shares of common
stock. These shares were valued at a price of $3.31 per share which was the
closing price of the Company's stock on November 18, 1998, the effective date of
the proposed settlement agreement. The Company has included approximately
$384,000 of associated legal and professional fees in this reserve, but has not
included in the reserve approximately $4,600,000 in cash that would be paid by
the Company's insurers.

     The Company is involved in various other disputes and lawsuits arising from
its normal operations. The litigation process is inherently uncertain and it is
possible that the resolution of these disputes and other lawsuits may adversely
affect the Company, however, it is the opinion of management, that the outcome
of such matters will not have a material adverse impact on the Company's
financial position, results of operations or cash flows.


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         -----------------------------------------------------------------------
         of Operations.
         -------------

     The following discussion and other sections of this Form 10-Q may contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended, and is subject to the safe harbors created by those sections. These
forward-looking statements are subject to significant risks and uncertainties,
including without limitation those identified in the Company's Annual Report on
Form 10-K for the year ended March 31, 1998, as amended, under the section
entitled "Risk Factors." Such risks, and 
<PAGE>
 
uncertainties may cause actual results to differ materially and adversely from
those discussed in such forward-looking statements. The forward-looking
statements within this Form 10-Q are identified by words such as "believes",
"anticipates", "expects", "intends", "may" and other similar expressions.
However, these words are not the exclusive means of identifying such statements.
In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances, including any underlaying
assumptions, are forward-looking statements. The Company disclaims any
obligation to publicly release the results of any revisions to these forward-
looking statements which may be made to reflect events or circumstances
occurring subsequent to the filing of this Form 10-Q with the Securities and
Exchange Commission ("SEC") or otherwise to revise or update any oral or written
forward-looking statement that may be made from time to time by or on behalf of
the Company.

     The information contained in this Form 10-Q is not a complete description
of the Company's business or the risks associated with an investment in the
Company. Readers are urged to carefully review and consider the various
disclosures made by the Company in this Report and in the Company's other
filings with the SEC that discuss the Company's business in greater detail and
attempt to advise interested parties of certain risks, uncertainties and other
factors that may affect the Company's business in the future.

Results of Operations

     The Company's net sales for the three months and nine months ended December
31, 1998 (the "1998 Periods") decreased by 3% to $3,468,000 for the quarter and
increased by 18% to $10,275,000 for the nine month period as compared to the
quarter and nine month periods ended December 31, 1997 (the "1997 Periods"),
respectively. The decrease for the three months ended December 31, 1998 was
primarily due to declining sales of dental products following the Company's
disagreement with a national distributor of dental products (on whom the Company
had previously relied to distribute certain of its products) offset by increased
sales generated by Ophthalmic Imaging Systems (OIS), and EyeSys Technologies,
Inc. (EyeSys), which were acquired between September 30, 1997 and February 28,
1998. The increase in the Company's net sales for the nine months ended December
31, 1998 was primarily attributable to sales of ophthalmic products manufactured
by the Company's 51%-owned subsidiary, Ophthalmic Imaging Systems (OIS), which
was not included in the 1997 Periods.

     Cost of sales increased 45% to $3,344,000 during the three months ended
December 31, 1998 and 91% to $10,315,000 during the nine months ended December
31, 1998 from $2,305,000 and $5,391,000 during the corresponding 1997 Periods.
These increases were attributable to the higher sales volume and under-
absorption of manufacturing personnel and overhead costs at the Company's Irvine
facility, and included reserves recorded for additional excess inventory
quantities of $580,000 during the three months ended September 30, 1998, and
$511,000 during the three months ended December 31, 1998.

     Selling and marketing expenses increased 66% to $2,446,000 during the three
months ended 
<PAGE>
 
December 31, 1998 and 105% to $6,516,000 during the nine months ended December
31, 1998 from $1,474,000 and $3,184,000 reported for the corresponding 1997
Periods. Selling and marketing expenses of OIS (which were not included in the
1997 Periods), accounted for approximately one-half of the increases during each
1998 Period. Dental products' selling and marketing expenses for the three
months ended December 31, 1998 were higher than previous quarters due to
seasonal increases in trade show activity, advertising, and promotional efforts
that typically occur during the fall months. Other factors which contributed to
the increases during the 1998 Periods included the expense of conferences and
seminars associated with the Company's product offerings.

     Research and development expenses increased 45% to $1,205,000 during the
three months ended December 31, 1998 and 91% to $3,853,000 during the nine
months ended December 31, 1998 as compared to the corresponding 1997 Periods.
Research and development expenses of OIS accounted for approximately two-thirds
of the increase during the quarter ended December 31, 1998 as compared to the
corresponding 1997 Period, and approximately one-third of the increase during
the nine months ended December 31, 1998 as compared to the corresponding 1997
Period. The balance of the increases arose from personnel additions,
professional services, and component costs associated with new product
development (both dental and ophthalmic products) at the Company's Irvine
facility.

     General and administrative expenses increased 25% to $1,055,000 during the
three months ended December 31, 1998 and 152% to $4,651,000 during the nine
months ended December 31, 1998 from $844,000 and $1,848,000 reported for the
corresponding 1997 Periods. General and administrative expenses of OIS accounted
for substantially all of the increase during the quarter ended December 31, 1998
as compared to the corresponding 1997 Period, and approximately one-third of the
increase during the nine months ended December 31, 1998 as compared to the
corresponding 1997 Period. Legal and accounting fees also contributed to the
increases during the 1998 Periods as compared to the 1997 Periods. These
increases ensued from the resignation of the Company's former auditors and the
resulting need to have audits performed for two fiscal years, as well as class
action litigation and SEC/Nasdaq inquiries that arose during the quarter ended
June 30, 1998. Hiring of additional accounting, human resources, and other
administrative personnel at the Company's Irvine facility further contributed to
the increases during the 1998 Periods.

     In September 1997, the Company acquired EyeSys Technologies and wrote-off
$9,200,000 of in-process research and development and $2,147,000 of merger
related and integration costs. No business acquisitions have occurred during the
1998 Periods.

     During the three months ended December 31, 1998, the Company reached an
agreement in principle with lead plaintiffs and their counsel to settle the
class and derivative actions. Under the terms of the agreement in principle, in
exchange for a release of all claims, the Company would pay 2,250,000 shares of
common stock and $4,600,000 in cash. The cash portion of the settlement would be
paid by the Company's insurance carrier. Completion of the settlement is subject
to the execution of the final settlement agreement, court approval and certain
other conditions. In accordance with 
<PAGE>
 
the terms of the agreement in principle to settle class and derivative actions,
the Company established a reserve during the three months ended December 31,
1998 for the issuance of 2,250,000 shares of common stock. These shares were
valued at a price of $3.31 per share which was the closing price of the
Company's stock on November 18, 1998, the effective date of the proposed
settlement agreement. The Company has included approximately $384,000 of
associated legal and professional fees in this reserve, but has not included in
the reserve approximately $4,600,000 in cash that would be paid by the Company's
insurers.

     Net interest increased by 5% to $237,000 for the quarter and decreased by
60% to $294,000 for the nine month period ended December 31, 1998 as compared to
the corresponding 1997 Periods. The increase is primarily attributable to the
maturity of short term bond investments during the quarter ended December 31,
1998. The decline in interest income for the nine months ended December 31, 1998
reflects the decreased cash available for the Company to invest, following the
declines in sales levels for laser products, the higher operating expenses
discussed above, business acquisitions, and inventory increases.

Liquidity and Capital Resources

     The Company's operations have been financed through the proceeds from the
sale of the Company's equity securities, including an initial public offering in
December 1994, and a secondary public offering in October 1996, the exercise of
publicly traded warrants and stock options, revenues from operations, and
proceeds from a Small Business Innovative Research Grant. The Company's
principal capital requirements include the financing of inventory, accounts
receivable, research and development activities, the development of an
ophthalmic and a surgical sales force, the development of marketing programs and
the acquisition and/or licensing of patents.

     At December 31, 1998, the Company had unrestricted cash and short-term
investments of $1,508,000 and its working capital was $4,202,000. The decrease
in cash and short-term investments since March 31, 1998 was primarily the result
of the losses for the 1998 Periods, increased by working capital changes during
the period, including the continued receipt of inventory purchases commitments
that had been made during the prior fiscal year. Cash flow during the 1997
Periods was positive as the net result of capital stock transactions, reduced by
operating requirements and investing activities.

     The Company's future capital requirements will depend on many factors,
including the progress of the Company's research and development activities, the
scope and results of pre-clinical studies and clinical trials, the costs and
timing of regulatory approvals, the rate of technology advances by the Company,
competitive conditions within the medical laser industry, the maintenance of
manufacturing capacity, the outcome of the class action lawsuits and the
establishment of collaborative marketing and other relationships which may
either involve cash infusions to the Company, or require additional cash from
the Company. The Company's ability to meet its working capital needs will be
dependent on its ability to achieve sales targets, profitability and a positive
cash 
<PAGE>
 
flow from operations. No assurance can be given that the Company will be able to
achieve sales targets, profitable operations or a positive cash flow from
operations.
 
     The Company believes that its present liquid assets and cash to be
generated by sales of its inventories (including substantial amounts of reserved
inventory) will be sufficient to meet its working capital requirements through
at least March 31, 1999. Any significant uninsured settlement or judgment
associated with the class action litigation would materially adversely affect
the Company's ability to satisfy its working capital requirements. If additional
capital is required, the Company would consider several financing alternatives
including the issuance of securities, licensing of technology and marketing
rights, and/or bank financing. There can be no assurances that the Company would
be successful in obtaining additional financing.

Year 2000 Issues

     During the quarter ended September 30, 1998, the Company upgraded its
computerized accounting system to a release that is compliant with Year 2000
dating sensitivities. The costs of this upgrade were minimal. The Company has
not prepared a formal assessment of the internal and external Year 2000 issues
that would have a significant impact on its products. The Company's laser
products are not date sensitive. Diagnostic products, on the other hand, contain
date sensitive data bases. The Company's internal software engineers are
developing a plan to have a test version of the new software available by mid-
1999. The costs of software modification are not expected to be material. Any
diagnostic products currently in the market that are covered by a warranty will
be upgraded at no charge to the customer at an insignificant cost to the
company. The Company plans to charge upgrade fees for previously sold products
that are outside of the warranty period. The Company expects that its existing
warranty reserves will be adequate to absorb the upgrade costs.

Seasonality

     To date, the Company's revenues have typically been significantly higher in
the second and fourth calendar quarters. This seasonality reflects the timing of
major medical and dental industry trade shows in these quarters, significantly
reduced sales during the summer and the effect of year end tax planning
influencing the purchasing of capital equipment for depreciation during the
fourth calendar quarter.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.
         -----------------------------------------------------------

Not applicable.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.
         ------------------
<PAGE>
 
Securities Class Action

     On May 1, 1998, a class action suit (the "Valenti Litigation") was
commenced in the United States District Court for the Central District of
California pursuant to federal securities laws on behalf of purchasers of the
Company's securities during the period from February 12, 1998 through April 15,
1998. The complaint alleges that the Company and certain of its officers and
directors violated the federal securities laws by issuing false and misleading
statements and omitting material facts regarding the Company's financial results
and operations during such period. Among other things, the complaint alleges
that the defendants materially misstated the Company's financial results for the
fiscal quarter ended December 31, 1997 and that as a result of such
misstatements, the plaintiff suffered damages as a result of a decrease in the
market price of the Company's publicly traded securities.

     After the filing of such complaint, a number of similar complaints have
also been filed in the United States District Court for the Central District of
California, and the California Superior Court for the County of Orange, seeking
certification as class actions, and covering class periods commencing as early
as May 7, 1997. Such complaints alleged facts similar to those described above
with respect to the Valenti Litigation, as well as allegations that the Company
artificially inflated the price of its outstanding publicly traded securities as
a result of misrepresentations relating to the market and prospects for sale of
its Centauri Er:YAG laser. All of the above described complaints seek monetary
damages in unspecified amounts, together with attorneys' fees, interest, costs
and related remedies. The Company has been successful in having all of such
securities class actions lawsuits consolidated into a single action in the
federal court and a single action in the state court.

     The Company has also been named as a nominal defendant in a shareholder
derivative lawsuit filed in the Orange County, California Superior Court, in a
case captioned Eskeland vs. Cozean, et al. The complaint was filed by a
shareholder of the Company, on behalf of the Company, against certain of the
Company's current and former officers and directors, including Colette Cozean,
Michael Hiebert, Richard Roemer, Ronald Higgins, Patrick Day, Grace Chin-Hsin
Lin, G. Lynn Powell, and E. Donald Shapiro. The complaint alleges, among other
things, that such persons violated their fiduciary duty to the Company by
exposing the Company to liability under the securities laws, failing to ensure
that the Company maintained adequate accounting controls, and related alleged
actions and omissions. Although the Company is a named defendant, the lawsuit
seeks to recover damages from the individual defendants on behalf of the
Company. Accordingly, it is not clear whether the Company will have any
liability or incur any material loss as a result of being named as a defendant
in this matter.

     The Company has announced that it has reached agreement in principle with
lead plaintiffs and their counsel to settle the class action and shareholder
derivative lawsuits.

     A settlement agreement is currently being prepared by the parties and when
executed will be submitted to the courts for the purpose of giving notice to the
plaintiffs and seeking judicial approval. 
<PAGE>
 
Under the agreement in principle, in exchange for a release of all claims, the
company will pay 2,250,000 shares of common stock and $4.6 million in cash. The
cash portion of the settlement will be paid by the company's insurance carrier.
Completion of the settlement is subject to execution of the final settlement
agreement, court approval and certain other conditions. In the settlement
agreement, the defendants will continue to deny any wrongdoing.

Investigations and Other Matters

     The Company has been the subject of recent Securities and Exchange
Commission ("SEC") and Nasdaq Stock Market investigations concerning matters
pertaining to the Company's revenue reporting practices, and related management
issues. The Company has cooperated with both the SEC and the Nasdaq in
connection with both of these investigations. These investigations, the Company
believes, generally relate to whether the Company, in SEC filings and press
releases issued prior to the end of the 1998 fiscal year, properly recognized
revenues for transactions occurring during fiscal 1997, and during interim
periods of fiscal 1998. To date, the SEC has not indicated that it is seeking to
impose any penalties on the Company or that it has made any specific finding
with respect to the Company's accounting practices. In July 1998, the Nasdaq
Stock Market notified the Company of a proposed delisting of the Company's
securities from the Nasdaq Stock Market. The Company filed an appeal of this
proposed action and attended a hearing on September 17, 1998. On October 21,
1998 the Company received notification that the Nasdaq Listing Qualifications
Panel had determined that the trading of the Company's stock and warrants would
resume, effective October 22, 1998. That notification indicated that the
decision of the panel was subject to later review by the Nasdaq Listing and
Hearing Review Council.

     The Company is also involved in various disputes and other lawsuits from
time to time arising from its normal operations. The litigation process is
inherently uncertain and it is possible that the resolution of any of such
lawsuits or disputes, as well as the matters described above, may adversely
affect the Company.

Item 2.  Changes in Securities and Use of Proceeds.
         ----------------------------------------- 

     Not applicable.

Item 3.  Defaults Upon Senior Securities.
         --------------------------------

     Not Applicable.

Item 4.  Submission of Matters to a Vote of Security Holders.
         ----------------------------------------------------
<PAGE>
 
     Not Applicable.

Item 5.  Other Information.
         ------------------

     None.

Item 6.  Exhibits and Reports on Form 8-K.
         ---------------------------------

     (a)  Exhibits:

          27   Financial Data Schedule (filed herewith)

     (b)  Reports on Form 8-K:

     None.
<PAGE>
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



                                  PREMIER LASER SYSTEMS, INC.


Dated: February 12, 1999          By: /s/ COLETTE COZEAN
                                      ------------------------------------------
                                      Colette Cozean, Chief Executive Officer
                                      (duly authorized officer)


Dated: February 12, 1999          By: /s/ ROBERT V. MAHONEY
                                      ------------------------------------------
                                      Robert V. Mahoney, Chief Financial Officer
                                      (Principal Financial Officer and Principal
                                      Accounting Officer)