<PAGE>   1

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

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

                                  FORM 10-K/A

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

                For the Fiscal Year Ended December 31, 1996, 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: 0-18053
    
                                   LASERSCOPE
             (Exact name of Registrant as specified in its charter)


               California                                  77-0049527
    (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                    Identification No.)


               3052 Orchard Drive San Jose, California 95134-2011
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (408) 943-0636

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

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

          Securities registered pursuant to Section 12(g) of the Act:
                           Common Stock, no par value
                          Common Share Purchase Rights

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $60,200,000 as of March 17, 1997, based upon the
closing sale price on the NASDAQ National Market System reported for such date.
Shares of Common Stock held by each officer and director and by each person who
owns 5% of more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

There were 12,004,306 shares of Registrant's Common Stock issued and
outstanding as of March 17, 1997.
<PAGE>   2
                      DOCUMENTS INCORPORATED BY REFERENCE

The undersigned Registrant hereby amends and restates its Annual Report on Form
10-K for the fiscal year ended December 31, 1996, as set forth below.

                     INTRODUCTORY STATEMENT AND REFERENCES

Except for the historical information presented in this Annual Report on Form
10-K, the matters discussed herein are forward-looking statements made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995.  Investors are cautioned that all forward- looking statements are
subject to certain risks and uncertainties that could cause the actual results
to differ materially from those projected.  Factors that could cause actual
results to differ materially include, but are not limited to, the risks
associated with the Company's acquisition of Heraeus Surgical, Inc., including
the integration of the assets acquired and assumption of the liabilities
assumed by Laserscope, the timing of orders and shipments, the Company's
ability to balance its inventory and production schedules, the timely
development and market acceptance of new products and surgical/therapeutic
procedures, the impact of competitive products and pricing and public policy
relating to health care reform in the United States and other countries.

The Company desires to continue expansion of its operations outside of the
United States and to enter additional international markets, requiring
significant management attention and financial resources and further subjecting
the Company to the risks of operating internationally.  These risks include
unexpected changes in regulatory requirements, delays resulting from difficulty
in obtaining export licenses for certain technology, customs, tariffs and other
barriers and restrictions, and the burdens of complying with a variety of
foreign laws.  The Company is also subject to general geopolitical risks in
connection with its international operations, such as political and economic
instability and changes in diplomatic and trade relationships.  The Company
cannot predict whether quotas, duties, taxes or other charges or restrictions
will be imposed by the United States, Japan, countries in the European Union or
other countries upon the import or export of the Company's products in the
future, or what effect any such actions would have on its business, financial
condition or results of operations.  In addition, fluctuations in currency
exchange rates may negatively impact the Company's ability to compete in terms
of price against products denominated in local currencies. In addition, there
can be no assurance that regulatory, geopolitical and other factors will not
adversely impact the Company's operations in the future or require the Company
to modify its current business practices.

Other risks are detailed from time to time in the Company's press releases and
other public disclosure filings with the U.S. Securities and Exchange
Commission (SEC), copies of which are available upon request from the Company.
The forward-looking statements included herein speak only of the date hereof.
The Company assumes no obligation to update any forward-looking statements
included herein.

References made in this Report to "Laserscope," the "Company" or the
"Registrant" refer to Laserscope and its subsidiaries.  References made in this
Report to "HSI" refer to Heraeus Surgical, Inc.

The following are Laserscope registered trademarks which may be mentioned
herein: Laserscope, Dermastat, KTP/532, KTP/YAG, MicroBeam, Opthostat,
ClearView, Crossfire, Digilase, Infraguide, Illumina, Laserblade, Luxus,
Permaline, Pinnacle, Sureshot, Ultralase, Ultraline, and Ultraspot.

The following are Laserscope common law trademarks and service marks which also
may be mentioned herein: AccuStat, ADD, ADDStat, Ascent Medical Systems, Aura,
Dermastat, DiscKit, Dual FX, Everything You Need. Everything Unique! (SM),
Endostat, FiberLife, FocalStat, KTP/YAG, Laparostat, LaparoVac, LDD, Medical
Insite (Web Site SM), MicronSpot, Microstat, Orion, People Who Do More (SM),
The Power Family (SM), Pulsar, SmartConnector, SmartScan, SpineScope,
SpineStat, StarPulse, ArthroGuide, Enhance, Hercules, InfraTips, On Target,
OrthoProbe, QuickPulse, Radiance, Resilient, SpinaLase, SuperPulse, and
UroLine.

Photofrin and Optiguide are registered trademarks of QLT PhotoTherapeutics,
Inc. Hanaulux and Hanauport are trademarks of Heraeus Med GmbH.  Maquet is a
trademark of Maquet Corporation. CVAC is a trademark of CVAC, Inc.





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<PAGE>   3
                                     PART I

ITEM 1.  BUSINESS

General Overview of Business

Laserscope(R) designs, manufactures, sells and services, on a worldwide basis,
surgical, dermatologic and therapeutic laser systems and related surgical
instrumentation and disposable supplies and accessories.  Its portfolio of more
than 350 products, includes an advanced line of KTP/532(R), CO2, Nd:YAG,
Er:YAG, Ruby, Diode and Dye medical laser systems and related energy delivery
devices for the office, outpatient surgical center and hospital markets.

Laserscope's Ascent Medical Systems(TM) (AMS) are innovative equipment for the
surgical and outpatient care environments.  The AMS product family includes
procedure and treatment lights, ceiling-mounted equipment organizers,
centralized smoke evacuation systems, video systems and operating tables.

Primary medical markets served include dermatology, aesthetic surgery, urology,
gynecology, ear, nose and throat (ENT) surgery and photodynamic therapy (PDT),
an emerging cancer treatment.  Secondary markets include general surgery,
neurosurgery, orthopedics, gastroenterology as well as other surgical
specialties.

Mission

Laserscope's corporate mission is to improve the quality and cost effectiveness
of health care by providing innovative medical products and services.

History

Laserscope was founded in 1982 and its first product was shipped in 1984.
During its initial years, the Company was funded by several venture capital
firms and by E.I. du Pont de Nemours & Company.  Laserscope received the first
in a series of U.S. regulatory clearances in 1987 and completed its initial
public offering in December 1989.  Laserscope is a California corporation.

Market Focus

Laserscope believes that it participates in several business areas with good
opportunities.  Near-term opportunities lie in the dermatology/aesthetic
surgery marketplace.  Laserscope's new desktop-sized Aura(TM) laser is
effective in treating leg veins in addition to minimizing the side effects
inherent in other laser leg vein treatments.  The Company's Pulsar(TM) CO2
laser is an attractive new entry in the skin resurfacing (treatment of
wrinkles) market.

More mid-term opportunities lie in further developing the surgical support
products (renamed Ascent Medical Systems) obtained through the acquisition of
Heraeus Surgical, particularly the centralized smoke evacuation and equipment
management systems, discussed in more detail below.

Longer-term opportunities for the Company lie in photodynamic therapy (PDT), a
modality to treat cancer and pre-malignant conditions with laser energy and
light-activated, photosensitive pharmaceuticals.  In January 1996, Laserscope
announced that marketing clearance had been received from the U.S. Food and
Drug Administration (FDA) for its PDT laser systems and the drug Photofrin(R).
The laser systems' marketing clearance came in conjunction with the FDA
approval of Photofrin to treat advanced esophageal cancer.  Photofrin, a
proprietary drug of QLT PhotoTherapeutics Inc. (QLT), is the first
light-activated drug for use in photodynamic therapy to be approved in the
United States.

In February 1997, QLT and Laserscope jointly requested FDA approval of PDT for
early and late-stage lung cancer.

Photofrin is distributed through QLT's distribution partners which are Sanofi
Pharmaceuticals, Inc. in the U.S. and Beaufour Ipsen in Europe.  Laserscope is
the worldwide distributor of its own PDT laser systems and QLT's Optiguide(R)
fiberoptic delivery devices.





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Laserscope has a strategic alliance with QLT for the development, manufacture
and distribution of medical devices for the PDT market, as well as a sales and
marketing agreement with Rare Earth Medical, a developer and manufacturer of
advanced fiber optic light diffusing products for PDT applications.  Laserscope
also is actively engaged in discussions with other pharmaceutical partners,
some of whom are pursuing non-cancer PDT applications.

Products

Laser Platforms:

The Company's Aura(TM) Laser System is a compact, highly portable, KTP/532
single wavelength laser designed for office use.  Its integrated StarPulse
feature is designed for the removal of benign vascular and pigmented surface
lesions, including leg telangiectasia (spider-like leg veins).  It can also be
used as a continuous wave laser for surgical applications that include
endoscopic blepharoplasty, rhinoplasty, facelifts, tonsillectomy, wart removal
and snoring cessation.

The Orion(TM) Laser System is a mid-size, more powerful system for outpatient
surgical centers and hospitals.  It features dual KTP/532 and Nd:YAG
wavelengths as well as StarPulse.  The range of applications include ENT,
gynecology, urology, general surgery, neurosurgery, orthopedics, spine surgery,
as well as aesthetic surgery and dermatology.  The Orion also can serve as a
base laser system for Laserscope's PDT laser dye module, enabling photodynamic
therapy applications.  Both the Aura and Orion systems are available with
SmartScan, a microprocessor-controlled beam scanning device.

The Pulsar(TM) Laser System is a mid-size CO2 laser for the office, outpatient
surgical centers and hospitals.  It features an advanced pulsing technology
called ClearPulse to create custom skin tissue effects.  It also operates in a
continuous beam mode for surgical applications.  It is primarily used for skin
resurfacing or wrinkle removal as well as being a surgical laser for ENT and
gynecologic applications.  It is available with ParaScan, a
microprocessor-controlled beam scanning device.

The Hercules Nd:YAG Laser System delivers both continuous and pulsed laser
energy for a variety of laser procedures.  It is compact and highly
maneuverable, and delivers 40, 60 or l00 watts of power.  The QuickPulse
feature pulses the laser ten times faster than conventional Nd:YAG lasers for
rapid ablation of tissue with reduced thermal damage. Applications are in
urology, gynecology, ENT, gastroenterology, and thoracoscopy.  The Hercules is
sold principally to hospitals outside of the United States.

The 800 Series KTP/YAG(TM) Surgical Laser System is designed for use in
hospitals.  It is a high-power, dual-wavelength system with applications in
urology, gynecology, ENT, aesthetic surgery, orthopedics, general surgery,
neurosurgery, pulmonary surgery and gastroenterology.  The KTP/532 beam
surgically cuts, vaporizes and coagulates tissue with minimal disruption to
adjacent areas.  Cutting and vaporization are achieved hemostatically, making
the system effective for endoscopic as well as open surgical procedures.
Complementing the KTP/532 beam is the Nd:YAG infrared beam which provides deep
coagulation and powerful ablative capabilities.  The 800 Series System, which
provides up to 40 watts of KTP/532 energy and 100 watts of Nd:YAG energy, can
also serve as a base laser system for Laserscope's PDT laser dye module,
enabling photodynamic therapy applications.

Laserscope's PDT systems include the Model 630 and 630XP PDT Dye Modules.  The
Model 630 Dye Module provides 3.2 watts of power while the Model 630 XP Dye
Module provides 7.0 watts of power.  Both systems operate at 630 nm for
photoactivation of Photofrin, are portable and tunable to other wavelengths.

PDT utilizes a light-activated drug that is administered intravenously to the
patient.  This is followed by an interval during which the drug circulates,
accumulates and is retained in tumors, while largely clearing from other
tissues.  The drug has no apparent effect on tumors until it is activated by
non-thermal light from the Model 630 or 630XP PDT Dye Module and produces an
active form of oxygen that destroys the cancer.

Through its distribution arrangements with NWL Laser-Technologie, GmbH, the
Company has access to erbium yttrium-aluminum garnet (Er:YAG), and Ruby lasers
which have applications in dermatology, in addition to other lasers with
industrial applications.  Laserscope has received FDA 510(k) approval to market
the Er:YAG and intends to apply for 510(k) 




                                      -4-
<PAGE>   5
approval to market the Ruby laser in the U.S.  At some future time, the Company
may elect to introduce all of these products to the U.S. and other geographic
areas.

Laser Devices, Instruments and Disposables:

Laserscope offers a broad line of surgical instrumentation, disposables, kits
and other accessories for use with its surgical laser systems.  These products
include disposable optical fibers, diffusing fibers for PDT applications,
side-firing devices, individual custom handpieces for specific surgical
applications, scanning devices, micromanipulators for microscopic surgery, and
various other devices, procedure-specific kits and accessories. This portfolio
of aftermarket products includes more than 350 medical devices.

The disposable optical fibers are available in different lengths and diameters
for different surgical applications and preferences.  The handpieces, which are
used to hold and aim the optical fiber, give the surgeon the feel of a
traditional surgical tool.  When used in contact with body tissue, they provide
tactile feedback similar to conventional surgery.

Ascent Medical Systems (AMS):

Ascent Medical Systems are integrated equipment and instrumentation for the
operating and emergency rooms.  The AMS product family includes procedure and
treatment lights, ceiling-mounted equipment organizers, centralized smoke
evacuation systems, video systems and operating tables.

The AMS ceiling-mounted equipment management systems are designed to improve
efficiency of an operating or emergency room by moving medical equipment,
anesthesia machines, endoscopic equipment, cords, hoses, accessories and gas
outlets from the floor into their optimal clinical positions overhead.
Ergonomically positioned equipment is designed to minimize fatigue and strain
and avoid distractions for the hospital's surgical staff.

Also available is a centralized smoke evacuation system (CVAC) designed to
remove potentially harmful, microscopic debris from the air to protect both
patients and healthcare workers.  The CVAC system is integrated into a
ceiling-mounted equipment management system.

Through distribution arrangements with Hereaus Med GmbH and Maquet, the Company
markets additional operating and emergency room equipment.

Supplied by Heraeus Med, the Hanaulux(TM) high-intensity surgical lights
provide brilliant light, shadow-free illumination and true color for every
surgical procedure.  A multi-lens system with a cascade of focal points allows
each light source to illuminate the entire light field independently,
minimizing shadows and creating a homogeneous light field.

Electrohydraulic surgical tables supplied by Maquet,(TM) offer motorized
movement for anatomic positioning of the patient during all types of surgical
procedures.

Also supplied by Heraeus Med are ceiling-mounted, broadcast-quality
Hanauvision(TM) interactive video systems which allow monitoring, teaching,
teleconferencing or consultation from a remote site or with other specialties,
such as radiology and pathology, during surgical procedures.

Sales and Marketing

The Company concentrates its marketing efforts for its laser products on high
volume surgical procedures.  The marketing of AMS products is directed at
planners and architects, engaged primarily in retrofitting existing operating
or emergency rooms.

Laserscope believes that increased awareness of both the benefits of laser
surgery and the drawbacks of conventional surgery is one of the most important
factors in expanding the market for its laser and laser-based products.  As a
result, the Company has designed its marketing and sales strategy around a
strong educational effort to promote awareness of the versatility, safety and
cost-effectiveness of its surgical laser systems.  For AMS products, the
marketing strategy emphasizes the efficient and productive operation of an
operating or emergency room.





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Laserscope promotes its products through trade shows and exhibits covering most
of the surgical specialties, physician workshops and seminars, medical journal
advertising and direct mailings.  The Company supports and participates in a
substantial number of workshops and seminars.  For laser products, the
workshops usually include a demonstration of the Company's laser systems and
provide surgeons with direct experience using the Company's products.

Distribution

In the U.S., the U.K. and France, the Company distributes its products to
hospitals, outpatient surgical centers and physician offices through its own
direct sales force.  In Germany, Laserscope products are distributed by NWL
Laser-Technologie, GmbH a company in which Laserscope has a minority equity
interest and an option to acquire the remainder.  Elsewhere, Laserscope
products are sold through regional distributor networks.  At present, 32
distributors serve 39 countries throughout Europe, the Middle East, Latin
America, Asia and the Pacific Rim.  Laserscope is both ISO 9001 and CE
certified.

International Business

Revenues from Europe, Asia and the Pacific Rim continue to account for an
increased percentage of total sales.  Approximately 26% of Laserscope's 1996
revenues were derived from its international operations, up from 23% in 1995
and 17% in 1994.  The Company expects that international sales will continue to
represent a significant percentage of net sales.

In March 1995, the Company entered into an agreement with NWL Laser-Technologie
("NWL") whereby the Company paid NWL approximately $1.6 million in exchange for
a cross-distribution and development agreement, a minority equity position in
NWL and an option to purchase all of the ownership interests in NWL.  These
assets are carried at cost.  If the Company does not exercise its option to
purchase NWL by June 1997, there will be no reimbursement of the Company's
investment and the Company's equity position will be relinquished.  If the
Company exercises its option, the remaining purchase price will be paid over
three and one half years from the exercise date.  The Company currently expects
to exercise its purchase option prior to lapse of the option period.

Installed Base of Lasers

Laserscope has more than 5,500 laser systems installed worldwide.  The
installed base provides a market for service as well as the sale of devices,
instruments and disposables.

Installation, Service and Support

A direct field service organization provides installation and service for the
Company's products. The Company generally provides a twelve month warranty on
its laser systems. After the warranty period, maintenance and support is
provided on a variety of service contract bases or on an individual call basis.
The Company also has a "99.0% Uptime Guarantee" on its laser systems.  Under
provisions of this guarantee, the Company extends the term of the related
warranty or contract if specified system uptime levels are not maintained.  To
date, all systems covered by this guarantee have achieved a 99.9% uptime rate.

Research and Development

The Company operates in an industry that is subject to rapid technological
changes and its ability to remain competitive depends on, among other things,
its ability to anticipate and react to such change.  As a result, the Company
intends to continue to invest significant amounts in research and development.

Laserscope's current research and development programs are directed toward the
development of new laser systems and delivery devices as well as enhanced
operating room products.   In development, for example, are new diode laser
systems for the emerging PDT market and other applications.  However, there can
be no assurance that the PDT market will develop as anticipated or that
Laserscope's product development will prove successful.  Nor can there be any
assurance that such new products, if developed and introduced, will receive
market acceptance.





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<PAGE>   7
Manufacturing

The Company manufactures the laser resonators used in its laser systems, the
system chassis and certain accessories.  The Company's laser manufacturing
operations concentrate on the assembly and test of components and subassemblies
manufactured to the Company's designs and specifications by outside vendors.
The Company believes that it has sufficient manufacturing capacity in its
present facilities to support current operations at least through the end of
1997.

In addition to its laser manufacturing capability, the Company has a production
facility for certain of its disposable products.  The Company's Endostat
fibers, KTP Disc Kit, and Angled Delivery Devices (ADD and ADDStat) are
manufactured in this facility.

Certain of the components used in the Company's products, including KTP
(potassium titanyl phosphate) crystals, molded and cast components, power
supplies, and certain optical components, are purchased from single sources.
While the Company believes that most of these components are available from
alternative sources, an interruption of these or other supplies would adversely
affect the Company. KTP crystals are currently available at appropriate quality
levels from only one supplier, a division of Litton Industries.  This supplier
has a second crystal growing and fabrication facility at a second location in
the United States geographically isolated from its original production
facility.  While the Company believes that an alternative supplier of KTP
crystals could be qualified, if the supply of crystals from the present
supplier were interrupted there would be an adverse effect on the Company's
business and results of operations.

Employees

At December 31, 1996, the Company had 265 full-time employees.  The Company
believes that it maintains competitive compensation, benefit, equity
participation and work environment policies to assist in attracting and
retaining qualified personnel.  The Company believes that the success of its
business will depend, in part, on its ability to attract and retain such
personnel, who are in great demand.

Competition

The medical equipment market is highly competitive.  The ability of the Company
to compete effectively depends on such factors as market acceptance of its
products, product performance and price, customer support, the success and
timing of new product development, and continued development of successful
channels of distribution.  Some of the Company's current and prospective
competitors have or may have significantly greater financial, technical,
manufacturing and marketing resources than the Company.  To compete, the
Company will need to continue to expand its product offerings, periodically
enhance its existing products and continue to expand its distribution
internationally.

Product Liability Exposure

The business of the Company entails the risk of product liability claims.  The
Company has experienced product liability claims from time to time, which it
believes are ordinary for its business.  While it is not feasible to predict or
determine the outcome of the actions brought against it, the Company believes
that these actions will not ultimately have a material adverse impact on the
Company's financial position or results of operations.

At present, the Company maintains product liability insurance on a "claims
made" basis with coverage of $10,000,000 in the aggregate and a deductible of
$100,000 per occurrence and an annual maximum aggregate deductible of $500,000.
There can be no assurance that such insurance will be available at a reasonable
cost, if at all, in the future, nor can there be any assurance that other
claims will not be brought against the Company which would exceed applicable
insurance coverage.

Factors Affecting Financial Results and Stock Price

A number of factors affect the Company's financial results and stock price,
especially on a quarterly basis. One such factor is timing of shipments.  The
Company's laser products are relatively expensive pieces of medical capital
equipment and the precise shipment date of specific units can have a marked
effect on the Company's results of operations on a quarterly basis.  A delay in
product shipments near the end of a quarter could cause quarterly results to
fall short of anticipated levels.





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A related factor is the timing of orders.  To the extent orders are received by
the Company near the end of a quarter, the Company may not be able to fulfill
the order during the balance of that same quarter.  Additionally, the Company
typically receives a disproportionate percentage of its orders toward the end
of each quarter.  To the extent that anticipated orders are not received or are
delayed beyond the end of the applicable quarter, the Company's revenues may be
adversely affected and the Company's revenues may be unpredictable from quarter
to quarter.  Further, there can be no assurance that revenue growth or
profitability on a quarterly or annual basis will be accomplished.  Factors
affecting operating results include, but are not limited to, product mix,
competitive pricing pressures, material costs, revenue and expenses related to
new products and enhancements to existing products, as well as delays in
customer purchases in anticipation of new products or product enhancements by
the Company or its competitors.

The market price of the Company's common stock may be subject to significant
fluctuations.  These fluctuations may be due to factors specific to the
Company, such as quarterly fluctuations in the Company's financial results,
changes in analysts' estimates of future results, changes in investors'
perceptions of the Company or the announcement of new or enhanced products or
strategic transactions by the Company or its competitors.  In addition, such
fluctuations may be due to or exacerbated by general conditions in the medical
equipment industry or conditions in the financial markets generally.

Patents and Licenses

While the Company believes the patents that it has and for which it has applied
are of value, other factors are of greater competitive importance.  The Company
holds several patents issued in the United States, generally covering surgical
laser systems, delivery devices, calibration inserts, the laser resonator and
the connector used to attach disposable and reusable instrumentation to the
Company's laser systems.

In April 1992, the Company entered into a worldwide, license agreement with
PDT, Inc. (PDTI) for licenses under the dye laser patents issued to PDTI.  The
licenses, which expire in April 1999, allow the Company, on an exclusive basis,
to sublicense, manufacture, have manufactured or use, and on a non-exclusive
basis, lease and sell the dye laser.  Under the terms of the agreement, PDTI
retains ownership of the intellectual property licensed to the Company under
the agreement and has the right to manufacture, have manufactured, use, lease,
and sell the dye laser for use in photodynamic therapy with PDTI photodynamic
drugs.  To acquire the licenses, the Company paid PDTI $400,000 and provided
PDTI certain laser equipment.  Under the terms of the license, the Company must
pay a royalty to PDTI based on the net sales price of Dye Lasers sold by the
Company.

Government Regulation

Government regulation in the U.S. and other countries is a significant factor
in the development, manufacturing and marketing of many of the Company's
products and in the Company's ongoing research and development activities.

The Company and its products are regulated by the FDA under statutory
authorities, including the Federal Food, Drug and Cosmetic Act (the "FDC Act")
and the Radiation Control for Health and Safety Act.

The FDC Act provides two basic review procedures for medical devices.  Certain
products may qualify for a Section 510(k) ("510(k)") procedure under which the
manufacturer gives the FDA premarket notification of the manufacturer's
intention to commence marketing the product.  The manufacturer must, among
other things, establish that the product to be marketed is "substantially
equivalent" to a previously marketed product. In some cases, the manufacturer
may be required to include clinical data gathered under an investigational
device exemption ("IDE") granted by the FDA allowing human clinical studies.

If the product does not qualify for the 510(k) procedure, the manufacturer must
file a premarket approval application ("PMA") based on testing intended to
demonstrate that the product is both safe and effective.  The PMA requires more
extensive clinical testing than the 510(k) procedure and generally involves a
significantly longer FDA review process. Approval of a PMA allowing commercial
sale of a product requires preclinical laboratory and animal tests and human
clinical studies conducted under an IDE establishing safety and effectiveness.
Generally, because of the amount of information required, the 510(k) procedure
takes less time than the PMA procedure.





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<PAGE>   9
To date, all of the Company's products (except for the 600 Series Dye Module)
have been marketed through the 510(k) procedure.  Future applications, however,
may require clearance through the PMA procedure.  There can be no assurance
that such marketing clearances can be obtained on a timely basis.  Delays in
receiving such clearances could have a significant adverse impact on the
Company.  The FDA may also require post-market testing and surveillance
programs to monitor certain products.

Certain other countries require the Company to obtain clearances for its
products prior to marketing the products in those countries.  The requirements
vary widely from country to country and are subject to change.  The European
community is in the process of developing a new approach to the regulation of
medical products which may significantly change how medical devices are
marketed in those countries within the next several years.  In February 1996,
the Company achieved ISO 9001 and CE (European Conformation) Mark registration
in anticipation of this change.

The Company is also required to register with the FDA and state agencies, such
as the Food and Drug Branch of the California Department of Health Services, as
a medical device manufacturer.  The Company is inspected on a routine basis by
both the FDA and the State of California for compliance with the FDA's Current
Good Manufacturing Practice regulations.  Those regulations impose certain
procedural and documentation requirements upon the Company with respect to
manufacturing, testing, and quality control activities.  If violations of
applicable regulations are noted during these inspections, the continued
marketing of any products manufactured by the Company may be adversely
affected.

In addition, the Company's laser products are covered by a performance standard
for laser products set forth in FDA regulations. The laser performance standard
imposes certain specific record keeping, reporting, product testing, and
product labeling requirements on the Company.  These requirements also include
affixing warning labels to the Company's laser systems, as well as the
incorporation of certain safety features in the design of the Company's
products.  The Company believes that it is in material compliance with all of
these requirements.

Complying with applicable governmental regulations and obtaining necessary
clearances or approvals can be time consuming and expensive, and there can be
no assurance that regulatory review will not involve delays or other actions
adversely affecting the marketing and sale of the Company's products.  The
Company also cannot predict the extent or impact of future legislation or
regulations.

The Company is also subject to regulation under federal and state laws
regarding, among other things, occupational safety, the use and handling of
hazardous materials and protection of the environment. The Company believes
that it is in material compliance with these requirements.

Acquisitions

On August 30, 1996, the Company consummated the acquisition of Heraeus
Surgical, Inc.  ("HSI"), a Delaware corporation and wholly-owned subsidiary of
Heraeus Med GmbH, a company organized under the laws of the Federal Republic of
Germany.  As consideration for HSI and certain of the assets and liabilities of
Heraeus Med's laser distribution operations, Laserscope paid Heraeus Med $2
million and issued Heraeus Med 4,609,345 shares of Laserscope common stock (the
"Heraeus Shares")  The Heraeus Shares were issued pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended.  The Company has agreed to register the Heraeus Shares pursuant to a
"shelf" registration statement to be filed with the Securities Exchange
Commission by August 30, 1997.  On August 30, 1997, certain contractual
limitations on Heraeus Med's ability to transfer the shares will expire.  The
sale of the Heraeus Shares would substantially alter the Company's market float
for its common stock and could have an adverse impact on the Company's ability
to raise capital.  In addition, any such sales (or the investment community's
anticipation of such sales), especially in large amounts, could materially
affect the market price of Laserscope common stock.





                                      -9-
<PAGE>   10
EXECUTIVE OFFICERS OF THE COMPANY

The following sets forth certain information with respect to the executive
officers of the Company, and their ages as of December 31, 1996:

<TABLE>
<CAPTION>
                NAME                 AGE                  POSITION
                ----                ----                  --------
        <S>                          <C>   <C>
        Benjamin L. Holmes           62    Chairman of the Board and Director
        Robert V. McCormick          52    President, Chief Executive Officer and Director
        Thomas B. Boyd               50    Senior Vice President of Operations and
                                             International
        Roy Fiebiger                 42    Senior Vice President of Marketing, Sales and Service
        Bonnie Jones*                48    Vice President of Human Resources
        Dennis LaLumandiere          43    Vice President of Finance, Chief Financial
                                           Officer and Assistant Secretary
        Eric Reuter                  35    Vice President of Research and Development
</TABLE>

* Ms. Jones resigned as an officer of the Company effective January 1997.

Benjamin L. Holmes has been a director of the Company since January 1992 and
was appointed Chairman of the Board of Directors in June 1992.  Mr. Holmes was
General Manager of the Medical Products Group of Hewlett-Packard Company ("HP")
from 1983, and a Vice President of HP, from 1985 until his retirement in
October 1995.  Mr. Holmes is a member of the Board of Directors of Project HOPE
and the Massachusetts High Technology Council. He is also a member of the
Massachusetts Governor's Council on Economic Growth and Technology, Past
Commissioner of the Massachusetts Universal Health Care Commission, and a past
member of the Board on Health Care Service, Institute of Medicine, National
Academy of Sciences.  He is also Past Chairman of the Board of Directors of the
Health Industry Manufacturers Association (HIMA).

Robert V. McCormick has been President of the Company since December 1991 and
Chief Executive Officer since July 1992.  Between December 1991 and July 1992
he also served as the Company's Chief Operating Officer.  He has been a
director of the Company since July 1992.  Mr. McCormick also served as the
Company's Senior Vice President of Marketing and Field Operations from April
1991 to December 1991.  Mr. McCormick was employed by Acuson Corporation, a
manufacturer of medical imaging equipment, from 1983 to April 1991 in a variety
of sales and marketing executive positions culminating as Vice President of
Marketing and Field Operations.

Thomas B. Boyd was hired as Senior Vice President of Operations and Finance in
April 1994 and was appointed to the position of Senior Vice President of
Operations and International in September 1996.  Prior to joining Laserscope,
from January 1992 to March 1994, Mr. Boyd was Vice President of Operations for
American Safety Razor (ASR) Co., a consumer and medical products company.  From
August 1975 to December 1991 he was employed by Baxter Healthcare Corporation,
an international manufacturer and distributor of healthcare products, in
various financial and operations management positions including Vice President
of Manufacturing from September 1989 to December 1991.

Roy Fiebiger was hired as Vice President of Marketing in September 1995.  Mr.
Fiebiger was promoted to Vice President of Marketing and Sales in November 1995
and then to Senior Vice President of Marketing, Sales and Service in February
1997.  Prior to his employment with Laserscope, from November 1994 to August
1995, Mr. Fiebiger was President and Chief Executive Officer of EnVision
Surgical Systems (since renamed "Novacept"), a private, development stage
medical device company.  From April 1991 to October 1994, Mr. Fiebiger was
Executive Vice President and Chief Operating Officer for  Norian Corporation, a
development stage medical device company, and from August 1984 to March 1991 he
was Vice President of Sales and Marketing for Techmedica, a medical device
company.

Bonnie Jones was employed with the Company since November 1988 when she was
hired as Laserscope's first Personnel Manager.  She was promoted to Director of
Personnel in June 1991 and Vice President of Human Resources in June 1993.
Prior to working for the Company, she was as an independent consultant for
various companies and Director of Personnel for Humphrey Instruments, an
ophthalmic instruments company. Ms. Jones worked at Humphrey from 1982 through
1987.  Ms. Jones resigned as an officer of the Company effective January 1997.





                                      -10-
<PAGE>   11
Dennis LaLumandiere has been employed with the Company since September 1989
when he was hired as Laserscope's Corporate Controller.  He was promoted to
Vice President of Finance in February 1995, appointed as Chief Financial
Officer in February 1996 and Assistant Secretary in November 1996.  Prior to
working for the Company, he held various financial and operations management
positions at Raychem Corporation, a multinational materials science company.
Mr. LaLumandiere was employed by Raychem from 1983 to 1989.

Eric Reuter was hired as Vice President of Research and Development in
September 1996.  Prior to working for the Company, from February 1994 to August
1996, Mr. Reuter was employed at the Stanford Linear Accelerator Center at
Stanford University as the Project Engineer for the B-Factory High Energy Ring,
an electron storage ring to be used for high energy physics research.  From
February 1991 to January 1994 he held positions as a Senior Staff Engineer and
Program Manager in digital imaging at Siemens Medical Systems - Oncology Care
Systems, a medical device company.  From July 1984 to January 1991, Mr. Reuter
held various positions in design engineering, project engineering, and
engineering management at the Stanford Linear Accelerator Center.

ITEM 2.  PROPERTIES

The Company leases three buildings and supplemental warehouse space aggregating
approximately 91,000 square feet in San Jose, California under leases expiring
in February 2001. The Company has options to extend the leases at the
then-current market rates. These facilities house the Company's research and
development and manufacturing operations as well as the Company's principal
sales, marketing, service and administrative offices.  During late 1996, the
Company invested approximately $1 million in leasehold improvements to these
facilities to accommodate the employees hired as a result of the acquisition of
HSI.  The Company believes that these facilities are suitable for its current
operations and are adequate to support those operations at least through the
end of 1997. The Company has also leased small offices in the United Kingdom
and France where the Company's local sales and marketing staffs are based.

ITEM 3.  LEGAL PROCEEDINGS

The Company is a party to various legal proceedings arising in the normal
course of its business.  These actions may include product liability and
employee-related issues.  While it is not feasible to predict or determine the
outcome of the actions brought against it, the Company believes that the
ultimate resolution of these claims will not ultimately have a material adverse
impact on the Company's financial position or results of operations.

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

Not Applicable.





                                      -11-
<PAGE>   12
                                    PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
         MATTERS

The Company's common stock is traded on the Nasdaq National Market under the
symbol LSCP.  As of March 17, 1997 the Company had approximately 800
shareholders of record.

The following table shows the Company's high and low selling prices for the
years ended December 31, 1996 and December 31, 1995 as reported by Nasdaq:

<TABLE>
<CAPTION>
                                            1996            
                                 -------------------------
                                 HIGH BID          LOW BID 
                                 --------          -------
 <S>                             <C>               <C>
 First Quarter                   $ 3 3/4           $ 1 5/8
 Second Quarter                  $ 8 7/16          $ 3 1/8
 Third Quarter                   $ 6 5/8           $ 3 7/8
 Fourth Quarter                  $ 6 7/8           $ 4 3/4
</TABLE>


<TABLE>
<CAPTION>
                                            1995   
                                 -------------------------
                                 HIGH BID          LOW BID 
                                 --------          --------
 <S>                             <C>               <C>
 First Quarter                   $ 4 3/8           $ 3 1/2
 Second Quarter                  $ 4 1/2           $ 3 3/8
 Third Quarter                   $ 5 1/8           $ 3 1/4
 Fourth Quarter                  $ 4               $ 1 1/2
</TABLE>

The Company has not paid dividends on its common stock and has no present plans
to do so.  Provisions of the Company's bank line of credit prohibit the payment
of dividends without the bank's permission.

ITEM 6.  SELECTED FINANCIAL DATA

            (THOUSANDS EXCEPT PER SHARE AMOUNTS)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
                           1996(1)      1995       1994      1993       1992  
                           --------   --------   --------   -------   --------
        <S>                <C>        <C>        <C>        <C>       <C>
        Net revenues       $ 42,844   $ 30,133   $ 36,320   $37,831   $ 35,963

        Net income (loss)    (1,692)    (3,552)      (931)      589     (4,421)

        Net income (loss)
          per share           (0.19)     (0.51)     (0.13)     0.09      (0.66)
</TABLE>

CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):

<TABLE>
<CAPTION>
                                    1996(1)     1995    1994      1993     1992  
                                    -------   -------  -------   -------  -------
      <S>                           <C>       <C>      <C>       <C>      <C>
      Cash, cash equivalents &
        short-term investments      $ 3,917   $ 2,278  $ 6,602   $ 8,144  $10,143

      Working capital                18,444    12,564   16,825    17,132   16,219

      Total assets                   44,469    23,582   27,321    29,301   30,242

      Capital leases (excluding
        current portion)                202        15       27        26       97

      Shareholders' equity           27,175    17,326   20,901    21,234   20,182
</TABLE>





                                      -12-
<PAGE>   13
CONSOLIDATED QUARTERLY STATEMENT OF OPERATIONS DATA (UNAUDITED):

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED
                                                   ------------------
                                   MAR. 31,     JUN. 30,      SEP. 30,(1)     DEC. 31,(1) 
                                   --------     --------      -----------     ----------- 
        <S>                         <C>         <C>             <C>             <C>
        1996(1)
        Net revenues                $7,722      $ 8,481         $10,561         $16,080

        Gross Margin                 3,870        4,193           5,335           7,564

        Net income (loss)              137          251          (2,811)            731

        Net income (loss) per share   0.02         0.03           (0.32)           0.06

        1995

        Net revenues                $9,215      $ 6,879         $ 7,048         $ 6,991

        Gross Margin                 4,832        3,801           3,463           3,245

        Net income (loss)              251         (835)         (1,259)         (1,709)

        Net income (loss) per share   0.04        (0.12)          (0.18)          (0.25)
        
</TABLE>

(1)  The Company closed its acquisition of Heraeus Surgical, Inc. on August 30,
     1996.

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

FINANCIAL REVIEW - RESULTS OF OPERATIONS

The following table sets forth certain data from the Company's consolidated
statement of operations, expressed as a percentage of net revenues:

<TABLE>
<CAPTION>
                                                         1996       1995       1994
         <S>                                             <C>        <C>        <C>
         Net revenues                                    100.0%     100.0%     100.0%
         Cost of sales                                    51.1       49.1       46.6
                                                         -----      -----      -----
         Gross margin                                     48.9       50.9       53.4
         Operating expenses:
           Research and development                        6.0       12.7        9.9
           Purchased in-process research & development     5.5          -          -
           Selling, general and administrative            39.1       50.9       46.8
           Other non-recurring charges related to
             the acquisition of Heraeus Surgical, Inc.     2.0          -          -
                                                         -----      -----      -----
                                                          52.6       63.6       56.7

         Operating loss                                   (3.7)     (12.7)      (3.3)

         Interest and other income, net                     .1         .9         .7
                                                         -----      -----      -----
         Loss before income taxes                         (3.6)     (11.8)      (2.6)

         Provision for income taxes                         .4          -          -
                                                         -----      -----      -----

         Net loss                                         (4.0)%    (11.8)%     (2.6)%
                                                         =====      =====      =====  
</TABLE>

The Company sells its products to hospitals, outpatient surgery centers, pay
per use providers and individual physicians in the United States, Europe, the
Middle East and the Pacific Rim.  The Company's sales in the U.S. are through
its own direct sales force.  The Company's export sales, which are generated by
its wholly and majority owned subsidiaries in the United Kingdom and France and
by independent distributors in the rest of the world, are denominated in the
local currencies of the United Kingdom and France, and in U.S. dollars in the
rest of the world.

During August 1996, the Company acquired Heraeus Surgical, Inc. ("HSI") from
Heraeus Med, GmbH.  Heraeus Med received approximately 4.6 million shares of
newly issued Laserscope common stock and $2.0 million in cash in exchange





                                      -13-
<PAGE>   14
for all of the outstanding shares of HSI and certain assets and liabilities of
Heraeus Med's German laser distribution organization.

1996 RESULTS COMPARED TO 1995

During 1996 the Company's revenues increased 42% from 1995. This increase was
primarily the result of higher capital equipment revenues and revenues from
sales of products and services acquired in the HSI acquisition, which accounted
for approximately $5.7 million and $1.3 million, respectively.

During 1996, the Company's revenues from the sales of capital equipment
increased 123% and represented 52% of total net revenues compared to 33% of
total net revenues in 1995.  This was due to a combination of higher unit
shipments of lasers with a shift in mix to those having lower average selling
prices than those sold in 1995.  The higher unit sales were principally of the
Company's Aura office laser system which has a lower average selling price than
those of the Company's hospital-based systems. In addition, approximately $4.6
million of the increase was from sales of capital equipment products acquired
in the HSI acquisition.  The Company believes that the continuing trend toward
reduced health care costs in the United States is still a factor which
continues to impact negatively laser procurement by its hospital customers in
the United States.  As a result, the Company expects that its revenue mix
trends in the U.S. market will continue to shift toward lower priced office
lasers.

The Company's net revenues in 1996 were negatively impacted by lower shipments
of its disposable supplies and instrumentation which were 3% lower in 1996 than
in 1995. Revenues from sales of these products represented approximately 34% of
total revenues in 1996 compared to approximately 50% in 1995.  The Company
believes that the decline in proportion of total net revenues is primarily
attributable to increased shipments of its Aura laser systems and increased
shipments of lasers internationally while the reduction in absolute dollar
revenues was due primarily to lower shipments of its side-firing devices due to
fewer laser prostate surgeries being performed during this period than in 1995,
partially offset by increased shipments of scanning devices sold as accessories
to the Aura office laser system.  The Company expects that revenues from the
sales of instrumentation and disposable supplies will depend on the Company's
ability to increase its installed base of systems and to promote and develop
surgical procedures which use its laser systems, instrumentation and disposable
supplies.

The Company's net service revenues during 1996 were 16% higher than in 1995.
These revenues represented 14% of total net revenues in 1996 compared to 17% of
total net revenues in 1995.  The increase in absolute dollars reflects higher
international service revenues in addition to incremental revenues resulting
from the acquisition of HSI.  The decrease in proportion of total net revenues
is principally due to the increased capital equipment shipments in 1996.

The Company believes that continued acceptance of lasers in aesthetic surgery,
dermatology, urology and ear, nose and throat surgery, is important to its
business. In addition, the adoption of photodynamic therapy by medical
practitioners also will be important.  The Company continues to invest in the
development of new instrumentation for emerging surgical applications and to
educate surgeons in the U.S. and internationally to encourage the adoption of
such new applications.  Through the acquisition of HSI, the Company has
expanded its product offering to include non-laser operating room equipment.
The acceptance of this equipment by hospitals will be critical to the success
of this product line.  Finally, penetration of the international market,
although increasing, has been limited and the Company continues to view
expansion of international sales as important to the Company's success.
International revenues accounted for approximately 26%, and 23% of total
revenues in 1996 and 1995, respectively.

The Company's product gross margin as a percentage of net revenues in 1996 was
51%, compared to 54% in 1995.  The reduction is due principally to a product
mix shift from higher margin disposable supplies to lower margin capital
equipment. In addition, a higher proportion of the Company's revenues in 1996
came from sales to independent, international distributors than in 1995.  These
revenues generally generate lower gross margins than sales through its direct
sales force.  Finally, the Company acts as a distributor for certain product
lines. Revenues from sales of these products generally generate lower gross
margins than products manufactured by the Company.  The Company expects that
product gross margin as a percentage of sales may vary from quarter to quarter
during 1997 as it continues to balance production volumes and inventory levels
with product demand, and as product and distribution mix varies.





                                      -14-
<PAGE>   15
Gross margin from service activities as a percentage of net service revenues
was 34% in 1996, compared to 37% in 1995.  The decline reflects further price
erosion due to restructuring of the Company's contract programs in response to
competitive pressures and reduced customer acceptance of service contracts. The
Company expects that gross margin from service activities as a percentage of
net revenues will continue to be influenced by these factors and will remain at
or below 1996 levels for at least the next several quarters.

Research and development expenses are the result of activities related to the
development of new laser, instrumentation and disposable products and the
enhancement of the Company's existing products.  In 1996, amounts spent on
research and development decreased 33% from amounts spent in 1995 due
principally to lower expenses incurred in the development of the Company's Aura
laser system.  During 1995, the Company deployed significant resources to bring
its Aura laser system to market in approximately nine months.  As a percentage
of revenues, research and development spending was 6% in 1996 compared to 13%
in 1995.  The Company expects to increase amounts spent in research and
development during 1997.  However, as a percentage of net revenues, the Company
expects these amounts to vary from quarter to quarter as net revenues change.

Selling, general and administrative expenses as a percentage of net revenues
were 39% in 1996 compared to 51% in 1995.  In absolute dollars, these expenses
increased $1.4 million during 1996.  The decrease as a percentage of net
revenues is due to higher net revenues in 1996 than in 1995.  The increase in
absolute dollars is primarily due to higher expenses resulting from personnel
which joined the Company from HSI after the acquisition.  As a percentage of
revenues, selling, general and administrative expenses are expected to remain
at similarly high levels during 1997 as the Company continues to invest in
international expansion, marketing programs and educational support.

During the quarter ended September 30, 1996, the Company recorded non-recurring
charges directly attributable to the acquisition of HSI consisting of a $2.4
million charge to write off purchased in-process research and development which
arose from the acquisition and of $0.9 million in charges to write off certain
inventory and fixed assets which became redundant as a result of the
acquisition of HSI.

During 1996 the Company recorded a $152,000 income tax provision due to the
non-deductible charge for in-process research and development offset by the
benefit of net operating loss carryforwards.  In 1995 the Company recorded no
income tax provision due to the net loss incurred during the period.

1995 RESULTS COMPARED TO 1994

During 1995, the Company's revenues decreased 17% from 1994 which is the
combined result of lower product and service revenues.  During 1995, the
Company's revenues from the sales of capital equipment declined 19% due to
lower unit shipments of lasers and lower average selling prices than in 1994.

The Company's net revenues from the sales of products during the year ended
December 31, 1995 were also affected negatively by lower shipments of its
disposable supplies and instrumentation which were 18% lower in 1995 than in
1994.  The Company believes that this was due primarily to lower shipments of
its side-firing devices due to fewer laser prostate surgeries being performed
during this period than in 1994.  This was caused principally by increased drug
treatment for those patients with mild to moderate prostate disorders as well
as adoption of alternative electrosurgical techniques to perform prostate
surgeries.

The Company's net service revenues during the year ended December 31, 1995 were
9% lower than in the year ended December 31, 1994.  The decline reflected price
erosion due to restructuring of the Company's contract programs in response to
competitive pressures and reduced customer acceptance of service contracts.

Revenues from sales of instrumentation and disposable supplies represented
approximately 50% of total revenues in each of the years ended December 31,
1995 and 1994. Revenues from sales of service represented approximately 17% of
total revenues in 1995 and 16% of total revenues in 1994.

International revenues accounted for approximately 23%  and 17% of total
revenues in 1995 and 1994, respectively.





                                      -15-
<PAGE>   16
The Company's product gross margin as a percentage of net revenues was 54% and
55% in 1995 and 1994, respectively.  During 1995, a 19% reduction in its
product revenues caused further reductions in production volumes and greater
unfavorable manufacturing variances and a reduction in product gross margin as
a percentage of net revenues.

Gross margin from service activities as a percentage of net revenues was 37% in
1995, and 43% in 1994.  The declines reflect price erosion due to restructuring
of the Company's contract programs in response to competitive pressures and
reduced customer acceptance of service contracts.

In 1995, amounts spent on research and development increased 7% from 1994 due
principally to expenses incurred in the development of the Company's Aura laser
system. As a percentage of revenues, research and development spending was 13%
in 1995 and 10% in 1994.

Selling, general and administrative expenses as a percentage of net revenues
were 51% in 1995 and 47% in 1994.  In absolute dollars, these expenses
decreased $1.6 million during 1995.  These decreases are the result of expense
control measures originally taken by the Company in 1992 which continued
through 1995.

During 1995 and 1994 the Company recorded no income tax provision due to its
net losses during these periods.

FINANCIAL REVIEW - LIQUIDITY AND CAPITAL RESOURCES

Total assets and liabilities as of December 31, 1996 were $44.5 million and
$17.3 million respectively, compared to assets and liabilities of $23.6 million
and $6.2 million at December 31, 1995.  Working capital increased $5.8 million
from $12.6 million at December 31, 1995 to $18.4 million at December 31, 1996
while cash and cash equivalents increased $1.6 million from $2.3 million at
December 31, 1995 to $3.9 million at December 31, 1996.  The increase to
working capital was primarily the result of the HSI acquisition which, net of
cash paid to Heraeus Med and transaction expenses incurred, added approximately
$3.8 million to working capital.  The net increase in cash and cash equivalents
was primarily due to cash provided by operating activities of $3.3 million.
Significant components of cash provided by operating activities included a net
loss of $1.7 million offset by non cash charges for depreciation and purchased
in-process research and development of $1.2 million and $2.4 million,
respectively.  Additionally a $1.1 million reduction of the Company's inventory
(without giving effect to the inventory acquired in the acquisition of HSI),
and a $2.9 million increase in accounts payable partially offset by a $2.6
million increase in accounts receivable contributed materially to cash provided
by operating activities.  The cash provided by operating activities was
partially offset by $1.7 million used in the acquisition of HSI (net of cash
received).

The Company anticipates that future changes in cash and working capital will be
dependent on a number of factors.  As a result of the acquisition of HSI, the
Company's Balance Sheet liquidity ratios changed and the Company's ability to
generate cash will be partially dependent on management's ability to manage
effectively non-cash assets such as inventory and accounts receivable.  In
addition, the level of profitability of the Company, as well as expenditures
relating to the HSI acquisition will have a significant impact on cash
resources.  At December 31, 1996, the Company had commitments for capital
expenditures relating to facility improvements of approximately $0.8 million
and other accrued liabilities relating to the HSI acquisition of approximately
$0.4 million.

The Company has in place a $5.0 million revolving bank line of credit which
expires in November 1997 and under which $1.6 million in borrowings were
outstanding at March 17, 1997.

From time to time, the Company may also consider the acquisition of, or
evaluate investments in, certain products and businesses complementary to the
Company's business.  Any such acquisition or investment may require additional
capital resources. The Company financed the HSI acquisition using its existing
cash resources and anticipates that, while its remaining cash resources will be
sufficient to fund its short term operating needs, additional financing either
through its bank line of credit or otherwise will be required for the Company's
currently envisioned long term needs.

The Company anticipates that current cash resources, internally generated
funds, capital and operating lease lines and available bank borrowings will be
sufficient to meet liquidity and capital needs at least through 1997.





                                      -16-
<PAGE>   17
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated  financial  statements  of  Laserscope  at  December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996, the
report of independent auditors thereon and Supplementary Data are included as
separate sections in this Annual Report on form 10-K in Item 6 "Selected
Financial Data" and Item 14, "Exhibits, Financial Statement Schedules and
reports on Form 8-K."

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

         Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


Information with respect to executive officers of Laserscope is set forth in
"Item 1 - Business - Executive Officers of the Company" in this Annual Report
on Form 10-K.  Executive officers of the Company do not serve for set terms,
but serve at the pleasure of the Board of Directors subject to Management
Continuity Agreements.  See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
WITH MANAGEMENT AND OTHERS."  Members of the Company's Board of Directors serve
until the next annual meeting of the Company's shareholders following their
election to the Board or until his or her successor has been elected and
qualified.

The names of the Company's directors, and certain information about them as of
December 31, 1996, are set forth below:


<TABLE>
<CAPTION>
NAME                               AGE         POSITION
----                               ---         --------
<S>                                <C>         <C>
Benjamin L. Holmes                 62          Chairman of the Board and Director
David Cohen                        44          Director
Klaus Goffloo                      50          Director
Thomas Ihlenfeldt                  49          Director
E. Walter Lange                    64          Director
Robert V. McCormick                52          President, Chief Executive Officer and Director
Rodney Perkins, M.D.               60          Director
Robert J. Pressley, Ph.D.          64          Director
</TABLE>


         Benjamin L. Holmes has been a Director of the Company since January
1992 and was appointed Chairman of the Board of Directors in June 1995.  Mr.
Holmes was General Manager of the Medical Products Group of Hewlett-Packard
Company ("HP") from 1983 to 1985, and a Vice President of HP, from 1985 until
his retirement in December 1994.  Mr. Holmes is a member of the Board of
Directors of Project HOPE and the Massachusetts High Technology Council. He is
also a member of the Massachusetts Governor's Council on Economic Growth and
Technology, and a member of the Board on Health Care Service, Institute of
Medicine, National Academy of Sciences.  He is a member of the Board of
Visitors of the UCLA and Boston University Medical Schools.  He was also
Chairman of the Board of Directors of the Health Industry Manufacturers
Association (HIMA).

         David Cohen has served as a Director of the Company since August 31,
1996.  Mr. Cohen has been an attorney practicing law with the firm of Cohen &
Ostler, A Professional Corporation, for more than five years.  Mr. Cohen's firm
served as counsel to Heraeus Med and HSI in connection with the Company's
acquisition of HSI.

         Klaus Goffloo has served as a Director of the Company since August 30,
1996.  He served as general manager of the Electrical Heating and Air
Conditioning group of Siemens AG from 1986 until 1992 and since that time has
served as Chairman of Heraeus Med and as a member of the Board of Directors of
Hereaus Holding Company.





                                      -17-
<PAGE>   18
         Thomas Ihlenfeldt has served as a Director of the Company since August
30, 1996.  He joined the Heraeus group of companies in 1984 and has served in
various positions.  Since mid-1995 Mr. Ihlenfeldt has served as Managing
Director of Heraeus Med.  From 1990 through 1995 Mr.  Ihlenfeldt served as
President and Chief Executive Officer of HSI, formerly Heraeus LaserSonics.

         Robert V. McCormick has been President of the Company since December
1991 and Chief Executive Officer since July 1992.  Between December 1991 and
July 1992 he also served as the Company's Chief Operating Officer.  He has been
a Director of the Company since July 1992.  Mr. McCormick also served as the
Company's Senior Vice President of Marketing and Field Operations from April
1991 to December 1991.  Mr.  McCormick was employed by Acuson Corporation, a
manufacturer of medical imaging equipment, from 1983 to April 1991 in a variety
of sales and marketing executive positions culminating as Vice President of
Marketing and Field Operations.  Mr. McCormick is also a director of NovaCept
(formerly AcuVasive and prior to that, EnVision Surgical Systems), a
manufacturer of microvisualization catheter products and private, development
stage medical device company.

         E. Walter Lange has been a Director of the Company since January 1992.
Mr. Lange has more than 31 years of experience in the pharmaceutical industry,
having served in a variety of executive positions at Eli Lilly & Co. from 1960
to 1991. Most recently, Mr. Lange was Group Vice President of Marketing,
Planning and Development and was responsible for Eli Lilly's worldwide product
planning, corporate strategic planning, business development and market
research.

         Rodney Perkins, M.D. is a co-founder of the Company and has been a
Director since its founding. Dr. Perkins also served as Chairman of the Board
of Directors from its founding until June 1995 and Chief Executive Officer from
February to May 1987, and from October 1991 to July 1992.  He also served as
the President of the Company from October to December 1991.  Dr. Perkins, a
specialist in otologic surgery, is President of the California Ear Institute at
Stanford and has been in private practice since 1968.  He is a Clinical
Associate Professor of Surgery at Stanford University School of Medicine, and
is the founder and President of Project HEAR a non-profit medical institute for
ear research and education. Dr. Perkins is a founder of Collagen Corporation, a
biomaterials company, and a member of its Board of Directors.  Dr.  Perkins is
also a founder and the Chairman of the Board of Directors of ReSound
Corporation, a hearing health care company.  He also serves on the board of
directors of NovaCept.

         Robert J. Pressley, Ph.D. is a co-founder of the Company and has been
a Director since its founding.  Dr. Pressley founded Silicon Video Corporation,
a developer of electronic products, and served as its President and Chief
Executive Officer from January 1991 to January 1994.  Dr. Pressley also founded
XMR, Inc., a manufacturer of eximer lasers and laser systems, and served as its
Chief Executive Officer from March 1979 until March 1990.





                                      -18-
<PAGE>   19
ITEM 11.  EXECUTIVE COMPENSATION


                       COMPENSATION OF EXECUTIVE OFFICERS
                           SUMMARY COMPENSATION TABLE

         The following table shows the compensation received by the Company's
Chief Executive Officer, the five other most highly compensated executive
officers of the Company for 1996 who were serving as executive officers at
December 31, 1996, and the compensation received by each such individual for
the Company's two prior years.

<TABLE>
<CAPTION>
                                                                                             
                                                                                        LONG-TERM
                                                                                       COMPENSATION
                                                                                          AWARDS
                                                                                       ------------
                                                          ANNUAL COMPENSATION          OPTION/SARS                 
                                                          --------------------           (SHARES)       ALL OTHER
      NAME AND PRINCIPAL POSITION         YEAR        SALARY(1)        BONUS(2)(3)        (4)(5)      COMPENSATION(6)
      ---------------------------         ----        ---------        -----------        ------      ---------------
<S>                                       <C>         <C>               <C>              <C>             <C>
Robert V. McCormick                       1996        $263,455          $129,486          40,000          $15,706
  President and Chief Executive Officer   1995        $248,060                --         165,000          $18,186
                                          1994        $236,250                --              --          $15,430

Thomas B. Boyd                            1996        $171,350          $ 51,749          40,000          $13,232
  Senior Vice President of Operations     1995        $168,324(7)             --          45,000          $13,219
  and International                       1994        $183,428(8)       $ 20,000          65,000          $ 9,111

Roy Fiebiger                              1996        $158,292          $ 47,888          40,000          $10,199
  Senior Vice President of Marketing,     1995        $ 48,557(9)       $ 10,000          65,000          $ 1,869
  Sales and Service                       1994            --                  --              --               --

Bonnie Jones                              1996        $122,491          $ 36,993          40,000          $10,819
  Vice President of Human Resources(10)   1995        $107,330                --          35,000          $ 6,252
                                          1994        $ 99,750                --          15,000          $ 4,552

Dennis LaLumandiere                       1996        $124,426          $ 37,580          40,000          $ 9,543
  Vice President of Finance, Chief        1995        $119,690                --          40,000          $ 3,279
  Financial Officer and Assistant         1994        $103,500                --          15,000          $ 1,548
  Secretary

Eric M. Reuter                            1996        $104,114(11)      $ 10,519          50,000          $ 2,462
  Vice President of Research and          1995              --                --              --               --
  Development(11)                         1994              --                --              --               --
</TABLE>
________________

(1) Includes amounts deferred under the Company's 401(k) plan.

(2) Includes bonuses earned in the indicated fiscal year and paid in the
    subsequent fiscal year. Excludes bonuses paid in the indicated fiscal year
    but earned in the preceding fiscal year.

(3) Executive officers are entitled to discretionary bonuses based on
    individual and corporate performance.  These bonuses are determined by the
    Board of Directors based on the recommendation of the Human Resources
    Committee

(4) The options listed with respect to 1995 long-term compensation awards
    include options granted upon the repricing of previously granted options.
    Options to purchase the following number of shares granted to the
    following persons in 1995 were canceled as a result of their repricing on
    November 30, 1995: Mr. McCormick -- 97,500: Mr.





                                      -19-
<PAGE>   20
     LaLumandiere -- 12,188.  Such canceled options have not been included with
     respect to 1995 long-term compensation award.  The repriced options
     retain the same term and vesting schedule as those options which were
     replaced.

 (5) All options granted in 1994, 1995 and 1996 to new employees and officers
     of the Company have 5-year terms and become exercisable cumulatively at
     the rate of 12.5% of the total six months after the vesting commencement
     date (first date of employment for new employees and date of grant for
     officers), and 1/48 of the shares subject to the option in equal monthly
     installments thereafter.  Generally options granted in 1994, 1995 and 1996 
     to existing employees also have 5-year terms but become exerciseable
     cumulatively at the rate of 1/48 of the shares subject to the option in
     equal monthly installments following their respective grant date.  All
     unvested options are subject to termination upon the termination of the
     participant's relationship with the Company.  All options were granted at
     market value on the date of grant.  In the event that certain change in
     control events were to occur, the options would be assumed or equivalent
     options substituted by a successor corporation, unless the Board of
     Directors determined that the options should become immediately
     exercisable.  The exercise price may be paid, subject to certain
     conditions, by delivery of already owned shares or with the proceeds from
     the sale of the option shares.  In addition, the Management Continuity
     Agreements entered into between the Company and each of its executive
     officers may affect the vesting and manner of exercise of options granted
     by the Company to these individuals. See "Transactions with Management and
     Others."

 (6) Consists of the Company's contributions to its 401(k) benefit plan and
     certain other employee benefits, including payment of disability and group
     term life insurance premiums and a car allowance.

 (7) Includes $8,331 paid to Mr. Boyd in connection with the relocation of his
     principal residence to the San Jose metropolitan area.

 (8) Includes salary paid to Mr. Boyd during the period beginning on the
     commencement of his employment on April 18, 1994 and ending on December
     31, 1994 and $79,578 paid to Mr. Boyd in connection with the relocation of
     his principal residence to the San Jose metropolitan area.

 (9) Includes salary paid to Mr. Fiebiger during the period beginning on the
     commencement of his employment on August 28, 1995 and ending on December
     31, 1995.

(10) Ms. Jones resigned as an officer of the Company effective January 1997.

(11) Includes salary paid to Mr. Reuter during the period beginning on the
     commencement of his employment on August 22, 1996 and ending on December
     31, 1996 and $70,614 paid to Mr. Reuter in connection with the relocation
     of his principal residence to the San Jose metropolitan area.





                                      -20-
<PAGE>   21
                          STOCK OPTION GRANTS IN 1996

The following table sets forth information for the named executive officers
with respect to grants of options to purchase Common Stock of the Company made
in 1996 and the value of all options held by such executive officers on
December 31, 1996.
<TABLE>
<CAPTION>
                                                                                               POTENTIAL
                                      INDIVIDUAL GRANTS                                        REALIZED
                                      -----------------                                    VALUE AT ASSUMED
                                              % OF TOTAL                                   ANNUAL RATES OF       
                                               OPTIONS                                          STOCK
                                                GRANTED TO                                PRICE APPRECIATION
                                     OPTIONS    EMPLOYEES    EXERCISE OR                         FOR
                                     GRANTED    IN FISCAL    BASE PRICE    EXPIRATION      OPTION TERM(3)
NAME                               (SHARES)(1)   YEAR(2)     (PER SHARE)       DATE         5%         10%  
----                               -----------  ----------   -----------   -----------   --------   --------
<S>                                 <C>            <C>          <C>          <C>         <C>        <C>
Robert V. McCormick . . . . .       40,000(4)      6.2%         $3.48        4/04/01     $38,500    $ 85,100
Thomas B. Boyd  . . . . . . .       40,000(4)      6.2%         $3.48        4/04/01     $38,500    $ 85,100
Roy Fiebiger  . . . . . . . .       40,000(4)      6.2%         $3.48        4/04/01     $38,500    $ 85,100
Bonnie Jones(6) . . . . . . .       40,000(4)      6.2%         $3.48        4/04/01     $38,500    $ 85,100
Dennis LaLumandiere . . . . .       40,000(4)      6.2%         $3.48        4/04/01     $38,500    $ 85,100
Eric M. Reuter  . . . . . . .       50,000(5)      7.8%         $4.63        8/29/01     $63,900    $141,200
---------------------                                                                                                         
</TABLE>
(1)  For a description of the material terms of the options, see footnote 5 of
     the Summary Compensation Table.

(2)  The Company granted options to employees for an aggregate of 641,225
     shares of Common Stock during 1996.

(3)  Gains are reported net of the option exercise price but before taxes
     associated with exercise.  These amounts represent certain assumed rates
     of appreciation only.  Actual gains, if any, on stock option exercises are
     dependent on future performance of the Company's Common Stock, as well as
     the optionee's continued employment through the vesting period.

(4)  Options listed were granted on April 4, 1996.

(5)  Options listed were granted on August 29, 1996.

(6)  Ms. Jones resigned as an officer of the Company effective January 1997.





                                      -21-
<PAGE>   22
                      AGGREGATED OPTION EXERCISES IN 1996
                           AND YEAR-END OPTION VALUES

         The following table sets forth information for the named executive
officers with respect to exercises in 1996 of options to purchase Common Stock
of the Company.
<TABLE>
<CAPTION>
                                                                    
                                                                NUMBER OF
                                                               UNEXERCISED          VALUE OF UNEXERCISED
                                                           OPTIONS AT 12/31/96:     IN-THE-MONEY OPTIONS
                                    SHARES                 --------------------        AT 12/31/96:
                                   ACQUIRED                                         --------------------
                                      ON        VALUE         (EXERCISABLE/           (EXERCISABLE/
NAME                               EXERCISE    REALIZED     UNEXERCISABLE)(1)         UNEXERCISABLE)   
----                               --------    --------     -----------------       -------------------
<S>                                  <C>         <C>        <C>                     <C>
Robert V. McCormick . . . .          --          --         340,729 / 154,271       $448,500 / $528,400
Thomas B. Boyd  . . . . . .          --          --          61,144 /  88,856       $ 87,200 / $241,500
Roy Fiebiger  . . . . . . .          --          --          19,899 /  85,101       $ 75,800 / $311,100
Bonnie Jones(2) . . . . . .          --          --          75,639 /  71,361       $101,100 / $212,100
Dennis LaLumandiere . . . .          --          --          54,541 /  68,959       $ 93,900 / $210,800
Eric M. Reuter  . . . . . .          --          --              -- /  50,000             -- / $ 81,300
</TABLE>

___________

(1)      Based on the closing price of the Company's Common Stock as reported
         on the NASDAQ National Market System on December 31, 1996 of $6.25 per
         share.
(2)      Ms. Jones resigned as an officer of the Company effective January
         1997.


            SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

On April 9, 1997, Eric Reuter, an officer of the Company, amended his Form 3
filed on August 30, 1996 to reflect ownership of 200 shares of Company Common
Stock and an option to acquire 50,000 shares of Company Common Stock.

         HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

There are currently no employee directors serving on the Human Resources
Committee of the Board of Directors.  The following non-employee directors
serve on the Company's Human Resources Committee:  Rodney Perkins, M.D., Robert
J. Pressley, Ph.D., David Cohen.

Dr. Perkins purchased an aggregate of 16,667 shares of the Company's Common
Stock in September 1989 under the Company's 1984 Stock Purchase Plan at an
aggregate price of $75,002.  Dr. Perkins purchased such shares through
promissory notes in favor of the Company bearing interest at the annual rate 9%
and secured by the shares purchased.  During 1995 the principal and accrued
interest on these notes were refinanced and the notes now carry annual interest
rates of 5.79%.  At December 31, 1996, Dr. Perkins owed an aggregate of
$136,067 under such notes, the largest amount of indebtedness owed by him to
the Company at any time during 1996.

Dr. Perkins is also Chairman of the Board of Directors and a member of the
Board of Directors' Human Resources Committee of ReSound Corporation, a
publicly traded hearing health care company.  The Company and ReSound
Corporation have not conducted any business with each other in the past and the
Company does not presently anticipate doing so in the future.





                                      -22-
<PAGE>   23
Dr. Perkins was also a founding shareholder of AcuVasive (formerly Envision
Surgical Systems), a manufacturer of microvisualization catheter products
("AcuVasive").  The Company has a commercial relationship with AcuVasive, Mr.
McCormick is a member of its Board of Directors and Dr.  Perkins and the
Company are each holders of AcuVasive's capital stock.  See "Transactions with
Management and Others."

Dr. Pressley purchased an aggregate of 16,667 shares of the Company's Common
Stock in September 1989 under the Company's 1984 Stock Purchase Plan at an
aggregate price of $75,002.  Dr. Pressley purchased such shares through
promissory notes in favor of the Company bearing interest at the annual rate 9%
and secured by the shares purchased.  During 1995 the principal and accrued
interest on these notes were refinanced and the notes now carry annual interest
rates of 5.79%.  At December 31, 1996, Dr. Pressley owed an aggregate of
$136,353 under such notes, the largest amount of indebtedness owed by him to
the Company at any time.

Mr. Cohen's firm served as counsel to Heraeus Med and HSI in connection with
the Company's acquisition of HSI (the "HSI Acquisition").  In accordance with
the Company's acquisition agreement ("Heraeus Agreement") dated April 23, 1996
with Heraeus Med pursuant to which the Company acquired HSI, the Company
appointed three designees of Heraeus Med (the "Heraeus Directors") to the
Company's Board of Directors.  The Heraeus Agreement requires the Company to
use its best efforts to have three nominees of Heraeus Med elected to the Board
of Directors for so long as Heraeus Med owns at least 3.3 million shares of
Company Common Stock, two nominees of Heraeus Med elected to the Board for so
long as Heraeus Med owns at least 1.6 million shares of Company Common Stock
and one nominee of Heraeus Med elected to the Board for so long as Heraeus Med
owns at least 600,000 shares of Company Common Stock.  Messrs. Cohen, Goffloo
and Ihlenfeldt are the initial Heraeus Directors and were appointed to the
Company's Board of Directors on August 30, 1996.  Under the Heraeus Agreement,
the Company and Heraeus Med have certain continuing obligations to each other.
These obligations include: reciprocal indemnification obligations in connection
with the HSI Acquisition; Heraeus Med's obligation not to develop, manufacture,
service or sell hospital or physician office-based laser surgical systems or
accessories prior to August 30, 2003; and the Company's obligation not to
develop, manufacture, service or sell products outside the United States based
on the mounting device technology licensed to the Company prior to August 30,
2006.  In addition, the Company is obligated to register the Common Stock
issued to Heraeus Med (the "Heraeus Shares") as partial consideration for HSI.
The Company has also agreed to pay all registration, qualification and filing
fees, printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses and the expense of any special audits
incident to or required by any registration in connection with any such
registration.  The Company and Heraeus Med have agreed to customary reciprocal
indemnification obligations in connection with any such registration.

The Company has entered into a supply relationship with Heraeus Med pursuant to
which Hereaus Med has agreed to supply the Company certain products for resale
and for use in the Company's production process.  During 1996, the Company
purchased approximately $937,000 of such  products pursuant to the Hereaus 
Med supply arrangement.

                           COMPENSATION OF DIRECTORS

Non-employee members of the Board of Directors (other than the Heraeus
Directors) receive a retainer of $2,000 per quarter and $500 per meeting of the
Board of Directors attended.  In addition, non-employee members (other than the
Heraeus Directors) of the Board of Directors receive options to purchase shares
of the Company's Common Stock pursuant to its 1990 Directors' Stock Option Plan
(the "1990 Directors' Option Plan") and 1995 Directors' Stock Option Plan (the
"1995 Directors' Option Plan").  Pursuant to the Heraeus Agreement, the Company
appointed three designees of Heraeus Med to the Company's Board of Directors.
For so long as Heraeus Med owns at least 3.3 million shares of Company Common
Stock, the Company has agreed to use its best efforts to have three nominees of
Heraeus Med elected to the Company's Board of Directors; for so long as Heraeus
Med owns at least 1.6 million shares of Company Common Stock, the Company has
agreed to use its best efforts to have at least two nominees of Heraeus Med
elected to the Company's Board of Directors; and for so long as Heraeus Med
owns at least 600,000 shares of Common Stock, the Company has agreed to use its
best efforts to have one nominee of Heraeus Med elected to the Board.  Pursuant
to the Heraeus Agreement, the Company has agreed to reimburse Heraeus Med for
the reasonable expenses of the Heraeus Directors in attending board meetings
and fulfilling their duties as directors, up to a maximum of $25,000 per year.

The 1990 Directors' Option Plan, which has been terminated by the Board of
Directors with respect to the grant of any future options, provided for the
grant of nonstatutory options to nonemployee directors of the Company at an
exercise price not less than the fair market value of the Company's Common
Stock on the date of grant.  Under the 1990 Directors' Option Plan, persons who
were non-employee directors as of October 18, 1991, as well as persons who have
joined the Board since that date through election by the shareholders of the
Company or appointment by the Board of Directors to fill a vacancy, have been
granted an option to purchase





                                      -23-
<PAGE>   24
45,000 shares of the Company's Common Stock.  Options issued pursuant to this
plan vest and become exercisable over three years with respect to each optionee
who remains a director and expire five years after the date of grant.

The 1995 Directors' Option Plan was approved by the Board of Directors in
November 1995 and also provides for the grant of nonstatutory options to
non-employee directors of the Company at an exercise price not less than the
fair market value of the Company's Common Stock on the date of grant.  Under
the 1995 Directors' Option Plan, persons who were non-employee directors as of
November 30, 1995, as well as persons who have joined the Board since that date
through election by the shareholders of the Company or appointment by the Board
of Directors to fill a vacancy, have been granted an option to purchase 45,000
shares of the Company's Common Stock.  Options issued pursuant to this plan
vest and become exercisable over three years with respect to each optionee who
remains a director and expire five years after the date of grant.  Directors
who are designated or nominated by shareholders who hold 10% or more of the
outstanding Company Common Stock, including the Heraeus Directors, are not
eligible to receive options under the 1995 Directors' Option Plan.

Directors who are employees of the Company do not receive any additional
compensation for their services as a director.





                                      -24-
<PAGE>   25
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


The following table sets forth the beneficial ownership of the Company's Common
Stock as of March 31, 1997 as to (i) each person who is known by the Company to
own beneficially more than five percent of the Company's Common Stock, (ii)
each of the Company's directors, (iii) each of the executive officers named in
the Summary Compensation Table beginning on page 19, and (iv) all directors and
executive officers as a group.

<TABLE>
<CAPTION>
                                                             SHARES BENEFICIALLY OWNED(1)
                                                             ----------------------------
                                                             NUMBER(2)    PERCENT OF TOTAL
                                                             ---------    ----------------
<S>                                                          <C>               <C>
Heraeus Med GmbH(3) . . . . . . . . . . . . . . . . . .      4,609,345         37.9%
Thomas B. Boyd  . . . . . . . . . . . . . . . . . . . .         80,358           *
David Cohen(5). . . . . . . . . . . . . . . . . . . . .              0           *
Roy Fiebiger  . . . . . . . . . . . . . . . . . . . . .         28,486           *
Klaus Goffloo(5). . . . . . . . . . . . . . . . . . . .              0           *
Benjamin L. Holmes  . . . . . . . . . . . . . . . . . .         44,583           *
Thomas Ihlenfeldt(5)  . . . . . . . . . . . . . . . . .              0           *
Bonnie Jones(4) . . . . . . . . . . . . . . . . . . . .         86,959           *
Dennis LaLumandiere . . . . . . . . . . . . . . . . . .         61,266           *
E. Walter Lange . . . . . . . . . . . . . . . . . . . .         26,250           *
Robert V. McCormick . . . . . . . . . . . . . . . . . .        331,832          2.7%
Rodney Perkins, M.D.  . . . . . . . . . . . . . . . . .        147,717          1.2%
Robert J. Pressley, Ph.D.   . . . . . . . . . . . . . .         42,266           *
Eric M. Reuter. . . . . . . . . . . . . . . . . . . . .          8,033           *
All directors and executive officers as a group
  (13 persons)(3),(5) . . . . . . . . . . . . . . . . .      5,467,095         42.7%
</TABLE>

------------------
*    Less than 1%.

1.   The persons named in this table have sole voting and investment power with
     respect to all shares of Common Stock shown as beneficially owned by them,
     subject to community property laws where applicable and the information
     contained in the other footnotes to this table.

2.   Includes with respect to each named person the following shares subject to
     options exercisable within 60 days of March 31, 1997:  Mr. Boyd -- 76,378;
     Mr. Fiebiger  -- 27,236; Mr. Holmes -- 42,083; Ms. Jones -- 79,332; Mr.
     LaLumandiere -- 57,290; Mr. Lange -- 21,250; Mr.  McCormick -- 226,874;
     Dr. Perkins -- 81,250 Dr. Pressley -- 21,250; Mr. Reuter -- 7,833.

3.   Does not include up to 500,000 shares of Laserscope common stock which
     Laserscope may issue to Heraeus Med, GmbH in certain circumstances in
     connection with its indemnification obligations to Heraeus Med in
     connection with Laserscope's acquisition of Heraeus Surgical, Inc.

4.   Ms. Jones resigned as an officer of the Company effective January 1997.

5.   Messrs. Cohen, Goffloo and Ihlenfeldt are affiliated with Heraeus Med and
     may be deemed to exercise beneficial ownership of the shares of Laserscope
     Common Stock owned by Heraeus Med. Messrs. Cohen, Goffloo and Ihlenfeldt
     disclaim beneficial ownership of the shares of Laserscope Common Stock held
     by Heraeus Med.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                    TRANSACTIONS WITH MANAGEMENT AND OTHERS

In March 1994, the Company entered into Management Continuity Agreements with
each of its executive officers, which were amended in December 1994. These
agreements provide (1) for continued employment or salary continuation at the
Company or its





                                      -25-
<PAGE>   26
successor for at least twelve (12) months following any Change in Control of
the Company (as defined below), at the same salary and with the same benefit
program as were in effect prior to such Change in Control, (2) that such
executives may, with thirty (30) days written prior notice, resign but will be
entitled to receive his or her current salary and level of benefits for the
remainder of the twelve (12) months following the Change in Control if, in
connection with such Change in Control the executive's duties or
responsibilities are materially reduced or executive is asked to relocate to a
facility or location more than 50 miles from the Company's current location,
(3) that all stock options exercisable for the Company's securities held by
such executives shall become immediately vested and shall be exercisable in
full in accordance with the provisions of the option agreement and plan
pursuant to which such option was granted, and (4) that upon the immediate
vesting of stock options, the optionee will have the right (subject to any
limitations imposed by Section 16 of the Securities Exchange Act of 1934 or
other applicable securities laws and only to the extent permitted by the terms
of the applicable option plan) to deliver a non-recourse promissory note
(secured only by the pledged shares for repayment), at the prime rate of
interest determined as of the date of the note, in payment of the exercise
price for the outstanding options. For purposes of the Management Continuity
Agreements, a Change in Control of the Company shall be deemed to have occurred
upon the happening of any of the following events: (1) any acquisition of
twenty percent (20%) or more of the Company's then outstanding voting
securities without the approval of the Board of Directors, (2) any merger or
consolidation in which the Company is not the surviving entity, (3) approval of
a plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets,
or (4) a change in the composition of the Board of Directors of the Company, as
a result of which fewer than a majority of the directors are incumbent
directors.

The Company has sold Common Stock to certain employees and directors and
accepted promissory notes secured by that stock as payment for certain of those
shares.  These notes originally carried annual interest rates of 9.0% to 9.5%.
During 1995 the principal and accrued interest on these notes were refinanced
and the notes now carry annual interest rates of 5.79%.

<TABLE>
<CAPTION>
                                                                 INDEBTEDNESS
                                                                TO THE COMPANY
                                   TOTAL SHARES    AGGREGATE        AS OF
                                     PURCHASED       PRICE      12/31/96 (1)(2)
                                     ---------     ---------    ---------------
PURCHASER
---------
<S>                                   <C>           <C>            <C>     
Rodney Perkins, M.D...............    16,667        $75,001        $136,067
Robert J. Pressley, Ph.D..........    16,666        $74,997        $136,353
</TABLE>

-----
(1)  In all cases, the amount shown was also the largest amount of indebtedness
     owed to the Company at any time during 1995.

(2)  Payment in the form of promissory notes in the above transactions was
     approved in each case by a majority of the disinterested directors of the
     Company and such sales were made pursuant to the Company's 1984 Stock
     Purchase Plan, which was approved by the shareholders of the Company.

During 1996 Mr. Holmes received $25,000 in compensation from the Company for
consulting services to the Company beyond his duties as Chairman of the Board
of Directors.

Non-employee members of the Company's Board of Directors receive cash
compensation and options to purchase shares of Common Stock in connection with
their service on the Board.

The Company has entered into indemnification agreements with each of its
directors and executive officers, which may require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers, to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' liability insurance if
available on reasonable terms.

The Company has entered into a supplier relationship with Heraeus Med pursuant
to which Hereaus Med has agreed to supply the Company certain products for
resale and for use in the Company's production process.  During 1996, the
Company purchased approximately $937,000 of such  products pursuant to the
Hereaus Med supply arrangement.





                                      -26-
<PAGE>   27
Under the Heraeus Agreement, the Company and Heraeus Med have certain
continuing obligations to each other. These obligations include: reciprocal
indemnification obligations in connection with the HSI Acquisition; Heraeus
Med's obligation not to develop, manufacture, service or sell hospital or
physician office-based laser surgical systems or accessories prior to August
30, 2003; the Company's obligation (subject to certain limitations described
below) to use its best efforts to have a specified number of Heraeus Med
designees elected to the Company's Board of Directors; and the Company's
obligation not to develop, manufacture, service or sell products outside the
United States based on the mounting device technology licensed to the Company
prior to August 30, 2006.  In addition, the Company is obligated to register
the Heraeus Shares issued to Heraeus Med as partial consideration for the
acquisition of HSI and has agreed to pay all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses and the expense of any special
audits incident to or required by any registration in connection with any such
registration.  The Company and Heraeus Med have agreed to customary reciprocal
indemnification obligations in connection with any such registration.

The Heraeus Agreement requires the Company to use its best efforts to have
three nominees of Heraeus Med elected to the Board of Directors for so long as
Heraeus Med owns at least 3.3 million shares of Company Common Stock, two
nominees of Heraeus Med elected to the Board for so long as Heraeus Med owns at
least 1.6 million shares of Company Common Stock and one nominee of Heraeus Med
elected to the Board for so long as Heraeus Med owns at least 600,000 shares of
Company Common Stock.  Messrs. Cohen, Goffloo and Ihlenfeldt are the initial
Heraeus Directors and were appointed to the Company's Board of Directors on
August 30, 1996.  Mr.  Goffloo is Chairman of Heraeus Med and is a member of
the Board of Directors of Hereaus Holding Company, Heraeus Med's parent
company.  Mr. Ihlenfeldt is Managing Director of Heraeus Med.  From 1990
through 1995 Mr. Ihlenfeldt served as President and Chief Executive Officer of
Heraeus Surgical, Inc.   Mr. Cohen's firm served as counsel to Heraeus Med and
HSI in connection with the Company's acquisition of HSI.





                                      -27-
<PAGE>   28
PART IV

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

(a)(1)  Financial Statements:

<TABLE>
<CAPTION>
                                                                     PAGE
                                                                     ----
        <S>                                                           <C>
        Report of Ernst & Young LLP,  Independent Auditors.           F-1

        Consolidated Balance Sheets at December 31, 1996 and 1995.    F-2
        

        Consolidated Statements of Operations
          - Years ended December 31, 1996, 1995 and 1994.             F-3


        Consolidated Statements of Cash Flows
          - Years ended December 31, 1996, 1995 and 1994.             F-4

        Consolidated Statements of Shareholders'  Equity
          - Years ended December 31, 1996, 1995 and 1994.             F-5

        Notes to Consolidated Financial Statements.            F-6 through F-14
</TABLE>

(2)     The following financial statement schedule for the years ended
        December 31, 1996, 1995 and 1994 is submitted herewith:

<TABLE>
<CAPTION>
                                                                     PAGE    
                                                                     ----
        <S>                                                           <C>
        Schedule II - Valuation and Qualifying Accounts               S-1
</TABLE>

       All other schedules are omitted because they are not applicable or the
       required information is shown in the consolidated financial statements
       or notes thereto.

(3)    Exhibits included herein (numbered in accordance with Item 601 of
       Regulation S-K):





                                      -28-
<PAGE>   29

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                           DESCRIPTION
-------                          -----------
 <S>      <C>
  2.1     Acquisition Agreement between Laserscope and Heraeus Med GmbH.(13)

  3.3     Seventh Amended and Restated Articles of Incorporation of Registrant.(1)

  3.4     By-laws of Registrant, as amended.(4)

  4.1     Common Shares Rights Agreement dated as of October 31, 1991 between Laserscope and American
          Stock Transfer & Trust Company as Rights Agent.(10)

  4.1A    First Amendment to Common Shares Rights Agreements between the Company and American Stock
          Transfer & Trust Company as Rights Agent dated as of April 22, 1996.(11)

  4.1B    Second Amendment to Common Shares Rights Agreement between the Company and American Stock
          Transfer & Trust Company as Rights Agent   dated as of August 6, 1996.(12)

 10.1A    1984 Stock Option Plan, as amended, and forms of Incentive Stock Option Agreement and
          Nonstatutory Stock Option Agreement.(4)

 10.1B    1994 Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock
          Option Agreement.(8)

  10.2    1984 Stock Purchase Plan and form of Common Stock Purchase Agreement.(2)

  10.3    1989 Employee Stock Purchase Plan and form of Subscription Agreement.(4)

  10.4    401(k) Plan.(2)

  10.6    Net Lease Agreement between the Registrant and Realtec Properties dated October 7, 1987.(2)

 10.6A    Amendment No. 1 dated January 18, 1990 to Net Lease Agreement between the Registrant and Realtec
          Properties dated October 7, 1987.(2)

 10.6B    Net Lease Agreement between Registrant and Realtec Properties dated December 14, 1989.(2)

 10.6C    Net Lease Agreement between Registrant and Realtec Properties dated June 25, 1990.(3)
</TABLE>





                                      -29-
<PAGE>   30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                               DESCRIPTION
-------                              -----------
 <S>      <C>
 10.6D    Amendment No. 2 dated November 10, 1992 to Net Lease Agreement between Registrant and
          Realtec Properties dated October 7, 1987.(5)

 10.6E    Amendment No. 3 dated April 19, 1994 to Net Lease Agreement between Registrant and Realtec
          Properties dated October 7, 1987.(7)

 10.6F    Amendment No. 1 dated April 19, 1994 to Net Lease Agreement between Registrant and Realtec
          Properties dated June 25, 1990.(7)

 10.6G    Amendment No. 1 dated April 19, 1994 to Net Lease Agreement between Registrant and Realtec
          Properties dated December 14, 1989.(8)

 10.10    Form of Indemnification Agreement.(2)

 10.11    Amended and Restated Loan and Security Agreement between the Registrant and Silicon Valley
          Bank Dated November 23, 1996.(14)

 10.13    1990 Directors' Stock Option Plan and form of Option Agreement.(4)

 10.14    Form of Laserscope Management Continuity Agreement, as amended.(8)

 10.18    1995 Directors' Stock Option Plan and form of Option agreement.(9)

 22.1     Subsidiaries of Registrant.(6)

 23.1     Consent of Ernst & Young LLP, Independent Auditors (see page 32).(14)

 25.1     Power  of  Attorney  (see  page 33).(14)

 27.1     Financial Data Schedule.
</TABLE>





                                      -30-
<PAGE>   31
Reports on Form 8-K:

On November 8, 1996, the Company filed a Form 8-K/A amending its current report
on Form 8-K filed September 11, 1996.  The Form 8-K/A reported the consummation
of the Company's acquisition of HSI and contained audited Balance Sheets of HSI
as of December 31, 1995 and 1994 and the related statements of operations,
stockholder's equity and cash flows for each of the three years ended December
31, 1995, 1994 and 1993 as well as the unaudited balance sheet of HSI as of
June 30, 1996 and the related unaudited statements of operations, stockholder's
equity and cash flows for the six-month period ended June 30, 1996 and 1995. In
addition, the Form 8-K/A contained the unaudited pro forma combined condensed
balance sheet as of June 30, 1996, the unaudited pro forma combined condensed
statements of operations for the year ended December 31 1995 and the six months
ended June 30, 1996 and the notes thereto.

(1)      Incorporated by reference to identically numbered exhibits filed in
         response to Item 14(a)(3), "Exhibits," of the Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1989.

(2)      Incorporated by reference to identically numbered exhibits filed in
         response to Item 16(a), "Exhibits," of the Registrant's Registration
         Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto
         (File No. 33-31689), which became effective on November 29, 1989.

(3)      Incorporated by reference to identically numbered exhibits filed in
         response to Item 14(a)(3), "Exhibits", of the Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1990.

(4)      Incorporated by reference to identically numbered exhibits filed in
         response to Item 14(a)(3), "Exhibits", of the Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1991.

(5)      Incorporated by reference to identically numbered exhibits filed in
         response to Item 14(a)(3), "Exhibits", of the Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1992.

(6)      Incorporated by reference to identically numbered exhibits filed in
         response to Item 14(a)(3), "Exhibits", of the Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1993.

(7)      Incorporated by reference to identically numbered exhibits filed in
         response to Item 6(a), "Exhibits", of the Registrant's Quarterly
         Report on Form 10-Q for the quarterly period ended June 30, 1994.

(8)      Incorporated by reference to identically numbered exhibits filed in
         response to Item 14(a)(3), "Exhibits", of the Registrant's Annual
         Report on Form 10-K for the year ended December 31, 1994.

(9)      Incorporated by reference to identically numbered exhibits filed in
         response to Item 14(a)(3), "Exhibits", of the Registrant's Annual
         Report on Form 10-K/A for the year ended December 31, 1995.

(10)     Incorporated by reference to Exhibit 1 of the Registrant's
         Registration Statement on Form 8-A filed November 15, 1991.

(11)     Incorporated by reference to identically numbered exhibits filed in
         response to Item 6(a), "Exhibits", of the Registrant's Quarterly
         Report on Form 10-Q for the quarterly period ended June 30, 1996.

(12)     Incorporated by reference to identically numbered exhibits filed in
         response to Item 6(a), "Exhibits", the Company's Form 8- A/A filed
         September 4, 1996.

(13)     Incorporated by reference to Exhibit A to the Definitive Proxy
         Statement for the Special Meeting of Shareholders held August 29,
         1996.

(14)     Filed herewith.





                                      -31-
<PAGE>   32
                                  EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-38831, 33-33692, 33-40506 33-53052, 33-53158, 33- 63603
33-82524, 333-07089, 333-07101, 333-07103, 333-07095, 333-11787 and 333-11795)
pertaining to the 1984 Stock Option Plan, the 1989 Employee Stock Purchase
Plan, the 1990 Director's Stock Option Plan, the 1994 Stock Option Plan, the
1995 Directors' Stock Option Plan and the 1995 Replacement Option Plan of
Laserscope) of our report dated January 28, 1997, with respect to the
consolidated financial statements and schedule of Laserscope included in the
Annual Report (Form 10-K/A) for the year ended December 31, 1996.



                                        /s/ Ernst & Young LLP

San Jose, California
April 25, 1997





                                      -32-
<PAGE>   33
                                   SIGNATURES

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

                                        LASERSCOPE

Date: April 28, 1997                    By: /s/ Dennis LaLumandiere
                                        ------------------------------
                                           Dennis LaLumandiere
                                           Vice President of Finance,
                                            Chief Financial Officer and
                                            Assistant Secretary

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

<TABLE>
<CAPTION>
          SIGNATURE                          TITLE                          DATE
          ---------                          -----                          ----
 <S>                                 <C>                               <C>
 /s/ Benjamin L. Holmes*             Chairman of the Board of          April 28, 1997
 -----------------------               Directors
  (Benjamin L. Holmes)                     

 /s/ Robert V. McCormick*            President, Chief Executive        April 28, 1997
 ------------------------              Officer and Director
 (Robert V. McCormick)                     

 /s/ Dennis LaLumandiere             Vice President of Finance,        April 28, 1997
 ------------------------              Chief Financial Officer and
 (Dennis LaLumandiere)                 Assistant Secretary
                                       (Principal Financial and
                                       Accounting Officer)

 /s/ David Cohen*                    Director                          April 28, 1997
 ----------------                                                                    
    (David Cohen)

 /s/ Klaus Goffloo*                  Director                          April 28, 1997
 ------------------                                                                  
     (Klaus Goffloo)

 /s/ Thomas Ihlenfeldt*              Director                          April 28, 1997
 ----------------------                                                              
     (Thomas Ihlenfeldt)

 /s/ E. Walter Lange*                Director                          April 28, 1997
 --------------------                                                                
    (E. Walter Lange)

 /s/ Rodney Perkins*                 Director                          April 28, 1997
 -------------------                                                                 
 (Rodney Perkins, M.D.)

 /s/ Robert J. Pressley*             Director                          April 28, 1997
 -----------------------                                                                                                 
 (Robert J. Pressley, Ph.D.)

*  By /s/ Dennis LaLumandiere
          -------------------
         (Dennis LaLumandiere
          Attorney-in-Fact)
</TABLE>





                                      -33-
<PAGE>   34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


The Board of Directors and Shareholders Laserscope

We have audited the accompanying consolidated balance sheets of Laserscope as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996.  Our audits also included the financial
statement schedule listed in the Index at Item 14(a).  These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Laserscope at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.



                                        /s/ Ernst & Young LLP

San Jose, California
January 28, 1997





                                      F-1
<PAGE>   35
                                   LASERSCOPE
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
(DOLLARS IN THOUSANDS)                                           1996          1995
----------------------                                           ----          ----
<S>                                                            <C>           <C>
ASSETS

Current Assets:
    Cash and cash equivalents                                  $  3,917      $  2,278
    Accounts receivable, net                                     13,286         5,543
    Inventories                                                  17,407        10,292
    Other current assets                                            926           692
                                                               --------      --------
    Total current assets                                         35,536        18,805
Property and equipment, net                                       3,109         2,663
Investment in NWL                                                 1,681         1,681
Developed technology and other intangibles, net                   3,473             -
Other assets                                                        670           433
                                                               --------      --------
Total assets                                                   $ 44,469      $ 23,582
                                                               ========      ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
    Accounts payable                                           $  9,246      $  1,455
    Accrued compensation                                          2,947         1,156
    Warranty                                                        962           476
    Deferred revenue                                              2,376         2,008
    Other accrued liabilities                                     1,507         1,132
    Current obligations under capital leases                         54            14
                                                               --------      --------
    Total current liabilities                                    17,092         6,241

Obligations under capital leases                                    202            15

Commitments and contingencies

Shareholders' equity:
    Common stock    11,868,171 shares outstanding                48,798        37,248
(7,060,634 in 1995)
    Accumulated deficit                                         (20,988)      (19,296)
    Translation adjustments                                        (260)         (251)
    Notes receivable from shareholders                             (375)         (375)
                                                               --------      -------- 
    Total shareholders' equity                                   27,175        17,326
                                                               --------      --------

Total liabilities and shareholders' equity                     $ 44,469      $ 23,582
                                                               ========      ========
</TABLE>

See notes to consolidated financial statements





                                      F-2
<PAGE>   36
                                   LASERSCOPE
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)                    1996            1995          1994
-------------------------------------                    ----            ----          ----
<S>                                                    <C>              <C>           <C>
Net Revenues:

    Products                                           $36,885          $24,974       $30,671
    Services                                             5,959            5,159         5,649
                                                       -------          -------       -------
                                                        42,844           30,133        36,320
Cost of Sales:

    Products                                            17,967           11,526        13,715
    Services                                             3,915            3,266         3,203
                                                       -------          -------       -------
                                                        21,882           14,792        16,918

Gross margin                                            20,962           15,341        19,402

Operating expenses:

    Research and development                             2,555            3,838         3,589
    Purchased in-process research and development        2,376                -             -
    Selling, general and administrative                 16,749           15,333        16,994
    Other non-recurring charges relating to the
      acquisition of Heraeus Surgical, Inc.                872                -             -
                                                       -------          -------       -------
                                                        22,552           19,171        20,583

Operating loss                                          (1,590)          (3,830)       (1,181)

Interest and other income, net                              50              278           250
                                                       -------          -------       -------

Loss before income taxes                                (1,540)          (3,552)         (931)

Provision for income taxes                                 152                -             -
                                                       -------          -------       -------

Net loss                                               $(1,692)         $(3,552)      $  (931)
                                                       =======          ========      ======= 

Net loss per share                                     $ (0.19)         $ (0.51)      $ (0.13)
                                                       =======          =======       ======= 

Shares used in per share calculations                    8,677            6,999         6,924
                                                       =======          =======       =======
</TABLE>

See notes to consolidated financial statements





                                      F-3
<PAGE>   37
                                   LASERSCOPE
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)                                        1996         1995        1994
----------------------                                        ----         ----        ----
<S>                                                          <C>         <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                $(1,692)    $(3,552)       $(931)

     Adjustments to reconcile net loss to cash
       provided (used) by operating activities:
         Depreciation and amortization                         1,218       1,419        1,623
         Purchased in-process research and development         2,376           -            -
     Increase (decrease) from changes in:
         Accounts receivable                                  (2,622)      2,523        (460)
         Inventories                                           1,076      (2,780)          853
         Other current assets                                   (34)         346           20
         Other assets                                              -         350           86
         Accounts payable                                      2,923         163        (485)
         Accrued compensation                                    441          20        (312)
         Warranty                                                 86        (201)        (166)
         Deferred revenue                                       (311)       (317)        (151)
         Other accrued liabilities                              (115)        182        (432)
                                                             -------     -------      -------
     Cash provided (used) by operating activities              3,346      (1,847)        (355)
                                                             -------     -------      -------
CASH FLOWS FROM INVESTING ACTIVITIES:

     Purchase of held-to-maturity investments                      -           -      (3,001)
     Maturity of held-to-maturity investments                      -       1,998        3,030
     Capital expenditures                                       (593)       (762)      (1,684)
     Funding of agreement with NWL                                 -      (1,681)            -
     Heraeus Surgical acquisition, net of cash received       (1,741)          -            -
     Other                                                        (9)        (71)           11
                                                             -------     -------      -------
     Cash used by investing activities                        (2,343)       (516)      (1,644)
                                                             -------     -------      -------

CASH FLOWS FROM FINANCING ACTIVITIES:

     Payment on obligations under capital leases                (14)         (11)        (101)
     Proceeds from the sale of common stock under stock
       plans, net of repurchases and shareholder 
       notes receivable                                          650          48          587
                                                             -------     -------      -------
     Cash provided by financing activities                       636          37          486
                                                             -------     -------      -------

     Increase (decrease) in cash and cash equivalents          1,639      (2,326)      (1,513)

     Cash and cash equivalents, beginning of year              2,278       4,604        6,117
                                                             -------     -------      -------
     Cash and cash equivalents, end of year                  $ 3,917     $ 2,278      $ 4,604
                                                             =======     =======      =======
</TABLE>

  In addition to the cash paid for the Heraeus Surgical, Inc. acquisition, the
Company issued 4,609,345 shares of common stock.

See notes to consolidated financial statements





                                      F-4
<PAGE>   38
                                   LASERSCOPE
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                        NOTES            TOTAL
                                                    ACCUMULATED      TRANSLATION   RECEIVABLE FROM    SHAREHOLDERS'
(DOLLARS IN THOUSANDS)              COMMON STOCK      DEFICIT        ADJUSTMENTS     SHAREHOLDERS        EQUITY
----------------------              ------------      -------        -----------     ------------        ------
<S>                                   <C>             <C>               <C>             <C>             <C>
Balance at December 31, 1993          $ 36,493        $(14,813)         $(191)            (255)         $21,234

Issuance of 140,665 shares
  under stock plans, net
  of repayment of notes                    581                                               6              587

Translation adjustments                                                    11                                11

Net loss                                                  (931)                                            (931)
                                      --------        --------          -----           ------          ------- 

Balance at December 31, 1994            37,074         (15,744)          (180)            (249)          20,901

Issuance of 76,790 shares
  under stock plans, net
  of repayment and
  refinancing of notes                     174                                            (126)              48

Translation adjustments                                                   (71)                              (71)

Net loss                                                (3,552)                                          (3,552)
                                      --------        --------          -----           ------          ------- 

Balance at December 31, 1995            37,248         (19,296)          (251)            (375)          17,326

Issuance of 198,192 shares
  under stock plans                        650                                                              650

Issuance of 4,609,345 shares in
  conjunction with the acquisition of
  Heraeus Surgical, Inc., including
  associated acquisition costs          10,900                                                           10,900

Translation adjustments                                                    (9)                               (9)

Net loss                                                (1,692)                                          (1,692)
                                      --------        --------          -----           ------          ------- 
Balance at December 31, 1996          $ 48,798        $(20,988)         $(260)          $ (375)         $27,175
                                      ========        ========          =====           ======          =======
</TABLE>

See notes to consolidated financial statements





                                      F-5
<PAGE>   39
                                   LASERSCOPE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

The Company operates in one business segment, the medical systems business. The
Company develops, manufactures, markets and supports surgical lasers and other
surgical systems, related instrumentation and disposable supplies.  The Company
markets its products and services in over thirty countries worldwide to
hospitals, outpatient surgery centers and physicians.

Basis of presentation

The accompanying consolidated financial statements include the Company and its
wholly and majority-owned subsidiaries.  All intercompany transactions and
balances have been eliminated.

Use of estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes.  Actual results could differ from those estimates.

Cash equivalents and short-term investments

The Company invests its excess cash in high-quality debt instruments.  The
Company considers cash equivalents to be short-term financial instruments that
are readily convertible to cash, subject to no more than insignificant interest
rate risk and that have original maturities of three months or less.

At December 31, 1996 and 1995 the Company's cash equivalents were in the form
of institutional money market accounts and totaled $1.8 million and $1.1
million, respectively.

At December 31, 1996 and 1995 the Company had no investments in debt
securities.

Revenue recognition and product warranty

The Company generally recognizes revenue related to the sale of systems,
instrumentation and disposables at the time of shipment and provides currently
for the estimated cost to repair or replace products under warranty provisions
in effect at the time of the sale.  Service revenue is recognized as the
services are provided or pro rata over the period of the applicable contract.

Property and equipment

Property and equipment is stated at cost less accumulated depreciation and
amortization.

Equipment is depreciated using principally accelerated methods over estimated
useful lives of three to seven years.  Equipment under capital leases is
amortized over the period of the lease.  Leasehold improvements are amortized
using the straight-line method over the remaining term of the lease.

Inventories

Inventories are stated at the lower of cost (computed on a first-in, first-out
basis) or market.

Net income (loss) per share

Net income (loss) per share is based upon the weighted average number of shares
of common stock outstanding and dilutive common equivalent shares from stock
options (using the treasury stock method).





                                      F-6
<PAGE>   40
Foreign currency translation

The functional currencies of the Company's foreign subsidiaries are their local
currencies.  Accordingly, all assets and liabilities related to their
operations are translated at the current exchange rates at the end of each
period.  The resulting cumulative translation adjustments are recorded directly
to the translation adjustments account included in shareholders' equity.
Revenues and expenses are translated at average exchange rates in effect during
the period.

Impairment of assets

The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed of" (SFAS121) during the year ended December 31, 1996.  Such
adoption did not have a material impact on the financial statements.

Intangible assets related to the acquisition of Heraeus Surgical, Inc.

Intangible assets related to the acquisition of Heraeus Surgical, Inc. included
developed technology and an established workforce.  These assets are amortized
on a straight-line basis over estimated useful lives of seven and five years,
respectively.

Advertising expense

The cost of advertising is expensed as incurred.  The Company does not incur
any direct response advertising costs.  Advertising costs were not significant
in 1996, 1995 and 1994.

2.  ACQUISITION OF HERAEUS SURGICAL, INC.

During April 1996, the Company and Heraeus Med, GmbH signed a definitive
agreement for the acquisition (the "Acquisition") of HSI (a wholly- owned
subsidiary of Heraeus Med, GmbH).  Pursuant to the Acquisition Heraeus Med
received approximately 4.6 million shares of newly issued Laserscope common
stock and a $2.0 million cash payment in exchange for all of the outstanding
shares of HSI and certain assets and liabilities of Heraeus Med's German laser
distribution organization.

The Acquisition closed on August 30, 1996 and has been accounted for as a
purchase.  The purchase price, including related acquisition costs, was
allocated based on an independent appraisal obtained by the Company to the
tangible and intangible assets acquired and the liabilities assumed based on
their respective fair values on the date of acquisition.

The purchase price for the Acquisition was (in thousands):

<TABLE>
                  <S>                                              <C>
                  Newly issued Laserscope common stock             $10,900
                  Cash paid                                          2,000
                  Transaction and other direct acquisition costs     1,662
                                                                   -------
                        Total                                      $14,562
</TABLE>

The allocation of the purchase price was determined as follows:

<TABLE>
                  <S>                                                <C>
                  Net tangible assets acquired:
                    Cash (before netting cash paid)                  $ 1,508
                    Accounts receivable, net                           5,121
                    Inventories                                        8,191
                    Other assets                                       1,111
                    Accounts payable and other current liabilities    (7,374)
                                                                     ------- 
                        Total net tangible assets acquired           $ 8,557
                  
                  Intangible assets acquired:
                    Developed technology                             $ 3,229
                    In-process technology                              2,376
                    Workforce                                            400
                                                                     -------
                                                                     $14,562
</TABLE>

To determine the value of the developed technology, the expected future cash
flow of each existing product was discounted, taking into account risks related
to the characteristics and applications of each product, existing and future
markets, and assessments of the





                                      F-7
<PAGE>   41
life cycle stage of each product.  The analysis resulted in a valuation of
approximately $3.2 million for completed products, which had reached
technological feasibility and therefore was capitalizable. The asset is being
amortized on a straight-line basis over a seven year period.

The value of the assembled workforce was derived by estimating the costs to
replace the existing employees including search costs, interview costs and
training costs for each category of employee.  The analysis determined a
valuation of approximately $400,000 for the assembled workforce.  The asset is
being amortized on a straight-line basis over a five year period.

In determining the value of technology in the development stage, the Company
considered, among other factors, the stage of development of each project, the
time and resources needed to complete each project, expected income and
associated risks.  Associated risks include the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility, and risks related to the viability of potential changes in future
target markets.  This analysis resulted in a valuation of approximately $2.4
million for technology in the development stage that had not yet reached
technological feasibility and did not have alternative future uses.  Therefore,
in accordance with generally accepted accounting principles, the $2.4 million
of technology in the development stage was expensed in the period ended
September 30, 1996 as purchased in-process research and development.

During the quarter ended September 30, 1996, the Company recorded an additional
$0.9 million in charges to write off inventory and fixed assets which became
redundant as a result of the acquisition of HSI.

The operating results of HSI from August 30, 1996 through December 31, 1996
have been included in the Company's consolidated results of operations.

The following unaudited pro forma combined results of operations of the Company
and Heraeus Surgical, Inc. (HSI) for the twelve months ended December 31, 1996
and December 31, 1995 have been prepared assuming that the Acquisition, had
occurred at the beginning of the period presented.  The following pro forma
information is not necessarily indicative of the results that would have
occurred had the Acquisition been completed at the beginning of the period
indicated, nor is it indicative of future operating results (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                       TWELVE MONTHS ENDED
                                                           DECEMBER 31,
                                                        1996          1995
                                                        ----          ----
                                                           (UNAUDITED)
               <S>                                    <C>           <C>
               Net revenues                           $ 61,928      $  57,909
               Loss from operations                   $ (2,209)     $ (6,718)
               Net loss                               $ (2,112)     $ (6,827)
               Net loss per share                     $  (0.18)     $  (0.59)
               Shares used in per share calculations    11,750        11,608
               
</TABLE>

The 4.6 million common shares issued to Heraeus Med, GmbH in this transaction
were unregistered pursuant to section 4(2) of the Securities Act of 1933, as
amended and cannot be sold, transferred or pledged by Heraeus Med GmbH until
August 30, 1997.  On that date, the Company has an obligation to register the
shares.

3.  ACCOUNTS RECEIVABLE

Accounts receivable at December 31 consisted of:

<TABLE>
<CAPTION>
               (IN THOUSANDS)                            1996          1995
               --------------                            ----          ----
               <S>                                      <C>           <C>
               Trade accounts receivable                $13,986       $ 6,033
               Less: allowance for doubtful accounts       (700)         (490)
                                                        -------       ------- 
                                                        $13,286       $ 5,543
                                                        =======       =======
</TABLE>





                                      F-8
<PAGE>   42
4.  INVENTORIES

Inventories at December 31 consisted of:

<TABLE>
<CAPTION>
                    (IN THOUSANDS)                    1996     1995
                    --------------                    ----     ----
                    <S>                             <C>     <C>
                    Sub-assemblies and purchased    $12,015  $  7,201
                    parts
                    Finished goods                    5,392     3,091
                                                    -------  --------
                                                    $17,407  $ 10,292
                                                    =======  ========
</TABLE>

5.  PROPERTY AND EQUIPMENT

Property and equipment at December 31 consisted of:

<TABLE>
<CAPTION>
           (IN THOUSANDS)                                    1996       1995
           --------------                                    ----       ----
           <S>                                             <C>        <C>
           Machinery and equipment                         $  4,967   $  4,562
           Office equipment and furniture                     7,448      6,917
           Leasehold improvements                             2,229      1,781
                                                           --------   --------
                                                             14,644     13,260
           Less accumulated depreciation and amortization   (11,535)   (10,597)
                                                           --------   -------- 
                                                           $  3,109   $  2,663
                                                           ========   ========
</TABLE>

6.  DEVELOPED TECHNOLOGY AND OTHER INTANGIBLES

Developed technology and other intangibles resulting from the acquisition of
HSI at December 31 consisted of:

<TABLE>
<CAPTION>
                    (IN THOUSANDS)                    1996      1995
                    --------------                    ----      ----
                    <S>                              <C>        <C>
                    Developed technology             $ 3,229    $-
                    Assembled workforce                  400     -
                                                     -------    --
                                                       3,629     -
                    Less accumulated amortization       (156)    -
                                                     -------    --
                                                     $ 3,473    $-
                                                     =======    ==
</TABLE>

7.  LINE OF CREDIT

In November 1996, the Company renewed its agreement with a bank for a $5
million line of credit that provides for short-term borrowings based on certain
eligible accounts receivable.  The line of credit, which expires in November
1997, is secured by the assets of the Company and bears interest at the bank's
prime rate plus one percentage point.  Provisions of this agreement prohibit
the payment of dividends and the repurchase of stock and require the Company to
maintain certain minimum working capital and net worth levels.  As of March 17,
1997, the Company was in compliance with the covenants and had $1.6 million in
borrowings under this agreement.

8.  INVESTMENT IN NWL

In March 1995, the Company entered into an agreement with NWL Laser-Technologie
("NWL") whereby the Company paid NWL approximately $1.6 million in exchange for
a cross-distribution and development agreement, a minority equity position in
NWL and an option to purchase all of the ownership interests in NWL.  These
assets are carried at cost.  If the Company does not exercise its option to
purchase NWL by June 1997, there will be no reimbursement of the Company's
investment and the Company's equity position will be relinquished.  If the
Company exercises its option, the remaining purchase price will be paid over
three and one half years from the exercise date.  The Company currently expects
to exercise its purchase option prior to lapse of the option period.

9.  LEASE OBLIGATIONS

The Company leases certain equipment under lease agreements that have been
accounted for as capital leases.  Leased equipment and accumulated amortization
related to assets under capital leases at December 31 were as follows:

<TABLE>
<CAPTION>
                    (IN THOUSANDS)                 1996     1995
                    --------------                 ----     ----
                    <S>                           <C>      <C>
                    Leased equipment              $1,784   $1,545
                    Accumulated amortization       1,531    1,518
                    
</TABLE>

There were $241,000 in additions to leased equipment in 1996, none in 1995 and
1994.





                                      F-9
<PAGE>   43
The Company leases its facilities and certain equipment under non-cancelable
operating leases.  Rental expense under these leases amounted to approximately
$982,000, $966,000 and $1,070,000 in each of the three years ended December 31,
1996, 1995 and 1994, respectively.

Future minimum lease payments under capital and operating leases were as
follows at December 31, 1996:

<TABLE>
<CAPTION>
                                                              CAPITAL        OPERATING
          (IN THOUSANDS)                                      LEASES          LEASES
          --------------                                      ------          ------
          <S>                                                 <C>             <C>
          1997                                                $  83           $1,094
          1998                                                   61              936
          1999                                                   61              777
          2000                                                   61              777
          2001 and beyond                                        61              130
                                                              -----           ------
                                                              $ 327           $3,714
                                                                              ======
          Less amount representing interest                      71
                                                              -----
          Present value of future minimum lease  payments     $ 256
                                                              =====
</TABLE>

10.  SHAREHOLDERS' EQUITY

The Company has 25,000,000 shares of no par value common stock authorized.  In
addition, the Company has authorized 5,000,000 shares of undesignated preferred
stock with rights, preferences and privileges to be determined by the Company's
Board of Directors.

1994 and 1984 Stock Option Plans

During 1994 and 1984, the Company adopted stock option plans under which the
Board of Directors may grant incentive stock options to purchase shares of
common stock to employees of the Company at a price not less than the fair
value of the shares as of the date of grant.  The Board of Directors may also
grant Non-statutory stock options to employees and consultants, including
directors who serve as employees or consultants, at not less than 85% of the
fair market value of the shares as of the date of grant.  Options issued
pursuant to the 1984 plan vest and become exercisable over periods of up to
five years and expire five to ten years after the date of grant.  Options
issued pursuant to the 1994 plan vest and become exercisable over periods of up
to four years and expire five years after the date of grant.

The 1984 Stock Option Plan expired by its terms with respect to any future
option grants effective in August 1994.  At December 31, 1996, the 1984 Stock
Option Plan had options to purchase 713,550 shares of common stock outstanding,
of which 646,607 were exercisable.

The Company has reserved 1,700,000 shares of common stock of which there were
410,520 shares available for issuance pursuant to its 1994 stock option plan as
of December 31, 1996.

In November 1995, the Company allowed non officer employees to cancel
outstanding options that had been granted under the 1984 plan but that had not
yet become exercisable and replace them with new non-statutory grants outside
of the 1984 plan for a like number with the same exercisability restrictions at
the fair market value of the common stock at the date of grant.  Employees
elected to cancel and receive new grants to purchase an aggregate of 175,453
shares at an exercise price of $2.00.

In November 1995, the Company also allowed employees to cancel outstanding
options that had been granted under the 1994 plan but that had not yet become
exercisable and replace them with new grants for a like number with the same
exercisability restrictions at the fair market value of the common stock at the
date of grant.  Employees elected to cancel and receive new grants to purchase
an aggregate of 455,384 shares at an exercise price of $2.00.

1990 and 1995 Directors' Stock Option Plans

The Company has reserved 600,000 shares of its common stock for issuance
pursuant to its 1990 and 1995 Directors' Stock Option Plans in aggregate. Under
these plans, non-employee directors of the Company have been granted options to
purchase 90,000 shares (45,000 shares pursuant to each plan) of the Company's
common stock exercisable at the fair market value of such shares on the
respective grant dates.  Because the 1990 Directors' Stock Option Plan was
terminated in 1995 with respect to any additional grants, new non employee
directors receive only a grant under the 1995 Directors' Stock Option Plan.
Options issued pursuant to these plans vest and become exercisable over three
years from the respective original date of issuance with respect to each
optionee who remains





                                      F-10
<PAGE>   44
a director and expire five years after the date of grant. There were 120,000
shares available for issuance pursuant to the 1995 Directors' Stock Option Plan
at December 31, 1996.

The following table summarizes activity in the Company's stock option plans
during the years ended December 31, 1995 and 1996:

<TABLE>
<CAPTION>
                                                SHARE     WEIGHTED AVERAGE
                                             OUTSTANDING   EXERCISE PRICE
                                             -----------   --------------
                  <S>                        <C>                <C>
                  Balance, December 31,       1,749,635         5.88
                                                                   
                  1994


                  Granted                     1,546,837         2.73
                                                                   

                  Exercised                           -            -
                  Canceled                   (1,023,744)       $5.02
                                             ----------        -----

                  Balance, December 31,       2,272,728         4.12
                                                                   
                  1995


                  Granted                       641,225         3.86
                                                                   

                  Exercised                    (101,222)        4.13
                                                                   

                  Canceled                     (451,000)       $5.24
                                             ----------        -----

                  Balance, December 31,       2,361,731        $3.84
                                             ==========        =====
                  1996
</TABLE>

The following table displays a summary of relevant ranges of exercise prices
for options outstanding and options exercisable for the Company's stock option
plans at December 31, 1996:

<TABLE>
<CAPTION>
                     OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                     -------------------                           -------------------
                                       WEIGHTED
                                        AVERAGE      WEIGHTED                    WEIGHTED
          RANGE OF         NUMBER      REMAINING      AVERAGE      NUMBER         AVERAGE
          EXERCISE      OUTSTANDING   CONTRACTUAL    EXERCISE    EXERCISABLE     EXERCISE
          --------      -----------   -----------    --------    -----------     --------
           PRICES                        LIFE          PRICE                      PRICE
           ------                        ----          -----                      -----
        <S>              <C>             <C>           <C>        <C>             <C>
        $2.00 - $2.88      884,100       4.58           2.00        297,489        2.00
        $3.48 - $5.13      838,786       4.19           4.05        291,824        4.33
        $5.38 - $8.00      638,393       2.28          $6.09        583,159       $6.12
        -------------    ---------       ----          -----      ---------       -----
        $2.00 - $8.00    2,361,279       3.82          $3.84      1,172,472       $4.63
        =============    =========       ====          =====      =========      n =====
</TABLE>

1989 Employee Stock Purchase Plan

The Company has reserved 450,000 shares of common stock, for issuance pursuant
to its 1989 Employee Stock Purchase Plan.  Under this plan, qualified
employees, excluding non-employee directors, may purchase up to a specified
maximum amount of the Company's common stock through payroll deduction at 85%
of its fair market value. At December 31, 1996, approximately 391,000 shares
had been purchased under this plan.

SFAS 123 Disclosure

The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options.  Under APB 25, because
the exercise price of the Company's stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.

Pro forma information regarding net income and earnings per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 13, 1994 under the fair value method of this Statement.  The fair
value for these options was estimated at the date of grant using a
Black-Scholes multiple option pricing model with the following weighted average
assumptions: risk-free interest rates of 5.89% and 6.44% for 1995 and 1996,
respectively; a dividend yield of 0.0%; a volatility factor of the expected
market price of the Company's common stock of 1.0; and an expected life of the
option of 4.0 years.





                                      F-11
<PAGE>   45
To comply with the pro forma reporting requirements of SFAS 123 with respect to
the Company's 1989 Employee Stock Purchase Plan, compensation cost is estimated
for the fair value of the employees' purchase rights using the Black-Scholes
model with the following assumptions for those rights granted in 1995 and 1996:
a dividend yield of 0.0%; an expected life of 0.5 years; an expected volatility
factor of 1.0; and weighted average risk free interest rates of 6.21% and 5.28%
for 1995 and 1996, respectively.  The weighted average fair value of those
purchase rights granted in 1995 and 1996 were $1.38 and $1.70, respectively.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable.  In addition, option models require the input of highly
subjective assumptions including the expected stock price volatility.  Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
            (IN THOUSANDS, EXCEPT PER SHARE DATA)     1996       1995
            ------------------------------------      ----       ----
            <S>                                      <C>        <C>
            Pro forma net loss                       $(2,808)   $(3,911)
            Pro forma loss per share                 $(0.33)    $(0.56)
</TABLE>

Because the SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.

1991 Shareholder Rights Plan

In November 1991, the Company adopted a shareholder rights plan and distributed
a dividend of one right to purchase one share of common stock (a "Right") for
each outstanding share of common stock of the Company.  The Rights become
exercisable in certain limited circumstances involving a potential business
combination transaction of the Company and are initially exercisable at a price
of $34 per share.  Following certain other events after the Rights have become
exercisable, each Right entitles its holder to purchase for $34 an amount of
common stock of the Company, or in certain circumstances, securities of the
acquirer, having a then current market value of twice the exercise price of the
Right.  The Rights are redeemable at the Company's option at $0.01 per Right
before they become exercisable.  Until a Right is exercised, the holder of a
Right, as such, has no rights as a shareholder of the Company.  The Rights
expire on November 20, 2001.

11.  EMPLOYEE SAVINGS AND INVESTMENT PLAN

In October 1989, the Company adopted a 401(k) savings and investment plan which
covers all employees.  The Company's contributions to the plan have been 50%
matching of employee contributions up to 3% of each employee's base
compensation and were approximately $132,000, $109,000 and $118,000 in the
years ended December 31, 1996, 1995 and 1994, respectively.

12.  INCOME TAXES

Significant components of the provision for income taxes were as follows (in
thousands):

<TABLE>
<CAPTION>
                                          1996     1995     1994
                                          ----     ----     ----
            <S>                           <C>      <C>      <C>
            Current federal taxes         $ 102    $   -    $  -
            Current state taxes              50                -
                                          -----    -----    ----
            Provision for income taxes    $ 152    $   -    $  -
                                          =====    =====    ====
</TABLE>

Pretax losses from foreign operations were $145,000, $1,185,000, and $1,100,000
respectively in 1996, 1995 and 1994.

Income taxes differ from the amount computed by applying the statutory federal
income tax rate of 34% to income (loss) before taxes.  The reasons for the
differences and the tax effect of each are as follows (in thousands):
<TABLE>
<CAPTION>
                                                       1996      1995    1994
                                                       ----      ----    ----
           <S>                                         <C>     <C>       <C>
           Computed expected tax                       $(539)  $(1,243)  $(326)
           Operating loss with no carryback               83     1,243     400
           benefit
           State taxes                                    50         -       -
           Benefit of net operating loss carryforward   (432)        -     (74)
</TABLE>





                                      F-12
<PAGE>   46
<TABLE>
         <S>                                  <C>     <C>       <C>
         Charge for in-process research
           and development                       832        -        -
         Other                                   158                 -
                                              ------   ------   ------
         Provision for income taxes           $  152   $    -   $    -
                                              ======   ======   ======
</TABLE>

The components of the deferred tax asset consisted of the following at December
31, (in thousands):

<TABLE>
<CAPTION>
                                                            1996      1995
                                                            ----      ----
          <S>                                              <C>       <C>
          Deferred tax assets:

            Net operating loss carryforwards               $ 3,200   $ 4,000
            General business credit carryforwards            1,100     1,000
            Inventory reserves and adjustments               2,500     1,400
            Other accruals and reserves not
              currently deductible for tax purposes          2,000     1,500
            Other                                            1,000         -
                                                           -------   -------
            Total deferred tax assets                        9,800     7,900
            Valuation for deferred tax assets               (8,600)   (7,900)
                                                           -------   ------- 
            Deferred tax asset                               1,200         -
          Deferred tax liabilities
            Acquired intangibles                            (1,200)        -
                                                           -------   -------
          Net deferred tax assets                          $     -   $     -
                                                           =======   =======
</TABLE>

Approximately $500,000 of the valuation allowance is attributed to stock
options, the benefit of which will be credited to paid-in-capital when
realized.

For federal tax purposes, the Company has net operating loss, research and
development credit, and minimum tax credit carryforwards of $5,900,000,
$350,000, and $350,000, respectively, which expire in the years 1997 through
2011.  The Company has net operating loss and research and development credit
carryforwards of $400,000 and $600,000, respectively, for state tax reporting
purposes.  The state net operating loss will expire in the years 1997 through
2000.  In addition, the Company has foreign tax loss carryforwards of
approximately $3,500,000 which begin to expire in 1998.

The availability of the Company's net operating loss and tax credit
carryforwards may be subject to a substantial limitation if it should be
determined that there has been a change in ownership of more than 50 percent of
the value of the Company's stock over a three year period.

13.  FINANCIAL INSTRUMENTS WITH MARKET RISK AND CONCENTRATIONS OF CREDIT RISK

The Company's trade receivables are made up of amounts due from its health care
industry customers, primarily in the United States, Europe and the Pacific Rim.
Any concentration of credit risk is substantially alleviated by the Company's
credit evaluation and collection practices and the relative lack of
concentration as well as geographical dispersion of customer accounts
comprising its accounts receivable.  Bad debt expense has been insignificant.

The Company's export sales represent sales to unaffiliated customers and are
displayed in the following table in approximate percentages of net revenues:

<TABLE>
<CAPTION>
                                   1996    1995    1994
                                   ----    ----    ----
                    <S>            <C>     <C>     <C>
                    Europe          17%     15%     10%
                    Middle           -       1%      1%
                    East
                    Pacific Rim      9%      7%      6%
                                   ---     ---     --- 
                      Total         26%     23%     17%
</TABLE>

The Company also has an Investment Policy approved by its Board of Directors
related to its short-term cash investment practices.  That policy limits the
amount of credit exposure to any one financial institution and restricts
investments to certain types of financial instruments based on specified credit
criteria.

14.  CONTINGENCIES





                                      F-13
<PAGE>   47
The Company is a party to a number of legal proceedings arising in the ordinary
course of its business.  These actions may include product liability and
employee-related issues.  While it is not feasible to predict or determine the
outcome of the actions brought against it, the Company believes that the
ultimate resolution of these claims will not ultimately have a material adverse
effect on its financial position or results of operations.





                                      F-14
<PAGE>   48
                                  SCHEDULE II

                                   LASERSCOPE

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)

<TABLE>
<CAPTION>
                                BALANCE AT                        BALANCE AT
                                BEGINNING                            END
     DESCRIPTIONS               OF PERIOD   ADDITION  DEDUCTION   OF PERIOD
----------------------          ---------   --------  ---------   ---------
<S>                               <C>         <C>       <C>         <C>
Allowance for doubtful
  accounts receivable:

  Year ended December 31, 1994    $540        $  -      $   -       $ 540
                                  ====        ====      =====       =====

  Year ended December 31, 1995    $540        $200      $ 250       $ 490
                                  ====        ====      =====       =====

  Year ended December 31, 1996    $490        $210      $   -       $ 700
                                  ====        ====      =====       =====

</TABLE>





                                      S-1 
<PAGE>   49
                               INDEX TO EXHIBITS
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                     DESCRIPTION
 -------                    -----------
  <S>       <C>
  10.11     Amended and Restated Loan and Security Agreement between the
            Registrant and Silicon Valley Bank dated November 30,1996.

   23.1     Consent of Ernst & Young, Independent Auditors (see page 32).

   25.1     Power of Attorney  (see page 33).

   27.1     Financial Data Schedule.
</TABLE>