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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|  |  |                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
| 
|  |  | For the fiscal year ended December 31,
    2002, or                                             
| 
|o |  | 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



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Laserscope

(Exact name of Registrant as Specified in its
Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|California                                                         |  | 77-0049527                              
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)

3070 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


(Title of Class)




---

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 þ          No o

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.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes o          No þ

The aggregate market value of the
Registrants voting and non-voting common equity held by
non-affiliates of the Registrant was approximately $55,325,673
as of June 28, 2002, 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 16,930,432 shares of Registrants Common Stock
issued and outstanding as of March 13, 2003.



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TABLE OF CONTENTS



|                                                         |  |  |  |  |  |  |  | 
|-------------------------------------------------------- |  |  |  |  |  |  |  | 
|DOCUMENTS INCORPORATED BY REFERENCE                     
|INTRODUCTORY STATEMENT AND REFERENCES                   
|REFERENCES                                              
|PART I                                                  
|EXECUTIVE OFFICERS OF THE COMPANY                       
|PART II                                                 
|RISK FACTORS                                            
|PART III                                                
|PART IV                                                 
|SIGNATURES                                              
|POWER OF ATTORNEY                                       
|CERTIFICATIONS                                          
|REPORT OF INDEPENDENT ACCOUNTANTS                       
|REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS       
|LASERSCOPE                                              
|SCHEDULE II LASERSCOPE VALUATION AND QUALIFYING ACCOUNTS
|EXHIBIT INDEX                                           
|EXHIBIT 3.3                                             
|EXHIBIT 10.20A                                          
|EXHIBIT 23.1                                            
|EXHIBIT 23.2                                            
|EXHIBIT 99.1                                            
|EXHIBIT 99.2                                            



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DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on
Form 10-K incorporates information by reference from the
definitive proxy statement for the Annual Meeting of
Shareholders to be held on June 27, 2003.




INTRODUCTORY STATEMENT AND
REFERENCES

Some of the statements in this Annual Report on
Form 10-K (Form 10-K), including but not
limited to the Risk Factors, Managements
discussion and analysis of financial condition and results of
operations, Business and elsewhere in this
document are forward-looking statements within the meaning of
the Private Securities Litigation Act of 1995. These statements
relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements
to be materially different from those expressed or implied by
any forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as
may, will, could,
would, should, expect,
plan, anticipate, intend,
believe, estimate, predict,
potential or continue or the negative of
these terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ
materially. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of those
statements. We are under no duty to update any of the
forward-looking statements after the date of this document to
reflect the occurrence of unanticipated events.

1



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##### Table of Contents






REFERENCES

References made in this Report to
Laserscope, the Company, the
Registrant, We, Us, or
Our refer to Laserscope and its subsidiaries.
References made in the Report to NWL refer to NWL
Laser-Technologie GmbH.

The following are registered trademarks of
Laserscope, which may be mentioned in this report:

|             |  | 
|------------ |  | 
|Laserscope;  |  | 
|Dermastat;   |  | 
|KTP/532; and |  | 
|MicroBeam.   |  | 

The following are common law trademarks and
service marks of Laserscope, which also may be mentioned in this
report:

|                                                   |  |                
|-------------------------------------------------- |  | ---------------
|AccuStat;                                          |  | Lyra;          
|ADD;                                               |  | Lyra i;      
|ADDStat,                                           |  | Lyra XP;       
|Aura;                                              |  | MicronSpot;    
|Aura SL;                                           |  | Microstat;     
|Aura XP;                                           |  | PVP;           
|Aura i;                                          |  | SmartConnector;
|Coolspot;                                          |  | StarPulse; and 
|Dermastat;                                         |  | Venus.         
|Endostat;                                          |  |                
|Venus i;                                         |  |                
|VersaStat;                                         |  |                
|VersaStat i;                                     |  |                
|Orion;                                             |  |                
|Model 630 PDT Dye Module;                          |  |                
|Model 630XP PDT Dye Module;                        |  |                
|800 Series KTP/ YAG Surgical Laser System;
    and |  |                
|SmartScan.                                         |  |                

2



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PART I



|        |         
|------- | --------
|Item 1. | Business

General Overview of Business

Laserscope designs, manufactures, sells and
services, on a worldwide basis, an advanced line of medical
laser systems and related energy devices for the medical office,
outpatient surgical center and hospital markets. The Company is
a pioneer in the development and commercialization of lasers and
advanced fiber-optic devices for a wide variety of applications.
Our product portfolio consists of more than 150 products,
including KTP/532, Nd:YAG, Er:YAG, and Dye medical laser systems
and related energy delivery devices.

Our primary medical markets include dermatology,
aesthetic surgery and urology. Our secondary markets include
ear, nose and throat surgery, general surgery, gynecology,
photo-dynamic therapy and other surgical specialties.

Mission

Our corporate mission is to improve the quality
and cost effectiveness of health care by providing safe,
innovative and minimally invasive surgical systems.

History

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

Market Focus

According to industry sources, over
13 million U.S. men were diagnosed with Benign
Prostatic Hyperplasia (BPH) in 2001, over 2 million of
them required treatment, and approximately 180,000 were treated
surgically. The number of surgical treatments is expected to
grow to over 400,000 by 2006 as the total number of patients
requiring treatment grows from 2.1 million in 2001 to
3.7 million in 2006. Because other current treatment
options for BPH require longer recovery periods and result in a
higher incidence of complications, the Company believes that
many doctors and patients may choose its fast, virtually
bloodless and minimally invasive Photo Vaporization of the
Prostate, (PVPTM) procedure. Clinical
results have shown that the procedure provides immediate and
complete symptom relief with an extremely low incidence of side
effects.

Laserscope began selling the PVP laser system and
related disposable fiber-optic delivery devices used in the PVP
procedure in the first quarter of 2002. Since that time, the
Company has sold 32 laser systems and 3,450 disposable
fiber-optics. This sales growth shows continuing penetration of
each of the target markets, which are U.S. hospitals and
clinics, U.S. mobile service providers and international
customers

We entered the dermatology/aesthetic surgery
market in the mid 1990s with several, highly versatile
laser systems. Laserscope has developed the unique VersaStat
i handpiece for its aesthetic lasers. It allows the
operator to continuously and easily adjust the spot size of the
laser from 1 to 5mm without changing handpieces. The Aura
i is intended for the treatment of vascular lesions,
red veins on the face and legs, port wine stains and pigmented
lesions such as lentigos and sun-damage. Our Lyra i
is FDA cleared for the treatment of wrinkles, leg veins,
vascular lesions, pseudofolliculitis (shaving bumps) and hair
removal on all skin types. A new application for Laserscope
technology is the combined use of the Aura and the Lyra lasers
in a procedure known as Enhanced Skin Rejuvenation. Enhanced
Skin Rejuvenation uses both wavelengths to improve appearance by
addressing facial wrinkles as well as treating age spots and red
facial veins. Our Venus is used for skin resurfacing (wrinkle
removal) and laser peels to reduce wrinkles and improve skin
tone. As a percentage of total revenues in 2002, the
dermatology/aesthetic surgery market accounted for approximately
69% of revenues.

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Our products are also used in several other
applications. Since the early 1990s, the ear, nose and
throat (ENT), gynecology (OB/ GYN) and general surgery
specialties have continued to represent markets into which we
sell our broad range of laser systems and the majority of our
energy delivery devices and surgical instruments. As a
percentage of total revenues in 2002 these markets accounted for
approximately 31% of our total revenues.

Products



| |                 
| | ----------------
| | Laser Platforms:

Our PVP System is a KTP single wavelength laser
used for Photo Vaporization of the Prostate, a procedure to
treat benign prostatic hyperplasia (BPH). BPH is a
non-cancerous enlargement of the prostate, the males
walnut-size gland located just below the bladder, which squeezes
the urethra as it grows and restricts the flow of urine. BPH is
a condition which increases in incidence as the male population
ages, and it is estimated that 30 million men worldwide
have this condition.

Our Lyra i and Lyra XP laser systems
are compact Nd:YAG, single wavelength lasers used primarily for
aesthetic procedures, including hair removal, wrinkle treatments
and leg vein treatments in physician offices. These lasers are
cleared by the FDA for hair removal on all skin color types and
were the first lasers cleared for market by the FDA for
treatment of pseudo folliculitis barbae (PFB),
commonly referred to as shaving bumps, razor
bumps or ingrown hairs. PFB is a condition
that has an incidence estimated from 20-60 percent in
African-American men and is of particular concern in the
military services.

Our Aura i laser systems are compact,
highly portable, KTP/532 single wavelength lasers designed for
office use. The Aura series lasers integrated StarPulse
feature is designed for the treatment of benign vascular and
pigmented lesions, including leg and facial telangiectasia
(spider-like veins) and pigmented lesions such as age-spots or
lentigos. 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.

Our Orion 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 includes ENT, OB/ GYN,
urology, general surgery, neurosurgery, orthopedics, spine
surgery, aesthetic surgery and dermatology. Both the Aura and
Orion systems are available with SmartScan, a
microprocessor-controlled beam-scanning device.

Our Venus i Erbium:YAG Laser System
is among the most compact and powerful, commercially available
Erbium lasers for micro-laser peels, skin resurfacing and acne
scar resurfacing. Venus is one-half the size and weight of most
other Erbium systems on the market.

Our 800 Series KTP/ YAG Surgical Laser
System is designed for use in hospitals. It is a high-power,
dual-wavelength system with applications in urology, general
surgery, and other surgical specialties. 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 photo-dynamic 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, a photodynamic therapy drug, and
are portable and may be tunable to other wavelengths.



| |                                                
| | -----------------------------------------------
| | Laser Devices, Instruments and
    Disposables:

We offer a broad line of surgical
instrumentation, disposables, kits and other accessories for use
with our surgical laser systems. These products include
disposable optical fibers, side-firing devices, individual custom

4



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hand pieces for specific surgical applications,
scanning devices, micromanipulators for microscopic surgery and
various other devices, procedure-specific kits and accessories.


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

Sales and Marketing

We concentrate much of our marketing efforts for
our laser products on high volume surgical procedures such as
the treatment of BPH, facial vascular lesions, the treatment of
leg veins and hair removal. We believe that increased market
awareness of both the benefits of laser procedures and the
drawbacks of conventional procedures is one of the most
important factors in expanding the market for our laser and
laser-based products. As a result, we have designed our
marketing and sales strategy around a strong educational effort
to promote awareness of the versatility, safety, and
cost-effectiveness of our surgical laser systems.

We promote our products through trade shows and
exhibits covering most of the surgical specialties, physician
workshops and seminars, medical journal advertising and direct
mailings. We support and participate in a substantial number of
workshops and seminars. For laser products, the workshops
usually include a demonstration of our laser systems and provide
surgeons with hands-on experience using our products.

Distribution

In the United States, we distribute our products
to hospitals, outpatient surgical centers and physician offices
through our own direct sales force and through the McKesson
Corporation Medical Group, (McKesson). In
December 2000, we signed a distribution agreement that
grants to McKesson the exclusive distribution rights for our
core aesthetic laser products in the United States. McKesson
Medical Groups Primary Care Division has a sales force of
more than 500 representatives throughout the United States who
are supported by our own direct sales force.

In the United Kingdom and France, we distribute
our products to hospitals, outpatient surgical centers and
physician offices through our own direct sales force. Elsewhere,
we sell our products through regional distributor networks
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 a large percentage of total sales.
Approximately 26% of Laserscopes 2002 revenues were
derived from its international operations including export
sales, compared to 35% in 2001 and 38% in 2000. We expect that
international sales will continue to represent a significant
percentage of net revenue in 2003.

On February 18, 2000, Laserscope signed an
agreement with Wavelight Laser Technologie AG to sell its
interest in NWL. The sale had an effective date of
January 1, 2000. NWL continued to distribute our products
in Germany until January 2002 when their distribution agreement
was terminated.

Installed Base of Lasers

We have more than 6,000 laser systems
installed worldwide. The installed base provides a market for
service as well as the sale of devices, instruments and
disposables.

Service and Support

We have a direct field service organization that
provides service for our products. We generally provide a twelve
month warranty on our laser systems. After the warranty period,
maintenance and support is provided

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on a service contract basis or on an individual
call basis. Our warranties and premium service contracts provide
for a 99.0% Uptime Guarantee on our laser systems.
Under provisions of this guarantee, we extend the term of the
related warranty or service contract if specified system uptime
levels are not maintained. Although most systems covered by this
guarantee have achieved a 99.0% uptime rate to date, we cannot
assure that we can maintain such uptime rates in the future.


Research and Development

We operate in an industry that is subject to
rapid technological changes. Our ability to remain competitive
in our industry depends on, among other things, our ability to
anticipate and react to such technological changes. Therefore,
we intend to continue to invest significant amounts in research
and development. Research and development expenditures totaled
$3.8 million, $3.8 million and $3.3 million in
the fiscal years ended 2002, 2001 and 2000, respectively.

Our current research and development programs are
directed toward the development of new laser systems and
delivery devices.

Manufacturing

We manufacture in the United States the laser
resonators, system chassis and certain accessories including
disposable products and re-usable hand pieces used in our laser
systems. Our laser manufacturing operations concentrate on the
assembly and test of components and subassemblies manufactured
to our designs and specifications by outside vendors. We believe
that we have sufficient manufacturing capacity in our present
facilities to support current operations at least through the
end of 2003.

A challenge we have been recently experiencing
relates to some of our component suppliers. Our commitment to
delivering a quality product for the PVP procedure has stretched
some of our vendors to the point where we were unable to fulfill
our PVP laser backlog during early 2003 due to a shortage of
some critical components. We are working with these suppliers to
overcome these issues and are also in the process of developing
alternative supply sources for these components. As a result of
the components shortage which has delayed shipments of PVP
lasers and the typical seasonal decline in elective procedures
during the holiday season, we expect procedure volume and
fiber-optics sales during the first quarter of 2003 to be lower
than in the fourth quarter of 2002 but to improve during the
second quarter.

Employees

At December 31, 2002, Laserscope had 178
employees. We believe that we maintain competitive compensation,
benefit, equity participation and work environment policies to
assist in attracting and retaining qualified personnel. We also
believe that the success of our business will depend, in part,
on our ability to attract and retain such personnel, who are in
great demand.

Competition

We compete in the non-ophthalmic surgical segment
of the worldwide medical laser market. In this market, lasers
are used in hospital operating rooms, outpatient surgery centers
and individual physician offices for a wide variety of
procedures. This market is highly competitive. Our competitors
are numerous and include some of the worlds largest
organizations as well as smaller, highly-specialized firms. Our
ability to compete effectively depends on such factors as:



| |   |                                   
| | - | ----------------------------------
| |  | market acceptance of our products;
|
| |  | product performance;              
|
| |  | price;                            
|
| |  | customer support;                 

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| |   |                                                               
| | - | --------------------------------------------------------------
| |  | the success and timing of new product
    development; and    
|
| |  | continued development of successful distribution
    channels.

Some of our current and prospective competitors
have or may have significantly greater financial, technical,
research and development, manufacturing and marketing resources
than we have. In early 2001, two of our largest competitors, ESC
Medical Systems (ESC) and Coherent Medical,
completed a business combination. To compete effectively, we
will need to continue to expand our product offerings,
periodically enhance our existing products and continue to
enhance our distribution.

Patents and Licenses

While we believe the patents that we have and for
which we have applied are of value, other factors are of greater
competitive importance. We currently hold approximately 30
patents issued in the United States, generally covering surgical
laser systems, delivery devices, calibration inserts, and laser
resonators. We have also licensed certain technologies from
others. For more information regarding patents and licenses,
please see Risk Factors  Reliance on Patents and
Licenses.

Environmental Regulation

Our operations are also subject to various
federal, state and local environmental protection regulations
governing the use, storage, handling and disposal of hazardous
materials, chemicals and certain waste products. In the United
States, we are subject to the federal regulation and control of
the Environmental Protection Agency. Comparable authorities are
involved in other countries. We believe that compliance with
federal, state and local environmental protection regulations
will not have a material adverse effect on our capital
expenditures, earnings and competitive and financial position.

Although we believe that our safety procedures
for using, handling, storing and disposing of such materials
comply with the standards required by state and federal laws and
regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials.

Dependence on Single-Source Suppliers and
Certain Third Parties

Certain of the components used in our laser
products, including certain optical components, are purchased
from single sources. While we believe that most of these
components are available from alternate sources, an interruption
of these or other supplies could adversely affect our ability to
manufacture lasers.

Backlog

As of December 31, 2002 and 2001, we had
firm orders in our backlog worth approximately $1.8 million
and $1.4 million, respectively. We completely exhausted in
2002 the backlog that existed at the end of 2001, and we plan to
completely exhaust during 2003 the backlog that existed at the
end of 2002.

Dispositions

On February 18, 2000, the Company signed an
agreement with Wavelight Laser Technologie AG to sell its
interest in NWL. The sale had an effective date of
January 1, 2000. NWL continued to distribute
Laserscopes products until January of 2002 when their
distribution agreement was terminated.

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EXECUTIVE OFFICERS OF THE COMPANY

The following sets forth certain information with
respect to the executive officers of the Company as of
December 31, 2002:

|                          |  |     |    |          |  |                                                                   
|------------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------
|Name                      |  | Age |    | Position
|                          |  |     |    |         
|Robert J. Pressley, Ph.D. |  |     | 70 |          |  | Chairman of the Board of Directors                                
|Eric M. Reuter            |  |     | 41 |          |  | President, Chief Executive Officer and Director                   
|Robert L. Mathews         |  |     | 57 |          |  | Executive Vice President                                          
|Ken Arnold                |  |     | 33 |          |  | Vice President, Research and Development                          
|Van Frazier               |  |     | 50 |          |  | Vice President, Quality and Regulatory Affairs                    
|Dennis LaLumandiere       |  |     | 49 |          |  | Vice President, Finance, Chief Financial Officer
    and Secretary
|Robert Mann               |  |     | 45 |          |  | Vice President, North American Sales and Marketing                
|Kerrick Securda           |  |     | 63 |          |  | Vice President, Global Marketing and Business
    Development     

Robert J. Pressley, Ph.D. is a co-founder of
the Company and has been a director since its founding.
Dr. Pressley was appointed Chairman of the Board of
Directors in June 1998. Dr. Pressley co-founded Candescent
Technologies Corporation (formerly named 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.
Dr. Pressley has been a self-employed technology consultant
since January 1995.

Eric M. Reuter joined Laserscope as Vice
President, Research and Development in September 1996 and was
appointed President and Chief Executive Officer of the Company
in June 1999. Prior to joining Laserscope, from February 1994 to
August 1996, Mr. Reuter was employed at the Stanford Linear
Accelerator Center at Stanford University (SLAC) as the
Project Engineer for the B-Factory High Energy Ring, an electron
storage ring used for high energy physics research. From
February 1991 to January 1994, he served as a Senior Staff
Engineer and Program Manager in digital imaging at Siemens
Medical Systems  Oncology Care Systems, a medical
device company.

Robert L. Mathews joined Laserscope as Executive
Vice President in August 1999. Before joining Laserscope, from
December 1998 to August 1999, he was Executive Vice
President & General Manager of the MasterPlan Division
of COHR, Inc., a management consulting and independent service
organization. From April 1997 to December 1998, he was Vice
President and General Manager of Diasonics Vingmed Ultrasound,
Inc., a medical device manufacturer. From April 1996 to April
1997, he was Senior Director, Corporate Accounts at Spacelabs
Medical, Inc., a medical device manufacturer. From May 1995 to
April 1996, Mr. Mathews was a self employed business
consultant and from February 1994 to May 1995 he was President
and Chief Executive Officer of Resonex Holdings Ltd., a medical
device manufacturer.

Ken Arnold joined Laserscope as a Manufacturing
Engineer in March 1996. Mr. Arnold served as a Design
Engineer from April 1997 to July 1999, Director of Engineering
and Technology from July 1999 to October 2001 and as Vice
President of Research and Development since October 2001. Prior
to joining Laserscope, from 1993 to 1996, he was a Program
Manager and Design Engineer at United Defense LP, a major
defense contractor.

Van Frazier joined Laserscope as Director of
Quality Assurance in January 1999 and was appointed Vice
President, Quality and Regulatory Affairs in June 1999. Before
joining Laserscope, from October 1997 to January 1999, he was
Director of Quality Assurance and Regulatory Affairs of
St. Jude Medical, a medical device manufacturer. From
January 1996 to October 1997, Mr. Frazier held various
regulatory management positions at Telectronics Pacing Systems,
a medical device manufacturer and from November 1991 to January
1996, he was Regulatory Compliance Manager for Physio-Control, a
medical device manufacturer.

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Dennis LaLumandiere joined Laserscope in
September 1989 as Corporate Controller. Mr. LaLumandiere
has served as Vice President, Finance since February 1995, Chief
Financial Officer since February 1996, Assistant Secretary from
November 1996 to October 2001 and Secretary since October 2001.
Prior to joining Laserscope, from 1983 to 1989,
Mr. LaLumandiere held various financial and operations
management positions at Raychem Corporation, a multinational
materials science company.

Robert Mann joined Laserscope in May 2001 as
Director of Physician Practice Enhancement. Mr. Mann served
as Senior Director of North American Aesthetic Sales from
December 2001 to October 2002, and was appointed Vice President
, North American Sales and Marketing in October 2002. Prior to
joining Laserscope, Mr. Mann served as National Director of
Operations for Vanishing Point Medical Group, a Multi-Specialty
Laser Aesthetics practice from January 1999 to May 2001, Vice
President of Operations at Pasqua Coffee, a retail food service
company, from January 1989 to May 1998 and as Vice President of
Operations at Mrs. Fields Cookies, a retail food service
company, from April 1981 to May 1998.

Kerrick Securda joined Laserscope in August 2001.
Before joining Laserscope, from February 1999 to August 2001,
Mr. Securda was Executive Director, Worldwide Marketing and
Knowledge Management of Sunrise Technologies
International, Inc., a medical device manufacturer. From
October 1991 to February 1999, Mr. Securda was President of
KCS Enterprises, a consulting company specializing in the
medical device industry.



|        |           
|------- | ----------
|Item 2. | Properties

Laserscope leases two buildings aggregating
approximately 40,000 square feet in San Jose,
California under leases expiring in September 2005. We have
options to extend the leases at the then-current market rates.
These facilities house our research and development and
manufacturing operations as well as our principal sales,
marketing, service and administrative offices. We believe that
these facilities are suitable for our current operations and are
adequate to support those operations through at least the end of
2003. We also lease offices in the United Kingdom and France
where our local sales and marketing staff are based.



|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Not Applicable.



|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

Not Applicable.




PART II



|        |                                                                             
|------- | ----------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common
    Stock and Related Shareholder Matters

Our common stock is traded on the Nasdaq National
Market under the symbol LSCP. As of March 13, 2003,
Laserscope had approximately 700 shareholders of record.

The following table shows Lasercopes high
and low selling prices for the years ended December 31,
2002 and December 31, 2001 as reported by the Nasdaq
National Market System:

|               |  |          |      |         |  |   |      | 
|-------------- |  | -------- | ---- | ------- |  | - | ---- | 
|               |  |         
|               |  | 2002    
|               |  |         
|               |  | High Bid |      | Low Bid
|               |  |          |      |        
|First Quarter  |  | $        | 4.47 |         |  | $ | 2.40 | 
|Second Quarter |  | $        | 6.00 |         |  | $ | 3.51 | 
|Third Quarter  |  | $        | 4.96 |         |  | $ | 3.26 | 
|Fourth Quarter |  | $        | 4.88 |         |  | $ | 3.25 | 

9



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##### Table of Contents



|               |  |          |      |         |  |   |      | 
|-------------- |  | -------- | ---- | ------- |  | - | ---- | 
|               |  |         
|               |  | 2001    
|               |  |         
|               |  | High Bid |      | Low Bid
|               |  |          |      |        
|First Quarter  |  | $        | 1.81 |         |  | $ | 0.94 | 
|Second Quarter |  | $        | 2.50 |         |  | $ | 0.90 | 
|Third Quarter  |  | $        | 2.18 |         |  | $ | 1.35 | 
|Fourth Quarter |  | $        | 2.85 |         |  | $ | 1.38 | 

We have not paid dividends on our common stock
and have no present plans to do so. Provisions of our bank line
of credit prohibit the payment of dividends without the
banks consent.

To address our capital needs in 2000, we
completed a private placement of our Common Stock pursuant to
Regulation D of the Securities Act of 1933, as amended, to
accredited investors providing gross proceeds of approximately
$1.9 million to Laserscope. The transaction consisted of
two closings. The first was approximately $1.1 million in
gross proceeds in exchange for 1,505,000 shares of
Laserscope common stock, which closed on December 30, 1999.
The second closing was for approximately $0.8 million in
exchange for 995,000 shares of Laserscope common stock
which closed on January 14, 2000. The shares had no par
value and were issued at a price of $0.80 per share. We
also issued warrants to purchase 218,875 shares of
common stock on the date of the second closing. The warrants are
convertible into shares of Laserscopes common stock at
$1.25 per share and expire in 2005.

On February 11, 2000, we completed a private
placement of subordinate convertible debentures pursuant to
Regulation D of the Securities Act of 1933, as amended, to
affiliates of Renaissance Capital Group, Inc. with gross
proceeds to Laserscope of $3.0 million. The debentures
mature seven years from issuance and bear an interest rate of
8.00%. The debentures are convertible into Laserscope common
stock with an initial conversion price, which is subject to
adjustment, of $1.25. The private placement also included
warrants convertible into 240,000 shares of Laserscope
common stock at $1.50 per share and expire in 2005.

On March 18, 2003, Renaissance Capital
Group, Inc. and the Company agreed to amend the terms of the
convertible debentures agreement. Principal payments are to
start on August 11, 2003 instead of February 11, 2003.
No other terms of the agreement are changed. In this amendment
to the agreement, Renaissance also gave notice that it will
convert debentures with a face value of $200,000 into shares of
Laserscope common stock on March 31, 2003.

There are covenants associated with the
debentures for debt-to-equity ratio, current ratio, and interest
coverage. In the event that we are unable to satisfy any of
these covenants, then we would be in default, and the lender
would have the right to exercise various remedies including
declaring due all outstanding principal and interest. The
interest coverage ratio requirement is 1.5 for the trailing
twelve months, and as of December 31, 2002 our interest
coverage was 6.7. Future ability to meet the interest coverage
requirement will depend primarily on our ability to generate
profits. The debt-to-equity requirement is a maximum of 1.5, and
the current ratio requirement is a minimum of 1.0. As of
December 31, 2002, we were in compliance with the
provisions of the covenants.

The proceeds from both of these financings were
used for general corporate working capital purposes.



|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

Consolidated Statement of Operations
Data

|                                              |  |                                       |        |      |  |         |        |         |  |            |        |  |  |   |        |   |  |   |        |  
|--------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ------- | ------ | ------- |  | ---------- | ------ |  |  | - | ------ | - |  | - | ------ | -
|                                              |  | 2002                                  |        | 2001 |  | 2000(1) |        | 1999(2) |  | 1998(3)(4)
|                                              |  |                                       |        |      |  |         |        |         |  |           
|                                              |  |                                      
|                                              |  | (Thousands, except per share amounts)
|Net revenues                                  |  | $                                     | 43,088 |      |  | $       | 35,087 |         |  | $          | 35,399 |  |  | $ | 40,990 |   |  | $ | 52,728 |  
|Net income (loss)                             |  |                                       | 323    |      |  |         | (829   | )       |  |            | 186    |  |  |   | (7,573 | ) |  |   | (9,796 | )
|Basic and diluted net income (loss) per share |  |                                       | 0.02   |      |  |         | (0.05  | )       |  |            | 0.01   |  |  |   | (0.60  | ) |  |   | (0.79  | )

10



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##### Table of Contents



Consolidated Balance Sheet Data (at end of
period):

|                                           |  |                                       |        |      |  |         |        |         |  |            |        |  |  |   |        |  |  |   |        | 
|------------------------------------------ |  | ------------------------------------- | ------ | ---- |  | ------- | ------ | ------- |  | ---------- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                           |  | 2002                                  |        | 2001 |  | 2000(1) |        | 1999(2) |  | 1998(3)(4)
|                                           |  |                                       |        |      |  |         |        |         |  |           
|                                           |  |                                      
|                                           |  | (Thousands, except per share amounts)
|Cash & cash equivalents                    |  | $                                     | 4,661  |      |  | $       | 3,408  |         |  | $          | 2,698  |  |  | $ | 1,449  |  |  | $ | 1,456  | 
|Working capital                            |  |                                       | 15,652 |      |  |         | 13,336 |         |  |            | 14,793 |  |  |   | 6,806  |  |  |   | 13,722 | 
|Total assets                               |  |                                       | 29,163 |      |  |         | 25,482 |         |  |            | 24,087 |  |  |   | 28,956 |  |  |   | 36,593 | 
|Capital leases (excluding current portion) |  |                                       | 60     |      |  |         | 60     |         |  |            | 277    |  |  |   | 534    |  |  |   | 1,012  | 
|Other long term debt                       |  |                                       | 2,853  |      |  |         | 3,000  |         |  |            | 3,000  |  |  |   | 862    |  |  |   | 1,693  | 
|Shareholders equity                       |  |                                       | 15,482 |      |  |         | 13,412 |         |  |            | 14,114 |  |  |   | 12,047 |  |  |   | 18,671 | 



---



|    |                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company sold its ownership interest in NWL
    Laser-Technologie GmbH effective January 1, 2000.                          
|   
|(2) | The Company recorded a $750,000 obsolete
    inventory provision in the quarter ended June 30, 1999.                          
|   
|(3) | The Company sold assets and liabilities related
    to its AMS product line on November 9, 1998 at a loss of
    $1.1 million.
|   
|(4) | The Company recorded a $2.1 million obsolete
    inventory provision in the quarter ended December 31, 1998.                  



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Our discussion and analysis of Laserscopes
financial condition, results of operations, and cash flows are
based upon Laserscopes consolidated financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States of America.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate these estimates, including those related to
bad debts, inventory valuation and obsolescence, intangible
assets, income taxes, warranty obligations, contingencies and
litigation. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.

Critical Accounting Policies

Our critical accounting policies are as follows:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | revenue recognition;                                           
|
| |  | allowance for doubtful accounts;                               
|
| |  | warranty obligation;                                           
|
| |  | excess and obsolete inventory;                                 
|
| |  | valuation of long-lived and intangible assets and
    goodwill;
|
| |  | functional currency; and                                       
|
| |  | income tax                                                     

Revenue Recognition.We derive our revenue from primarily two sources
(i) product revenue which includes lasers, instrumentation,
and disposables and (ii) service revenue. The Company
recognizes revenue on products and services when the persuasive
evidence of an arrangement is in place, the price is fixed or
determinable, collectibility is reasonably assured, remaining
obligations are insignificant, and title and risk of ownership
has been transferred. Transfer of title and risk of ownership
generally occurs when the product is shipped to the customer or
when the customer receives the product, depending on the nature
of the arrangement. The Company currently provides for the
estimated cost to repair or replace products under

11



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##### Table of Contents



warranty at the time of sale. Service revenue is
recognized as the services are provided and for service
contracts on a pro rata basis over the period of the applicable
service contract.


Allowance for Doubtful
Accounts.We assess the credit
worthiness of our customers prior to making a sale in order to
mitigate the risk of loss from customers not paying us. However,
to account for the inevitability that a customer may not pay us,
we maintain an allowance for doubtful accounts. We estimate
losses based on the overall business climate, our accounts
receivable aging profile, and an analysis of the circumstances
associated with specific accounts which are past due. Despite
the significant amount of analysis used to compute the required
allowance, if the financial condition of Laserscopes
customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be
required.

Warranties.We
engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our
component suppliers. In addition to these proactive measures, we
also provide for the estimated cost of product warranties at the
time revenue is recognized. We estimate the cost of our warranty
obligation based on product failure rates over the last twelve
months and the actual material usage and service delivery costs
experienced in correcting those failures. However, should actual
product failure rates, material usage or service delivery costs
differ from our estimates, revisions to the estimated warranty
liability would be required.

Excess and Obsolete
Inventory.We maintain reserves for
our estimated obsolete or unmarketable inventory. The reserves
are equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are
less favorable than those projected by management, additional
inventory reserves may be required.

Valuation of Long-Lived and Intangible Assets
and Goodwill.In July 2001, we adopted
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets,
and as a result do not amortize goodwill. Instead, we test
goodwill for impairment at the reporting unit level, at least
annually, by determining the fair value of the reporting unit
and comparing it with its book value. A reporting unit is the
lowest level of an entity that is a business and can be
distinguished from other activities, operations, and assets of
the entity. If, during the annual impairment review, the book
value of the reporting unit exceeds the fair value, the implied
fair value of the reporting units goodwill is compared
with the carrying amount of the units goodwill. If the
carrying amount exceeds the implied fair value, goodwill is
written down to its implied fair value. SFAS No. 142
requires management to estimate the fair value of the assets and
liabilities of each reporting unit, other than goodwill. The
implied fair value of goodwill is determined as the difference
between the fair value of a reporting unit, taken as a whole,
and the fair value of the assets and liabilities of such
reporting unit.

We review other long-lived assets for impairment
whenever events or circumstances indicate that the carrying
amount of an asset may not be recoverable. Events which could
trigger an impairment review include, among others, a decrease
in the market value of an asset, the assets inability to
generate income from operations and positive cash flow in future
periods, a decision to change the manner in which an asset is
used, a physical change to the asset or a change in business
climate. We calculate estimated future undiscounted cash flows,
before interest and taxes, of the related operation and compare
it to the carrying value of the asset in determining whether
impairment potentially exists. If a potential impairment exists,
a calculation is performed to determine the fair value of the
long-lived asset. This calculation is based upon a valuation
model and discount rate commensurate with the risks involved.
Third party appraised values may also be used in determining
whether impairment potentially exists.

Future adverse changes in market conditions or
poor operating results of a related reporting unit may require
us to record an impairment charge in the future. The effect of a
change in our estimates and assumptions related to goodwill
could be on impairment loss equal to as much as the total of
goodwill we have reported, which is $655,000.

Functional Currency.We have a foreign subsidiary in France
which sells to customers in France, and we also have a
subsidiary in the UK which sells to customers in all of Europe,
except France, as well as customers in Pacific Rim countries. In
preparing our consolidated financial statements, we are required
to

12



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translate the financial statements of the foreign
subsidiaries from the currency in which they keep their
accounting records into United States Dollars. Our two
subsidiaries maintain their accounting records in their
functional currencies which are also their respective local
currencies, the Euro and the British Pound Sterling. The
functional currency is determined based on managements
judgment and involves consideration of all relevant economic
facts and circumstances affecting the subsidiary. Generally, the
currency in which the subsidiary transacts a majority of it
transactions, including billing, financing, payroll, and other
expenditures would be considered the functional currency but any
dependency upon the parent and the nature of the
subsidiarys operations must also be considered. Since our
two subsidiaries functional currencies are deemed to be
the local currencies, then any gain or loss associated with the
translation of those subsidiaries financial statements is
included in cumulative translation adjustments. If in the future
we determine that there has been a change in the functional
currency of a subsidiary from its local currency to the
United States Dollar, any translation gains or losses
arising after the date of change would be included within our
statement of operations.


Income Tax.In
preparing our consolidated financial statements we are required
to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves us estimating our actual
current tax exposure together with assessing temporary
differences resulting from differing treatment of items such as
deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and the extent we believe
that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or
increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations. Due to
a history of operating losses, management believes that there is
sufficient uncertainty regarding the realization of deferred tax
assets and a full valuation allowance is appropriate.

Financial Review  Results of
Operations

The following table sets forth certain data from
Laserscopes consolidated statements of operations,
expressed as a percentage of net revenues:

|                                  |                                     |      |       |      |  |      |       |      |  |  |       |      | 
|--------------------------------- | ----------------------------------- | ---- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- | ---- | 
|                                  |                                     | 2002 |       | 2001 |  | 2000
|                                  |                                     |      |       |      |  |     
|Net revenues                      |                                     |      | 100.0 | %    |  |      | 100.0 | %    |  |  | 100.0 | %   
|Cost of products and services     |                                     |      | 48.4  |      |  |      | 50.5  |      |  |  | 52.5  |     
|                                  |                                     |      |       |      |  |      |       |      |  |  |       |     
|Gross margin                      |                                     |      | 51.6  |      |  |      | 49.5  |      |  |  | 47.5  |     
|Operating expenses:               |                                     |      |       |      |  |      |       |      |  |  |       |     
|                                  | Research and development            |      |       | 8.9  |  |      |       | 10.7 |  |  |       | 9.3  | 
|                                  | Selling, general and administrative |      |       | 40.9 |  |      |       | 40.0 |  |  |       | 36.7 | 
|                                  |                                     |      |       |      |  |      |       |      |  |  |       |     
|                                  |                                     |      | 49.8  |      |  |      | 50.7  |      |  |  | 46.0  |     
|Operating income (loss)           |                                     |      | 1.8   |      |  |      | (1.3  | )    |  |  | 1.5   |     
|Interest expense and other, net   |                                     |      | (0.9  | )    |  |      | (1.0  | )    |  |  | (1.0  | )   
|                                  |                                     |      |       |      |  |      |       |      |  |  |       |     
|Income (loss) before income taxes |                                     |      | 0.9   |      |  |      | (2.3  | )    |  |  | 0.5   |     
|Provision for income taxes        |                                     |      | 0.2   |      |  |      | 0.1   |      |  |  |      |     
|                                  |                                     |      |       |      |  |      |       |      |  |  |       |     
|Net income (loss)                 |                                     |      | 0.7   | %    |  |      | (2.4  | )%   |  |  | 0.5   | %   
|                                  |                                     |      |       |      |  |      |       |      |  |  |       |     

We sell our products to hospitals, outpatient
surgery centers, pay-per-use providers and individual physicians
in the United States, Europe, the Middle East, Latin America and
the Pacific Rim. In the United States, we sell through our
direct sales force as well as through a distributor, McKesson
Corporation Medical Group. We also generate export sales through
our wholly owned subsidiaries in the United Kingdom and
France and sell to independent distributors in the rest of the
world.

We operate in a technologically advanced, dynamic
and highly competitive environment. Our future operating results
are subject to quarterly variations based on a variety of
factors, many of which are beyond our

13



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control. While we attempt to identify and respond
to these conditions in a timely manner, these conditions
represent significant risks to our performance.


International sales accounted for 26%, 35% and
38% of our net revenues for 2002, 2001 and 2000, respectively.
We believe that international sales will continue to account for
a significant portion of our net revenues in the foreseeable
future. A large portion of our international sales occur through
our foreign subsidiaries and the remainder result from exports
to foreign distributors. Our international sales and operations
are subject to the risks of conducting business internationally.
These risks could harm our financial condition, results of
operations and future cash flows.

Through December 31, 2002, sales outside of
the United States have been denominated in the local currencies
of the United Kingdom and France and in U.S. Dollars for
the rest of the world. During 2002, 2001 and 2000 fluctuations
in foreign currencies did not materially affect the results of
operations reported by Laserscope. However, we are exposed to
foreign currency risk in a number of areas. Although our
revenues denominated in U.S. Dollars represented over 88%
of total revenues in 2002, 86% in 2001 and 85% in 2000, market
risk exists in foreign countries where we sell in
U.S. Dollars, and where a major strengthening of the
U.S. Dollar could have a material negative impact on our
business. In January 1999, our subsidiary in France began to
denominate its sales and report its financial statements in the
Euro. Through 2002, we had not sustained any material adverse
impact from the introduction of the Euro. However, any major
strengthening of the U.S. Dollar against the Euro or the
British Pound Sterling could have a material adverse impact on
our business.

Please refer to the Risk Factors
section of this Annual Report for further discussion on these
and other risks associated with our business.

The following table contains selected income
statement information for Laserscope for the years ended
December 31, 2002, 2001 and 2000:

|                          |                          |                     |        |               |  |               |     |          |   |        |        |        |  |           |     |           |   |   |        |        |  |  |     |    |   |  |     |    |   |  |     |     |   
|------------------------- | ------------------------ | ------------------- | ------ | ------------- |  | ------------- | --- | -------- | - | ------ | ------ | ------ |  | --------- | --- | --------- | - | - | ------ | ------ |  |  | --- | -- | - |  | --- | -- | - |  | --- | --- | --
|                          |                          |                    
|                          |                          | Twelve Months Ended
|                          |                          |                    
|                          |                          |                     |        |               |  |               |     |         
|                          |                          | Dec. 31, 2002       |        | Dec. 31, 2001 |  | Dec. 31, 2000 |     | % Change
|                          |                          |                     |        |               |  |               |     |         
|                          |                          | Amount              |        | %(a)          |  | Amount        |     | %(a)     |   | Amount |        | %(a)   |  | 2002-2001 |     | 2001-2000
|                          |                          |                     |        |               |  |               |     |          |   |        |        |        |  |           |     |          
|Revenues from sales of:   |                          |                     |        |               |  |               |     |          |   |        |        |        |  |           |     |           |   |   |        |        |  |  |     |    |   |  |     |    |   |  |     |    
|                          | Lasers & Instrumentation |                     | $      | 29,842        |  |               |     | 69       | % |        | $      | 23,593 |  |           |     | 67        | % |   | $      | 22,932 |  |  |     | 65 | % |  |     | 26 | % |  |     | 3   | % 
|                          | Disposable supplies      |                     |        | 7,420         |  |               |     | 17       | % |        |        | 5,671  |  |           |     | 16        | % |   |        | 6,762  |  |  |     | 19 | % |  |     | 31 | % |  |     | (16 | )%
|                          | Service                  |                     |        | 5,826         |  |               |     | 14       | % |        |        | 5,823  |  |           |     | 17        | % |   |        | 5,705  |  |  |     | 16 | % |  |     |   | % |  |     | 2   | % 
|                          |                          |                     |        |               |  |               |     |          |   |        |        |        |  |           |     |           |   |   |        |        |  |  |     |    |   |  |     |    |   |  |     |    
|Total net revenues        |                          | $                   | 43,088 |               |  |               | 100 | %        |   | $      | 35,087 |        |  |           | 100 | %         |   | $ | 35,399 |        |  |  | 100 | %  |   |  | 23  | %  |   |  | (1  | )% 
|Gross margin:             |                          |                     |        |               |  |               |     |          |   |        |        |        |  |           |     |           |   |   |        |        |  |  |     |    |   |  |     |    |   |  |     |    
|                          | Product                  |                     | $      | 20,430        |  |               |     | 55       | % |        | $      | 15,603 |  |           |     | 53        | % |   | $      | 14,780 |  |  |     | 50 | % |  |     | 31 | % |  |     | 6   | % 
|                          | Service                  |                     |        | 1,824         |  |               |     | 31       | % |        |        | 1,749  |  |           |     | 30        | % |   |        | 2,045  |  |  |     | 36 | % |  |     | 4  | % |  |     | (14 | )%
|                          |                          |                     |        |               |  |               |     |          |   |        |        |        |  |           |     |           |   |   |        |        |  |  |     |    |   |  |     |    |   |  |     |    
|Total gross margin        |                          | $                   | 22,254 |               |  |               | 52  | %        |   | $      | 17,352 |        |  |           | 49  | %         |   | $ | 16,825 |        |  |  | 48  | %  |   |  | 28  | %  |   |  | 3   | %  
|Research & development    |                          | $                   | 3,837  |               |  |               | 9   | %        |   | $      | 3,756  |        |  |           | 11  | %         |   | $ | 3,284  |        |  |  | 9   | %  |   |  | 2   | %  |   |  | 14  | %  
|Selling, general & admin. |                          | $                   | 17,626 |               |  |               | 41  | %        |   | $      | 14,043 |        |  |           | 40  | %         |   | $ | 13,005 |        |  |  | 37  | %  |   |  | 26  | %  |   |  | 8   | %  
|Net income (loss)         |                          | $                   | 323    |               |  |               | 1   | %        |   | $      | (829   | )      |  |           | 2   | %         |   | $ | 186    |        |  |  | 1   | %  |   |  | 139 | %  |   |  | 546 | %  



---



|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | expressed as a percentage of total net revenues
    except for gross margins which are expressed as a percentage of
    either product or service revenues as designated.



| |                              
| | -----------------------------
| | 2002 Results Compared to 2001

During 2002, total revenues increased
approximately $8.0 million, or 23%, from 2001.

During 2002, revenues from the sales of laser
equipment and instrumentation increased 26% to
$29.8 million, or 69% of total net revenues, compared to
$23.6 million, or 67%, of total net revenues in 2001.
Increases in revenues from sales of laser equipment and
instrumentation resulted from higher unit shipments, although at
lower average selling prices, due to increased aesthetic laser
shipments as well as the introduction

14



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##### Table of Contents



of the PVP laser. In addition, as we sold more
aesthetic lasers, we also sold more instruments that are used
with the aesthetic lasers. The U.S. distributor
relationship which we formed with McKesson Corporation effective
December 2000 contributed to the higher aesthetic laser sales.
We believe that we will continue to see moderate increases in
our sales of lower-priced office-based aesthetic lasers in all
geographic markets. In 2003, we believe that overall laser sales
will increase due to sales of our new PVP laser for treatment of
benign prostatic hyperplasia.


Net revenues from shipments of disposable
supplies were 31% higher in 2002 than 2001, and were
approximately $7.4 million, or 17%, of total revenues in
2002, compared to approximately $5.7 million, or 16% of
total revenues in 2001. The increase is principally due to the
January 2002 introduction of the PVP laser which has led to
increased fiber-optic sales.

Until recently, our sales have trended towards
lower-priced office lasers for aesthetic procedures and away
from lasers used in hospitals for non-aesthetic procedures. This
had resulted in lower sales of disposable supplies since office
lasers used in aesthetic procedures, although carrying one-time
sales of instrumentation, generally do not create a stream of
sales of disposable supplies. However, with the introduction of
the PVP laser we sold approximately 3,500 disposable fiber-optic
delivery devices in 2002 which has increased our disposables
revenue. We believe that our future sales of instrumentation and
disposable supplies depend on our ability to increase our
installed base of systems and also to develop and promote
surgical procedures that use these products.

Service revenues during 2002 were even with 2001.
These revenues were $5.8 million, or 14%, of total net
revenues in 2002, compared to $5.8 million, or 17%, of
total net revenues in 2001. Higher service revenues at our
foreign subsidiaries were offset by marginally lower service
revenues in the U.S. We believe that future revenues will
depend on increases to the installed base of lasers as well as
the acceptance of service contracts by our customers.

Product gross margin as a percentage of net
product revenues was 55% in 2002 compared to 53% in 2001. Higher
product gross margin is primarily due to an increase in domestic
laser sales relative to international laser sales in 2002 versus
2001. Historically, domestic product sales have higher margins
than international product sales. We expect that product gross
margin, as a percentage of net revenues in 2003, will be at
levels similar to 2002. However, we expect that these amounts
may vary from quarter to quarter during 2003 and will depend on
product demand and distribution mix.

Gross margin from service activities as a
percentage of net service revenues was 31% in 2002 compared to
30% in 2001. The increase reflects a decrease in overhead costs
for material and labor relative to revenue. We expect that gross
margin, as a percentage of net revenues from service activities
in 2003, will be similar to 2002 levels.

Research and development expenses result from
activities related to the development of new laser,
instrumentation and disposable products and the enhancement of
our existing products. In 2002, amounts spent on research and
development increased 2% from amounts spent in 2001. This was
due to an increase of $117,000 in clinical trials associated
with the PVP laser, the introduction of the i-series aesthetic
lasers, which are an upgrade of existing products, as well as
continuing refinements to other products. We expect that amounts
spent in research and development during 2003 will, as a
percentage of net revenues, be higher than that which was spent
in 2002.

Selling, general and administrative expenses
increased 26% in 2002 compared to 2001. This was due primarily
to an increase in headcount as we increased the size of our
sales force, higher commission expense following from an
increase in revenue, and higher travel expense. In addition,
legal expenses were higher than last year as a result of
increased litigation activity. We expect selling, general and
administrative expenses during 2003 to be at similar levels to
2002, as we continue to invest in educational support as well as
marketing programs for the PVP and other lasers.

In 2002, we recorded an income tax provision of
$86,000 because of the profitability of our UK subsidiary. The
U.S. operations reported a slight profit and the French
subsidiary reported a net loss in 2002. The U.S. and the French
entity have significant net operating loss carry forwards. In
2001, we recorded a tax

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provision of $45,000 for our U.K. subsidiary. Due
to a history of operating losses, management believes that there
is sufficient uncertainty regarding the realization of deferred
tax assets and a full valuation allowance is appropriate in 2002
and 2001 for our entities that had net operating losses.




| |                              
| | -----------------------------
| | 2001 Results Compared to 2000

During 2001, total revenues decreased
approximately $0.3 million, or 1%, from 2000.

During 2001, revenues from the sales of laser
equipment and instrumentation increased 3% to
$23.6 million, or 67% of total net revenues, compared to
$22.9 million, or 65%, of total net revenues in 2000.
Increases in revenues from sales of laser equipment and
instrumentation resulted from higher unit shipments of lasers
and corresponding higher shipments of scanning equipment and
hand pieces which are used with the lasers. This was partly
offset by lower average selling prices for the lasers due to
higher aesthetic laser shipments and lower non-aesthetic laser
shipments in 2001 than in 2000. The U.S. distributor
relationship which we formed with McKesson Corporation effective
December 2000 contributed to the higher aesthetic laser unit
sales.

Net revenues from shipments of disposable
supplies were 16% lower in 2001 than 2000, and were
approximately $5.7 million, or 16%, of total revenues in
2001, compared to approximately $6.8 million, or 19% of
total revenues in 2000. The decrease is principally due to
reduced shipments of disposable fiber-optic devices for hospital
surgical procedures in the United States and the Pacific Rim.

Service revenues during 2001 were 2% higher than
2000. These revenues were $5.8 million, or 17%, of total
net revenues in 2001, compared to $5.7 million, or 16%, of
total net revenues in 2000. The increase is primarily due to
higher service revenues at our foreign subsidiaries partly
offset by marginally lower service revenues in the U.S.

Product gross margin as a percentage of net
product revenues was 53% in 2001 compared to 50% in 2000. The
increase reflects a continued shift in sales mix toward higher
margin aesthetic laser product sales versus lower margin
surgical product sales.

Gross margin from service activities as a
percentage of net service revenues was 30% in 2001 compared to
36% in 2000. The decrease reflects an increase in overhead costs
for material and labor relative to revenue.

Research and development expenses result from
activities related to the development of new laser,
instrumentation and disposable products and the enhancement of
our existing products. In 2001, amounts spent on research and
development increased 14% from amounts spent in 2000. The
increase was due to final efforts necessary to bring the PVP
laser to market.

Selling, general and administrative expenses
increased 8% in 2001 compared to 2000. The increase in spending
primarily results from increased sales expenses as we increased
our selling efforts.

In 2001, we recorded an income tax provision of
$45,000 because of the profitability of our UK subsidiary. The
U.S. and French entities reported net losses in 2001 and both
have significant net operating loss carry forwards.
Consequently, no income tax provision was recorded for these
entities in 2001. In 2000, we recorded no income tax provision
due to the availability of net operating loss carry forwards.
Due to a history of operating losses, management believes that
there is sufficient uncertainty regarding the realization of
deferred tax assets and a full valuation allowance is
appropriate in 2001 and 2000 for our entities that had net
operating losses.

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Financial Review  Liquidity and
Capital Resources

The following table contains selected balance
sheet information at December 31, 2002 and 2001 (in
thousands):

|                          |  |              |        |              |  |   |        | 
|------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | 
|                          |  | December 31, |        | December 31,
|                          |  | 2002         |        | 2001        
|                          |  |              |        |             
|Cash and cash equivalents |  | $            | 4,661  |              |  | $ | 3,408  | 
|Total assets              |  | $            | 29,163 |              |  | $ | 25,482 | 
|Working capital           |  | $            | 15,652 |              |  | $ | 13,336 | 

The net increase in cash and cash equivalents in
2002 compared to 2001 was due primarily to cash provided by
operating activities.

Cash provided by operating activities in 2002
totaled $1.8 million. This was the combined result of the
following sources: Net income of $0.3 million; deferred
revenue  $0.4 million; other accrued
liabilities  $0.4; prepayments and other current
assets  $0.3 million; accounts payable increased
as we bought more material to support the higher sales
volume  $1.1 million; accrued
compensation  $0.4 million; and
warranty  $0.4 million; depreciation 
$1.1 million; and amortization of debt issuance
costs  $0.1 million. These sources were partly
offset by the following uses: we increased our inventories in
order to support the higher sales volumes we are
experiencing   $1.0 million; and accounts
receivable increased due to higher sales relative to the prior
year   $1.6 million.

Cash used in investing activities totaled
$0.8 million and consisted of capital
expenditures  $0.8 million.

Cash used by financing activities totaled $33,000
and consisted of a net decrease in line of credit 
$1.1 million; and payments on obligations under capital
leases  $0.1 million. These sources were offset
by proceeds from the sale of common stock under stock
plans  $1.2 million.

Laserscope has in place an asset based line of
credit which provides up to $5.0 million in borrowings and
expires in September 2003. Credit is extended based on eligible
accounts receivable and inventory. Laserscopes assets
collateralize the credit line which bears an interest rate
equivalent to the banks prime rate plus 1.50% per
annum. The prime rate at December 31, 2002 was 4.25%.
Borrowings against the line of credit are paid down as the
Company collects its accounts receivable. Provisions of the bank
loan agreement prohibit the payment of dividends on
non-preferred stock, or the redemption, retirement, repurchase
or other acquisition of Laserscope stock. The agreement further
requires us to maintain a minimum tangible net worth. As of
December 31, 2002, we had no outstanding borrowings under
the line and were in compliance with all covenants.

Capital expenditures totaled $0.8 million
and $1.1 million in 2002 and 2001, respectively. These
expenditures were due to capitalization of new models of lasers
to be used for research and development purposes, purchases for
computer systems, and machinery and equipment. We expect capital
expenditures in 2003 to be at levels similar to 2002.

To address our capital needs, on January 14,
2000, we completed a private placement of our common stock
providing net proceeds of approximately $1.8 million to
accredited investors, of which $1.0 million was received in
1999. We issued 2.5 million shares of our no par value
common stock at a price of $0.80 per share. We also issued
warrants to purchase 218,875 shares of our common
stock.

On February 11, 2000, we completed a private
placement of $3.0 million of subordinate convertible
debentures to affiliates of Renaissance Capital Group, Inc.,
with net proceeds to us of approximately $2.9 million. The
debentures mature seven years from issuance and bear an annual
interest rate of 8.00%. The debentures are convertible into
Laserscope common stock with an initial conversion price, which
is subject to adjustment, of $1.25. The private placement also
included warrants convertible into 240,000 shares of our
common stock.

On March 18, 2003, Renaissance Capital
Group, Inc. and the Company agreed to amend the terms of the
convertible debentures agreement. Principal payments are to
start on August 11, 2003 instead of February 11,

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2003. No other terms of the agreement are
changed. In this amendment to the agreement, Renaissance also
gave notice that it will convert debentures with a face value of
$200,000 into shares of Laserscope common stock on
March 31, 2003.


There are covenants associated with the
debentures for debt-to-equity ratio, current ratio, and interest
coverage. If we were unable to satisfy any of these covenants,
then we would be in default and the lender would have the right
to exercise various remedies including declaring due all
outstanding principal and interest. The interest coverage ratio
requirement is 1.5 for the trailing twelve months, and as of
December 31, 2002 our interest coverage was 6.7. Future
ability to meet the interest coverage requirement will depend
primarily on our ability to generate profits. The debt-to-equity
requirement is a maximum of 1.5, and the current ratio
requirement is a minimum of 1.0. As of December 31, 2002 we
were in compliance with the provisions of the covenants.

Future payments due under debt and lease
obligations as of December 31, 2002 (in thousands) are
as follows:

|      |  |            |       |           |  |         |       |       |  |   |     |  |  |   |       | 
|----- |  | ---------- | ----- | --------- |  | ------- | ----- | ----- |  | - | --- |  |  | - | ----- | 
|      |  |            |       | Operating |  | Capital |       |      
|      |  | Debentures |       | Leases    |  | Leases  |       | Total
|      |  |            |       |           |  |         |       |      
|2003  |  | $          | 147   |           |  | $       | 1,833 |       |  | $ | 123 |  |  | $ | 2,103 | 
|2004  |  |            | 324   |           |  |         | 1,853 |       |  |   | 62  |  |  |   | 2,239 | 
|2005  |  |            | 287   |           |  |         | 1,458 |       |  |   |    |  |  |   | 1,745 | 
|2006  |  |            | 255   |           |  |         |      |       |  |   |    |  |  |   | 255   | 
|2007  |  |            | 1,987 |           |  |         |      |       |  |   |    |  |  |   | 1,987 | 
|      |  |            |       |           |  |         |       |       |  |   |     |  |  |   |       | 
|Total |  | $          | 3,000 |           |  | $       | 5,144 |       |  | $ | 185 |  |  | $ | 8,329 | 
|      |  |            |       |           |  |         |       |       |  |   |     |  |  |   |       | 

We anticipate that future changes in cash and
working capital will be dependent on a number of factors
including:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | Our ability to effectively manage non-cash assets
    such as inventory and accounts receivable;                          
|
| |  | Our ability to anticipate and adapt to the
    changes in our industry such as new and alternative medical
    procedures;
|
| |  | Our level of profitability; and                                                                                           
|
| |  | Our determination to acquire or invest in
    products and businesses complementary to ours.                              

We have historically financed acquisitions using
our existing cash resources. While we believe our existing cash
resources, including our bank line of credit will be sufficient
to fund our operating needs for the next twelve months,
additional financing will be required for our currently
envisioned long term needs.

There can be no assurance that any additional
financing will be available on terms acceptable to us, or at
all. In addition, future equity financings could result in
dilution to our shareholders, and future debt financings could
result in certain financial and operational restrictions.

Recent Accounting Pronouncements

In April 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 145,
Rescission of FASB Statement No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections which eliminates inconsistencies between the
required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of
SFAS No. 145 are effective for fiscal years beginning
after May 15, 2002 and for transactions occurring after
May 15, 2002. The Company does not expect adoption of
SFAS No. 145 to have a material impact on its
financial statements.

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In June 2002, the FASB issued
SFAS No. 146, Accounting for Exit or Disposal
Activities which addresses the recognition, measurement,
and reporting of costs that are associated with exit and
disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance that the EITF
has set forth in EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 will be effective
for exit or disposal activities that are initiated after
December 31, 2002. The Company does not expect adoption of
SFAS No. 146 to have a material impact on its
financial statements.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that a liability be recorded
in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about
the guarantees that an entity has issued, including a
reconciliation of changes in the entitys product warranty
liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002,
irrespective of the guarantors fiscal year-end. The
disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after
December 15, 2002. The adoption of this standard had no
material impact on the Companys financial statements.

In November 2002, the Emerging Issues Task Force
(EITF) reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables.
EITF Issue No. 00-21 provides guidance on how to account
for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003. The Company believes that the adoption of
this standard will have no material impact on its financial
statements.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure.
SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148
requires disclosure of the pro forma effect in interim financial
statements. The transition and annual disclosure requirements of
SFAS No. 148 are effective for fiscal years ended
after December 15, 2002. The interim disclosure
requirements are effective for interim periods beginning after
December 15, 2002. The adoption of this standard had no
material impact on the Companys financial statements.

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN 46 requires
certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46
is effective immediately for all new variable interest entities
created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the
first interim or annual period beginning after June 15,
2003. The Company is currently evaluating the impact that the
adoption of this standard will have on its financial statements.




RISK FACTORS

Our business, financial condition and results of
operations have been, and in the future may be, affected by a
variety of factors, including those set forth below and
elsewhere in this report.

Limited Working Capital; Potential Need to
Raise Additional Capital

As of December 31, 2002, our total assets
were $29.2 million and our total liabilities were
$13.7 million. As of the same date, our working capital was
$15.7 million and our cash and cash equivalents totaled
$4.7 million. Current and anticipated demand for our
products as well as procurement and production affect

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our need for capital. Changes in these or other
factors could have a material impact on capital requirements and
may require us to raise additional capital.


For example, to address our capital needs, on
January 14, 2000 we completed a private placement of our
common stock providing net proceeds of approximately
$1.8 million to accredited investors. We issued
2.5 million shares of our no par value Common Stock at a
price of $0.80 per share. We also issued warrants to
purchase 218,875 shares of our Common Stock.

Similarly, on February 11, 2000, we
completed a private placement of subordinate convertible
debentures to affiliates of Renaissance Capital Group, Inc.,
with net proceeds to us of approximately $2.9 million. The
debentures mature seven years from issuance and bear an interest
rate of 8.00%. The debentures are convertible into Laserscope
common stock at an initial conversion price of $1.25, which is
subject to adjustment. The private placement also included
warrants convertible into 240,000 shares of our common
stock.

On March 18, 2003, Renaissance Capital
Group, Inc. and the Company agreed to amend the terms of the
convertible debentures agreement. Principal payments are to
start on August 11, 2003 instead of February 11, 2003.
No other terms of the agreement are changed. In this amendment
to the agreement, Renaissance also gave notice that it will
convert debentures with a face value of $200,000 into shares of
Laserscope common stock on March 31, 2003.

There are covenants associated with the
debentures for debt-to-equity ratio, current ratio, and interest
coverage. In the event that we are unable to satisfy any of
these covenants, then we would be in default and the lender
would have the right to exercise various remedies including
declaring due all outstanding principal and interest. The
interest coverage ratio requirement is 1.5 for the trailing
twelve months, and as of December 31, 2002 our interest
coverage was 6.7. Future ability to meet the interest coverage
requirement will depend primarily on our ability to generate
profits. The debt-to-equity requirement is a maximum of 1.5, and
the current ratio requirement is a minimum of 1.0. As of
December 31, 2002 we were in compliance with the provisions
of the covenants.

In 2002, except for shares issued through the
Companys Employee Stock Purchase Plan and the Incentive
Stock Option Plans, the only other capital raised was through
the exercise of warrants, which resulted in the issuance of
5,000 shares.

We anticipate that future changes in cash and
working capital will be dependent on a number of factors
including:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | Our ability to manage effectively non-cash assets
    such as inventory and accounts receivable;                          
|
| |  | Our ability to anticipate and adapt to the
    changes in our industry such as new and alternative medical
    procedures;
|
| |  | Our level of profitability; and                                                                                           
|
| |  | Our determination to acquire or invest in
    products and businesses complementary to ours.                              

We have historically financed acquisitions using
our existing cash resources. While we believe our existing cash
resources, including our bank line of credit, will be sufficient
to fund our operating needs for the next twelve months,
additional financing will be required for our currently
envisioned long term needs.

There also can be no assurance that any
additional financing will be available on terms acceptable to
us, or at all. In addition, future equity financings could
result in dilution to our shareholders, and future debt
financings could result in certain financial and operational
restrictions.

History of Losses; Uncertainty of Future
Profitability

At December 31, 2002, we had an accumulated
deficit of $39.5 million. We reported net income of
$0.3 million for the year ended December 31, 2002, net
loss of $0.8 million for the year ended December 31,

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2001, and net income of $0.2 million for the
year ended December 31, 2000. There can be no assurance
that we can achieve or maintain profitability on a quarterly
basis or at all.


Government Regulation; Uncertainty of
Obtaining Regulatory Approval

Government regulation in the United States and
other countries is a significant factor in the development,
manufacturing and marketing of many of our products.

Laserscope and its products are regulated in the
United States by the FDA under 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 qualify for a
Section 510(k) (510(k)) procedure under which
the manufacturer gives the FDA pre-market 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.

There can be no assurance that the FDA will grant
marketing clearance for our future products on a timely basis,
or at all.

If the product does not qualify for the 510(k)
procedure, the manufacturer must file a pre-market 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 pre-clinical 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.

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

Certain other countries require medical device
manufacturers to obtain clearances for products prior to
marketing the products in those countries. The requirements vary
widely from country to country and are subject to change.

We are also required to register with the FDA and
state agencies, such as the Food and Drug Branch of the
California Department of Health Services (CDHS), as a medical
device manufacturer. We are inspected routinely by these
agencies to determine our compliance with the FDAs current
Good Manufacturing Practice regulations. Those
regulations impose certain procedural and documentation
requirements upon medical device manufacturers concerning
manufacturing, testing and quality control activities. If these
inspections determine violations of applicable regulations, the
continued marketing of any products manufactured by us may be
adversely affected.

In addition, our 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 laser manufacturers. These requirements
also include affixing warning labels to laser systems, as well
as incorporating certain safety features in the design of laser
products.

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

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We are 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. We believe that we are in
material compliance with these requirements.

Insurance Reimbursement

Demand for certain of our products depends on
government and private insurance reimbursement of hospitals and
physicians for health care costs, including, but not limited to,
reimbursement of capital equipment costs. Reductions or delays
in such insurance coverage or reimbursement may negatively
impact hospitals and physicians decisions to
purchase our products, adversely affecting our future sales.

A substantial portion of our laser sales are for
aesthetic procedures that are generally not subject to
reimbursement by government or private health insurance. The
general absence of insurance coverage for these cosmetic
procedures may restrict the development of this market.

In November 2002, the Centers for Medicare and
Medicaid Services (CMS) announced its final rule with respect to
Ambulatory Payment Classification (APC) reimbursement codes
to be implemented in January 2003. One of the APC codes
that was affected is currently being used by hospitals to bill
Medicare for the PVP procedures. In February 2003, CMS
issued a technical correction to this APC code which represents
the reimbursement under this code for 2003. The reimbursement
level to the hospital for this code was reduced approximately
19% for the hospital site of service for Medicare patients
compared to the reimbursement during 2002.

This reduction will likely have a short-term
adverse effect on the adoption and sales growth of the Photo
Vaporization of the Prostate (PVP) procedure in the
United States as some hospital-based customers who would
normally consider adopting the PVP procedure delay their
purchases or adoption until the reimbursement climate becomes
more attractive. In addition, there are no assurances that CMS
nor other reimbursement setting agencies will not change the
classification of the PVP procedure to a reimbursement code or
codes that further negatively impact the adoption of the
procedure in either the hospital outpatient or other settings.

Uncertainty of Technological Change;
Uncertainty of New Product Development and Acceptance

We operate in an industry that is subject to
rapid technological change. Our ability to remain competitive
and future operating results will depend upon, among other
things, our ability to anticipate and respond rapidly to such
change by developing, manufacturing and marketing
technologically innovative products in sufficient quantities at
acceptable costs to meet such demand. As we introduce new
products this may cause some of our existing products to become
obsolete, which may result in the write-off of inventory.
However, without new products and enhancements, our existing
products will likely become obsolete due to technological
advances by other companies, which could result in the write-off
of inventory as well as diminished revenues. Therefore, we
intend to continue to invest significant amounts in research and
development.

Our expenditures for research and development
were $3.8 million in each of 2002 and 2001 and
$3.3 million in 2000. We anticipate that our ability to
compete will require significant research and development
expenditures with a continuing flow of innovative, high-quality
products. We cannot assure that we will be successful in
designing, manufacturing or selling enhanced or new products in
a timely manner. Nor can we assure that a competitor could not
introduce a new or enhanced product or technology that could
have an adverse effect on our competitive position.

Our current research and development programs are
directed toward the development of new laser systems and
delivery devices. We cannot assure that these markets will
develop as anticipated or that our product development efforts
will prove successful. Nor can we assure that such new products,
if developed and introduced, will be accepted by the market.

22



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Dependence on Single-Source Suppliers and
Certain Third Parties

Certain of the components used in our laser
products, including certain optical components, are purchased
from single sources. While we believe that most of these
components are available from alternate sources, an interruption
of these or other supplies could adversely affect our ability to
manufacture lasers.

Competition

We compete in the non-ophthalmic surgical segment
of the worldwide medical laser market. In this market, lasers
are used in hospital operating rooms, outpatient surgery centers
and individual physician offices for a wide variety of
procedures. This market is highly competitive. Our competitors
are numerous and include some of the worlds largest
organizations as well as smaller, highly-specialized firms. Our
ability to compete effectively depends on such factors as:



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | market acceptance of our products;                            
| |  | product performance;                                          
| |  | price;                                                        
| |  | customer support;                                             
| |  | the success and timing of new product
    development; and    
| |  | continued development of successful distribution
    channels.

Some of our current and prospective competitors
have or may have significantly greater financial, technical,
research and development, manufacturing and marketing resources
than we have. In 2001, two of our largest competitors, ESC
Medical Systems (ESC) and Coherent Medical,
completed a business combination. To compete effectively, we
will need to continue to expand our product offerings,
periodically enhance our existing products and continue to
enhance our distribution.

Certain surgical laser manufacturers have
targeted their efforts on narrow segments of the market, such as
angioplasty and lithotripsy. Their products may compete for the
same capital equipment funds as our products, and accordingly,
these manufacturers may be considered our competitors.
Generally, surgical laser manufacturers such as Laserscope
compete with standard surgical methods and other medical
technologies and treatment modalities. We cannot assure that we
can compete effectively against such competitors. In addition,
we cannot assure that these or other companies will not succeed
in developing technologies, products or treatments that are more
effective than ours or that would render our technology or
products obsolete or non-competitive.

Reliance on Patents and Licenses

We hold several patents issued in the
United States, generally covering surgical laser systems,
delivery devices, calibration inserts and the laser resonator.
We have also licensed certain technologies from others.

We cannot assure that any patents or licenses
that we hold or that may be issued as a result of our patent
applications will provide any competitive advantages for our
products. Nor can we assure that any of the patents that we now
hold or may hold in the future will not be successfully
challenged, invalidated or circumvented in the future. In
addition, we cannot assure that competitors, many of which have
substantial resources and have made substantial investments in
competing technologies, will not seek to apply for and obtain
patents that will prevent, limit or interfere with our ability
to make, issue, use and sell our products.

Furthermore, we cannot be certain that the steps
we have taken will prevent the misappropriation of our
intellectual property, particularly in foreign countries where
the laws may not protect our proprietary rights as fully as in
the United States.

We believe that we own or have the right to use
the basic patents covering our products. However, the laser
industry is characterized by a very large number of patents,
many of which are of questionable validity and some of which
appear to overlap with other issued patents. As a result, there
is a significant amount of uncertainty in the industry regarding
patent protection and infringement. Because patent applications
are maintained in secrecy in the United States until such
patents are issued and are maintained in secrecy for a

23



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##### Table of Contents



period of time outside the United States, we
can conduct only limited searches to determine whether our
technology infringes any patents or patent applications of
others.


Failure to Attract or Retain Key Personnel Can
Adversely Affect Results

We depend upon the efforts and abilities of a
number of current key personnel. If we are unable to attract and
retain key employees it would have a material adverse effect on
our business, financial condition, results of operations, and
future cash flows.

Reliance on Key Customers

In December 2000, Laserscope and McKesson
Corporation (McKesson) entered into a five year
agreement whereby McKesson would obtain exclusive distribution
rights for the Companys aesthetic product lines to
doctors offices in the United States. During 2002,
aesthetic product sales in the United States accounted for
approximately 49% of our total revenues and at December 31,
2002, accounts receivable from McKesson accounted for
approximately 19% of our total accounts receivable. If we are
unable to maintain a favorable relationship with McKesson or if
McKesson encounters financial difficulties, it would have a
material adverse effect on our business, financial condition,
results of operations, and future cashflows.

Fluctuations in Quarterly Operating
Results

A number of factors affect our quarterly
financial results including the timing of shipments and orders.
Our laser products are relatively expensive pieces of medical
capital equipment and the precise shipment date of specific
units can have a marked effect on our results of operations on a
quarterly basis. Any delay in product shipments near the end of
a quarter could cause our quarterly results to fall short of
anticipated levels. Furthermore, to the extent we receive orders
near the end of a quarter, we may not be able to fulfill the
order during the balance of that same quarter. Moreover, we
typically receive a disproportionate percentage of orders toward
the end of each quarter. To the extent that we do not receive
anticipated orders or orders are delayed beyond the end of the
applicable quarter, our results may be adversely affected and
may be unpredictable from quarter to quarter. In addition,
because a significant portion of our revenues in each quarter
result from orders received in that quarter, we base our
production, inventory and operating expenditure levels on
anticipated revenue levels. Thus, if sales do not occur when
expected, expenditure levels could be disproportionately high
and operating results for that quarter and potentially future
quarters, would be adversely affected. We cannot assure that
Laserscope will accomplish revenue growth or profitability on a
quarterly or annual basis. Nor can we assure that revenue growth
or profitability will not fluctuate significantly from quarter
to quarter.

Potential of Product Defects

Laser systems are inherently complex in design
and require ongoing regular maintenance. The manufacture of our
lasers, laser products and systems involves a highly complex and
precise process. As a result of the technical complexity of our
products, changes in our or our suppliers manufacturing
processes or the inadvertent use of defective materials by us or
our suppliers could result in a material adverse effect on our
ability to achieve acceptable manufacturing yields and product
reliability. To the extent that we do not achieve such yields or
product reliability, our business, operating results, financial
condition and customer relationships would be adversely affected.

Our customers may discover defects in our
products after the products have been fully deployed and
operated under peak stress conditions. In addition some of our
products are combined with products from other vendors, which
may contain defects. As a result, should problems occur, it may
be difficult to identify the source of the problem. If we are
unable to fix defects or other problems, we could experience,
among other things:



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | loss of customers;                                            
| |  | increased costs of product, returns and warranty
    expenses;
| |  | damage to our brand reputation;                               

24



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| |   |                                                                   
| | - | ------------------------------------------------------------------
| |  | failure to attract new customers or achieve
    market acceptance;
| |  | diversion of development and engineering
    resources; and       
| |  | legal actions by our customers.                                   

The occurrence of any one or more of the
foregoing factors could seriously harm our business, financial
condition and results of operations.

Product Liability Risk; Limited Insurance
Coverage

Our business has significant risks of product
liability claims. We have experienced product liability claims
from time to time, which we believe are ordinary for our
business. While we cannot predict or determine the outcome of
the actions brought against us, we believe that these actions
will not ultimately have a material adverse impact on
Laserscopes financial position, results of operations, and
future cash flows.

At present, we maintain product liability
insurance on a claims made basis with coverage of
$10.0 million in the aggregate with a deductible of
$0.1 million per occurrence and an annual maximum aggregate
deductible of $0.5 million. We cannot assure that such
insurance coverage will be available to us in the future at a
reasonable cost, if at all. Nor can we assure that other claims
will not be brought against us in excess of our insurance
coverage.

Natural Catastrophic Events; Terrorism and
Other Manmade Problems

Our corporate headquarters, including our
research and development operations, our manufacturing
facilities, and our principal sales, marketing and service
offices, are located in the Silicon Valley area of Northern
California, a region known for seismic activity. A significant
natural disaster, such as an earthquake or a flood, could have a
material adverse impact on our business, operating results, and
financial condition. In addition, despite our implementation of
network security measures, our servers are vulnerable to
computer viruses, break-ins, and similar disruptions from
unauthorized tampering with our computer systems. Any such event
could have a material adverse effect on our business, operating
results, and financial condition. In addition, the effects of
war or acts of terrorism could have a material adverse effect on
our business, operating results, and financial condition. The
terrorist attacks in New York and Washington, D.C. on
September 11, 2001 disrupted commerce throughout the world
and intensified the uncertainty of the U.S. and other economies.
The continued threat of terrorism and heightened security and
military action in response to this threat, or any future acts
of terrorism, may cause further disruptions to these economies
and create further uncertainties. To the extent that such
disruptions or uncertainties result in delays or cancellations
of customer orders, or the manufacture or shipment of our
products, our business, operating results and financial
condition could be materially and adversely affected.

Factors Affecting Financial Results and Stock
Price

A number of factors affect our financial results
and stock price including, but not limited to:



| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | product mix;                                                                                                                                                                            
| |  | competitive pricing pressures;                                                                                                                                                          
| |  | material costs;                                                                                                                                                                         
| |  | revenue and expenses related to new products and
    enhancements to existing products;                                                                                                 
| |  | delays in customer purchases in anticipation of
    new products or product enhancements by Laserscope or its
    competitors; and                                                      
| |  | the risk of loss or interruption to our
    operations or increased costs due to earthquakes, the
    availability of power and energy supplies and other events
    beyond our control.

The market price of our common stock may be
subject to significant fluctuations. These fluctuations may be
due to factors specific to Laserscope, such as:



| |   |                                                       
| | - | ------------------------------------------------------
| |  | quarterly fluctuations in our financial results;      
| |  | changes in analysts estimates of future
    results; 
| |  | changes in investors perceptions of our
    products;

25



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| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | announcement of new or enhanced products by us or
    our competitors;                         
| |  | announcements relating to acquisitions and
    strategic transactions by us or our competitors;
| |  | general conditions in the medical equipment
    industry; and                                  
| |  | general conditions in the financial markets.                                                   

The stock market has from time to time
experienced extreme price and volume fluctuations, particularly
among stocks of high technology companies, which, on occasion,
have been unrelated to the operating performance of particular
companies. Factors not directly related to Laserscopes
performance, such as negative industry reports or disappointing
earnings announcements by publicly traded competitors, may have
an adverse impact on the market price of our common stock.

As of March 13, 2003, we had
16,930,432 shares of outstanding common stock. The sale of
a substantial number of shares of common stock or the perception
that such sales could occur, could adversely affect prevailing
market prices for our common stock.

International Business

Our international revenues were 26% of total
revenues in the year ended December 31, 2002, compared to
35% of total revenues during the comparable period in 2001. Our
international sales are made through international distributors
and wholly-owned subsidiaries with payments to us typically
denominated in the local currencies of the United Kingdom and
France, and in U.S. Dollars in the rest of the world. We
intend to continue our operations outside of the United States
and potentially to enter additional international markets. These
activities, require significant management attention and
financial resources and further subject us to the risks of
operating internationally. These risks include, but are not
limited to:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | 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.                             

We are also subject to general geopolitical risks
in connection with our international operations, such as:



| |   |                                                           
| | - | ----------------------------------------------------------
| |  | differing economic conditions;                            
| |  | changes in political climate;                             
| |  | differing tax structures; and                             
| |  | changes in diplomatic and trade relationships and
    war.

In addition, fluctuations in currency exchange
rates may negatively affect our ability to compete in terms of
price against products denominated in local currencies.

Accordingly, our future results could be
materially adversely affected by changes in these regulatory,
geopolitical and other factors.

We do not engage in hedging transactions for
speculative or trading purposes.

Legal Proceedings

Laserscope is a party to a number of legal
proceedings arising in the ordinary course of business. While it
is not feasible to predict or determine the outcome of the
actions brought against us, we believe that the ultimate
resolution of these claims will not ultimately have a material
adverse effect on Laserscopes financial position, results
of operations, or future cash flows.

Interest Rate Risk

Laserscopes exposure to market rate risk
for changes in interest rates relates primarily to our
outstanding debt. In 2002, 2001, and 2000 we did not use
derivative financial instruments. We invest excess cash in money
market funds. Our debt financing consists of convertible
debentures and bank loans requiring either fixed or variable
rate interest payments. Investments in and borrowings under both
fixed-rate and floating-rate interest-

26



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##### Table of Contents



earning instruments carry a degree of interest
rate risk. On the investment side, fixed-rate securities may
have their fair market value adversely affected due to a rise in
interest rates, while floating-rate securities may produce less
income than expected if interest rates fall. In addition, our
future investment income may fall short of securities analyst
expectations due to changes in interest rates, or we may suffer
losses in principal if forced to sell securities which have
declined in market value due to changes in interest rates. On
the debt side, borrowings that require fixed-rate interest
payments require greater than current market rate interest
payments if interest rates fall, while floating rate borrowings
may require greater interest payments if interest rates rise.
Additionally, our future interest expense may be greater than
expected due to changes in interest rates.


Warranty Obligations

We have a direct field service organization that
provides service for our products. We generally provide a twelve
month warranty on our laser systems. After the warranty period,
maintenance and support is provided on a service contract basis
or on an individual call basis. Our warranties and premium
service contracts provide for a 99.0% Uptime
Guarantee on our laser systems. Under provisions of this
guarantee, we extend the term of the related warranty or service
contract if specified system uptime levels are not maintained.
Although most systems covered by this guarantee have achieved a
99.0% uptime rate to date, we cannot assure that we can maintain
such uptime rates in the future.

No Dividends

We have never paid cash dividends on our common
stock and do not anticipate paying cash dividends on the common
stock in the foreseeable future. The payment of dividends on the
common stock will depend on our earnings, financial condition
and other business and economic factors affecting us at such
time as the Board of Directors may consider relevant.

Penny Stock Rules

Our common stock is traded on the National
Association of Securities Dealers Automated Quotation
(NASDAQ) National Market System, which requires that
a company have a minimum bid price of $1.00 in order to qualify
for continued listing. Our low bid price in 2002 for each of the
quarters March 31, June 30, September 30 and
December 31 was $2.40, $3.51, $3.26 and $3.25,
respectively, and our last traded price on March 13, 2003
was $4.17. If we fail to maintain our listing for our common
stock on the NASDAQ National Market System, and no other
exclusion from the definition of penny stock under
the Exchange Act is available, any brokers engaging in
transactions in our securities would be required to provide
their customers with a risk disclosure document, the
compensation of the broker/ dealer in the transaction and
monthly account statements showing the market values of our
securities held in the customers accounts. The bid and
offer quotations and compensation information must be provided
prior to effecting the transaction and must be contained on the
customers confirmation. If brokers become subject to the
penny stock rules when engaging in transactions in
our securities, they would become less willing to engage in such
transactions, thereby making it more difficult for shareholders
to dispose of their shares of Laserscope common stock.

Dilution

Shareholders may experience dilution in the net
tangible book value of their investment upon the exercise of
outstanding options and warrants granted under Laserscopes
stock option plans and other options, warrants and outstanding
convertible securities.

Other

Other risks are detailed from time to time in our
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.

27



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##### Table of Contents





|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

We are exposed to a variety of risks, including
changes in interest rates affecting the return on investments,
outstanding debt balances and foreign currency fluctuations. In
the normal course of business, we employ established policies
and procedures to manage exposure to fluctuations in interest
rates and foreign currency values.

Interest Rate Risk

Our exposure to market rate risk for changes in
interest rates relates primarily to our outstanding debt. In
2002 and 2001, we did not use derivative financial instruments.
We invest our excess cash in money market funds. Our debt
financings consist of convertible debentures and bank loans
requiring either fixed or variable rate interest payments.
Investments in and borrowings under both fixed-rate and
floating-rate interest-earning instruments carry a degree of
interest rate risk. On the investment side, fixed-rate
securities may have their fair market value adversely affected
due to a rise in interest rates, while floating-rate securities
may produce less income than expected if interest rates fall. In
addition, our future investment income may fall short of
expectations due to changes in interest rates or we may suffer
losses in principal if forced to sell securities that have
declined in market value due to changes in interest rates. On
the debt side, borrowings, such as our convertible notes, that
require fixed-rate interest payments require greater than
current market rate interest payments if interest rates fall,
while floating rate borrowings, such as our line of credit, may
require greater interest payments if interest rates rise.
Additionally, our future interest expense may be greater than
expected due to changes in interest rates.

The following table presents principal amounts
and related weighted average interest rates by year of maturity
for our debt obligations as of December 31, 2002 and 2001.

|     |  |                    |       |               |  |      |       |      |  |  |      |   |  |  |      |  
|---- |  | ------------------ | ----- | ------------- |  | ---- | ----- | ---- |  |  | ---- | - |  |  | ---- | -
|     |  |                    |       |               |  |     
|     |  |                    |       | Average      
|     |  | Principal ($000s) |       | Interest Rate
|     |  |                    |       |              
|     |  | 2002               |       | 2001          |  | 2002 |       | 2001
|     |  |                    |       |               |  |      |       |     
|2003 |  | $                  | 147   |               |  | $    | 314   |      |  |  | 8.00 | % |  |  | 8.00 | %
|2004 |  |                    | 324   |               |  |      | 305   |      |  |  | 8.00 | % |  |  | 8.00 | %
|2005 |  |                    | 287   |               |  |      | 270   |      |  |  | 8.00 | % |  |  | 8.00 | %
|2006 |  |                    | 255   |               |  |      | 240   |      |  |  | 8.00 | % |  |  | 8.00 | %
|2007 |  |                    | 1,987 |               |  |      | 1,871 |      |  |  | 8.00 | % |  |  | 8.00 | %
|     |  |                    |       |               |  |      |       |      |  |  |      |   |  |  |      |  
|     |  | $                  | 3,000 |               |  | $    | 3,000 |      |  |  |      |   |  |  |      |  
|     |  |                    |       |               |  |      |       |      |  |  |      |   |  |  |      |  

Foreign Currency Risk

International revenues were 26% of total revenues
in the year ended December 31, 2002, compared to 35% of
total revenues during the comparable period in 2001, and 38% of
total revenues during the comparable period in 2000. Our
international sales are made through international distributors
and wholly-owned subsidiaries with payments to us typically
denominated in the local currencies of the United Kingdom and
France, and in U.S. Dollars in the rest of the world. We
intend to continue our operations outside of the United States
and potentially to enter additional international markets. These
activities, require significant management attention and
financial resources and further subject us to the risks of
operating internationally. These risks include, but are not
limited to:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | changes in regulatory requirements;                                                      
| |  | delays resulting from difficulty in obtaining
    export licenses for certain technology;
| |  | customs, tariffs and other barriers and
    restrictions;                                
| |  | the burdens of complying with a variety of
    foreign laws.                             

28



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We are also subject to general geopolitical risks
in connection with our international operations, such as:



| |   |                                                           
| | - | ----------------------------------------------------------
| |  | differing economic conditions;                            
| |  | changes in political climate;                             
| |  | differing tax structures; and                             
| |  | changes in diplomatic and trade relationships and
    war.

In addition, fluctuations in currency exchange
rates may negatively affect our ability to compete in terms of
price against products denominated in local currencies.

Accordingly, our future results could be
materially adversely affected by changes in these regulatory,
geopolitical and other factors.

We do not engage in hedging transactions for
speculative or trading purposes.



|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Consolidated financial statements of Laserscope
at December 31, 2002 and 2001, and for each of the three
years in the period ended December 31, 2002, 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 15, Exhibits, Financial Statement Schedules and
reports on Form 8-K.



|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.




PART III

Certain information required by Part III is
omitted from this Annual Report on Form 10-K because the
Company will file a definitive proxy statement prior to
April 30, 2003 pursuant to Regulation 14A (the
Proxy Statement) for its Annual Meeting of
Shareholders to be held June 27, 2003 and the information
included in the Proxy Statement is incorporated herein by
reference.



|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information concerning the Companys
directors and executive officers required by this Item 10
is incorporated by reference from the Companys Proxy
Statement for the 2003 Annual Meeting of Shareholders under the
headings Election of Directors and
Management, respectively. See also Item 1 above.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item 11 is
incorporated by reference from the Companys Proxy
Statement for the 2003 Annual Meeting of Shareholders under the
heading Executive Compensation.



|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The information required by this Item 12 is
incorporated by reference from the Companys Proxy
Statement for the 2003 Annual Meeting of Shareholders under the
heading Election of Directors and Beneficial
Ownership of Securities.



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this Item 13 is
incorporated by reference from the Companys Proxy
Statement for the 2003 Annual Meeting of Shareholders under the
heading Certain Transactions.

29



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##### Table of Contents






PART IV



|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) Evaluation of disclosure controls and
procedures

Under the supervision and with the participation
of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of our
disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934)
within 90 days of the filing date of this report. Based on
this evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and
procedures need improvement. (See Item 14(b) below)

(b) Changes in internal controls

In connection with the preparation of the
Companys financial statements as of and for the year ended
December 31, 2002, management, in conjunction with our financial
advisors, identified significant deficiencies that relate to our
foreign subsidiaries and that were primarily caused by turnover
of accounting personnel. Management believes that it had and
continues to have internal control procedures in effect at the
consolidated level sufficient to prevent any material
misstatement and in fact these deficiencies did not result in
any material misstatement of our consolidated financial results
for the year ended December 31, 2002 or any of the quarters
within 2002. However, corrective actions are being instituted,
and these matters have been discussed with our independent
accountants and the Audit Committee of the Board of Directors of
the Company.

30



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##### Table of Contents





|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) (1) Financial Statements:

|                                                                                                       |  |      |                  | 
|------------------------------------------------------------------------------------------------------ |  | ---- | ---------------- | 
|                                                                                                       |  | Page
|                                                                                                       |  |     
|Report of PricewaterhouseCoopers LLP, Independent
    Accountants                                      |  |      | F-1              | 
|Report of Ernst & Young LLP, Independent
    Auditors                                                  |  |      | F-2              | 
|Consolidated Balance Sheets at December 31,
    2002 and 2001                                          |  |      | F-3              | 
|Consolidated Statements of Operations 
    Years ended December 31, 2002, 2001 and 2000               |  |      | F-4              | 
|Consolidated Statements of Cash Flows 
    Years ended December 31, 2002, 2001 and 2000               |  |      | F-5              | 
|Consolidated Statements of Shareholders
    Equity  Years ended December 31, 2002, 2001 and
    2000 |  |      | F-6              | 
|Notes to Consolidated Financial Statements                                                             |  |      | F-7 through F-23 | 

(2) The following financial statement
schedule for the years ended December 31, 2002, 2001 and
2000 is submitted herewith:

|                                                    |                                                                                                                                                                         |      |     |  | 
|--------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | --- |  | 
|                                                    |                                                                                                                                                                         | Page
|                                                    |                                                                                                                                                                         |     
|Schedule II  Valuation and
    Qualifying Accounts |                                                                                                                                                                         |      | S-1 | 
|                                                   
|                                                    | 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):

|        |       |             |  |                                                                                                                                                                              
|------- | ----- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 2.1   |             |  | Acquisition Agreement between Laserscope and
    Heraeus Med GmbH.(8)                                                                                                        
|        | 2.1A  |             |  | Amendment Number One to Acquisition Agreement
    between Laserscope and Heraeus Med GmbH.(10)                                                                               
|        | 3.3   |             |  | Eighth Amended and Restated Articles of
    Incorporation of Registrant.(21)                                                                                                 
|        | 3.4   |             |  | By-laws of Registrant, as amended.(2)                                                                                                                                        
|        | 4.1   |             |  | Common Shares Rights Agreement dated as of
    October 31, 1991 between Laserscope and American Stock
    Transfer & Trust Company as Rights Agent.(5)                       
|        | 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.(6)
|        | 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.(7)
|        | 10.1A |             |  | 1984 Stock Option Plan, as amended, and forms of
    Incentive Stock Option Agreement and Non-statutory Stock Option
    Agreement.(2)                                       
|        | 10.1B |             |  | 1994 Stock Option Plan and forms of Incentive
    Stock Option Agreement and Non-statutory Stock Option
    Agreement.(3)                                                    
|        | 10.2  |             |  | 1984 Stock Purchase Plan and form of Common Stock
    Purchase Agreement.(1)                                                                                                 
|        | 10.3  |             |  | 1989 Employee Stock Purchase Plan and form of
    Subscription Agreement.(2)                                                                                                 
|        | 10.3A |             |  | 1999 Employee Stock Purchase Plan and form of
    Subscription Agreement.(14)                                                                                                
|        | 10.4  |             |  | 401(k) Plan.(1)                                                                                                                                                              
|        | 10.6  |             |  | Net Lease Agreement between the Registrant and
    Realtec Properties dated June 20, 2000.(17)                                                                               
|        | 10.6A |             |  | Net Lease Agreement between the Registrant and
    Realtec Properties dated October 18, 2000.(17)                                                                            
|        | 10.10 |             |  | Form of indemnification agreement.(1)                                                                                                                                        

31



---



##### Table of Contents



|        |        |             |  |                                                                                                                                     
|------- | ------ | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.11  |             |  | Amended and Restated Loan and Security Agreement
    between the Registrant and Silicon Valley Bank Dated
    November 23, 1996.(10)
|        | 10.11A |             |  | Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated November 26,
    1997.(10)                     
|        | 10.11B |             |  | Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated March 18, 1998.(10)                            
|        | 10.11C |             |  | Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated September 3,
    1998.(11)                     
|        | 10.11D |             |  | Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated November 25,
    1998.(12)                     
|        | 10.11E |             |  | Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated March 17, 1999.(12)                            
|        | 10.11F |             |  | Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated March 30, 1999.(13)                            
|        | 10.11G |             |  | Loan and Security Agreement between the
    Registrant and Silicon Valley Bank dated October 1,
    1999.(14)                       
|        | 10.11H |             |  | Amendment to Loan and Security Agreement between
    the Registrant and Silicon Valley Bank dated September 25,
    2000.(16)       
|        | 10.11I |             |  | Amendment to Loan and Security Agreement between
    the Registrant and Silicon Valley Bank dated September 26,
    2001.(18)       
|        | 10.11J |             |  | Amendment to Loan and Security Agreement between
    the Registrant and Silicon Valley Bank dated September 26,
    2002.(20)       
|        | 10.13  |             |  | 1990 Directors Stock Option Plan and form
    of Option Agreement.(2)                                                              
|        | 10.14  |             |  | Form of Laserscope Management Continuity
    Agreement, as amended.(15)                                                             
|        | 10.14A |             |  | Form of Laserscope Management Continuity
    Agreement, as amended.(19)                                                             
|        | 10.18  |             |  | 1995 Directors Stock Option Plan and form
    of Option agreement.(4)                                                              
|        | 10.18A |             |  | 1999 Directors Stock Option Plan.(14)                                                                                              
|        | 10.19  |             |  | Common Stock Placement Agreement.(14)                                                                                               
|        | 10.19A |             |  | Form of Common Stock Purchase Agreement.(14)                                                                                        
|        | 10.20  |             |  | Convertible Loan Agreement.(14)                                                                                                     
|        | 10.20A |             |  | Amendment to Convertible Loan Agreement.(21)                                                                                        
|        | 22.1   |             |  | Subsidiaries of Registrant, as amended.(17)                                                                                         
|        | 23.1   |             |  | Consent of Independent Accountants.(21)                                                                                             
|        | 23.2   |             |  | Consent of Ernst & Young LLP.(21)                                                                                                   
|        | 25.1   |             |  | Power of Attorney (see page 34).(21)                                                                                                
|        | 99.1   |             |  | Certification of Principal Executive Officer
    pursuant to 18 U.S.C. section 1350.(21)                                            
|        | 99.2   |             |  | Certification of Principal Financial Officer
    pursuant to 18 U.S.C. section 1350.(21)                                            



---



| |     |                                                                                                                                                                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | 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.
|
| | (2) | 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.                                                                                         
|
| | (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, 1994.                                                                                         

32



---



##### Table of Contents





| |     |                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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/ A for the year ended December 31, 1995.        
|
| | (5) | Incorporated by reference to Exhibit 1 of
    the Registrants Registration Statement on Form 8-A
    filed November 15, 1991.                                                                                        
|
| | (6) | 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.
|
| | (7) | 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.                                                 
|
| | (8) | Incorporated by reference to Exhibit A to
    the Definitive Proxy Statement for the Special Meeting of
    Shareholders held August 29, 1996.                                                                        
|
| | (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, 1996.        



|     |                                                                                                                                                                                                                            
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | 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, 1997.             
|    
|(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
    September 30, 1998.
|    
|(12) | 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, 1998.             
|    
|(13) | 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 March 31,
    1999     
|    
|(14) | 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, 1999.                
|    
|(15) | 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 March 31,
    2000.    
|    
|(16) | 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
    September 30, 2000.
|    
|(17) | 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, 2000.                
|    
|(18) | 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
    September 30, 2001.
|    
|(19) | 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 March 31,
    2002.    
|    
|(20) | 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
    September 30, 2002.
|    
|(21) | Filed herewith.                                                                                                                                                                                                            

Reports on Form 8-K:

None.

33



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##### Table of Contents






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



| |     |                   
| | --- | ------------------
| | By: | /s/ ERIC M. REUTER

| |                                          
| | -----------------------------------------
| |                                          
| | Eric M. Reuter                           
| | President and Chief Executive
    Officer

Date: March 27, 2003






POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Eric M. Reuter and Dennis LaLumandiere as his attorneys-in-fact,
each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and
Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.

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.

|                                                  |  |                                                                                                                             |  |                |  | 
|------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                                  |  |                                                                                                                             |  |               
|Signature                                         |  | Title                                                                                                                       |  | Date          
|                                                  |  |                                                                                                                             |  |               
|                                                 
|/s/ ROBERT J. PRESSLEY(Robert J. Pressley, Ph.D.) |  | Chairman of the Board of Directors                                                                                          |  | March 27, 2003
|                                                 
|/s/ ERIC M. REUTER(Eric M. Reuter)                |  | President, Chief Executive Officer
    and Director
    (Principal Executive Officer)                                       |  | March 27, 2003
|                                                 
|/s/ DENNIS LALUMANDIERE(Dennis LaLumandiere)      |  | Vice President, Finance,
    Chief Financial Officer
    and Secretary
    (Principal Financial and
    Accounting Officer) |  | March 27, 2003
|                                                 
|/s/ JAMES BAUMGARDT(James Baumgardt)              |  | Director                                                                                                                    |  | March 27, 2003
|                                                 
|/s/ ROBERT C. PEARSON(Robert C. Pearson)          |  | Director                                                                                                                    |  | March 27, 2003
|                                                 
|/s/ RODNEY PERKINS(Rodney Perkins, M.D.)          |  | Director                                                                                                                    |  | March 27, 2003

34



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##### Table of Contents






CERTIFICATIONS

I, Eric M. Reuter, certify that:

1. I have reviewed this annual report on
Form 10-K of Laserscope;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this annual report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                              
| | -----------------------------
| | /s/ ERIC M. REUTER           
| |                              
| | Eric M. Reuter               
| | Chief Executive Officer      
| | (Principal Executive Officer)

Date: March 27, 2003

35



---



##### Table of Contents



I, Dennis LaLumandiere, certify that:

1. I have reviewed this annual report on
Form 10-K of Laserscope;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this annual report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                              
| | -----------------------------
| | /s/ DENNIS LALUMANDIERE      
| |                              
| | Dennis LaLumandiere          
| | Chief Financial Officer      
| | (Principal Financial Officer)

Date: March 27, 2003

36



---



##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of

Laserscope:


In our opinion, the consolidated financial
statements listed in the Index appearing under
Item 15(a)(1) on page 31 present fairly, in all
material respects, the financial position of Laserscope and its
subsidiaries at December 31, 2002 and 2001, and the results
of their operations and their cash flows for the years then
ended in conformity with accounting principles generally
accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the Index
appearing under item 15(a)(2) on page 31 presents fairly in
all material respects, the information set forth therein for the
years ended December 31, 2002 and 2001 when read in
conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are
the responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.



| |                               
| | ------------------------------
| | /s/ PRICEWATERHOUSECOOPERS LLP
| |                               

San Jose, California

February 7, 2003, except for note 11,


as to which the
date is March 18, 2003


F-1



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##### Table of Contents






REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS

The Board of Directors and Shareholders

Laserscope


We have audited the accompanying consolidated
statements of operations, shareholders equity and cash
flows for the year ended December 31, 2000. Our audit also
included the financial statement schedule listed in the Index at
Item 15(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 audit.

We conducted our audit in accordance with
auditing standards generally accepted in the United States.
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 audit
provides a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements of Laserscope referred to above present fairly, in
all material respects, the consolidated results of its
operations and its cash flows for the year ended
December 31, 2000, in conformity with accounting principles
generally accepted in the United States. 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

Feb 16, 2001


F-2



---



##### Table of Contents



LASERSCOPE

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                               |                   |        |         |   |   |        |         |  
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------- | ----------------- | ------ | ------- | - | - | ------ | ------- | -
|                                           |                                                                                                               |                  
|                                           |                                                                                                               | December 31,     
|                                           |                                                                                                               |                  
|                                           |                                                                                                               | 2002              |        | 2001   
|                                           |                                                                                                               |                   |        |        
|                                           |                                                                                                               |                  
|                                           |                                                                                                               | (Thousands except
|                                           |                                                                                                               | share amounts)   
|ASSETS                                    
|Current assets:                            |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Cash and cash equivalents                                                                                     |                   | $      | 4,661   |   |   | $      | 3,408   |  
|                                           | Accounts receivable, net                                                                                      |                   |        | 10,287  |   |   |        | 8,427   |  
|                                           | Inventories, net                                                                                              |                   |        | 10,445  |   |   |        | 9,228   |  
|                                           | Other current assets                                                                                          |                   |        | 1,027   |   |   |        | 1,283   |  
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Total current assets                                                                                          |                   |        | 26,420  |   |   |        | 22,346  |  
|Property and equipment, net                |                                                                                                               |                   | 1,808  |         |   |   | 2,067  |        
|Goodwill                                   |                                                                                                               |                   | 655    |         |   |   | 655    |        
|Other assets                               |                                                                                                               |                   | 280    |         |   |   | 414    |        
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|Total assets                               |                                                                                                               | $                 | 29,163 |         |   | $ | 25,482 |        
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY  
|Current liabilities:                       |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Short-term bank loans                                                                                         |                   | $      |        |   |   | $      | 1,135   |  
|                                           | Accounts payable                                                                                              |                   |        | 3,989   |   |   |        | 2,821   |  
|                                           | Accrued compensation                                                                                          |                   |        | 2,033   |   |   |        | 1,588   |  
|                                           | Warranty                                                                                                      |                   |        | 1,127   |   |   |        | 748     |  
|                                           | Other accrued liabilities                                                                                     |                   |        | 1,948   |   |   |        | 1,470   |  
|                                           | Deferred revenue                                                                                              |                   |        | 1,408   |   |   |        | 1,031   |  
|                                           | Convertible subordinated debentures, current
    portion                                                      |                   |        | 147     |   |   |        |        |  
|                                           | Current obligations under capital leases                                                                      |                   |        | 116     |   |   |        | 217     |  
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Total current liabilities                                                                                     |                   |        | 10,768  |   |   |        | 9,010   |  
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|Long-term liabilities:                     |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Convertible subordinated debentures, net of
    current portion                                               |                   |        | 2,853   |   |   |        | 3,000   |  
|                                           | Obligations under capital leases                                                                              |                   |        | 60      |   |   |        | 60      |  
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Total long-term liabilities                                                                                   |                   |        | 2,913   |   |   |        | 3,060   |  
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|Commitments and contingencies (Note 10)    |                                                                                                               |                   |        |         |   |   |        |        
|Shareholders equity:                      |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Common stock, no par value:                                                                                   |                   |        |         |   |   |        |         |  
|                                           | Authorized shares  30,000,000 and
    25,000,000 at December 31, 2002 and 2001, respectively                 |                   |        |         |   |   |        |         |  
|                                           | Issued and outstanding shares 
    16,828,324 and 16,085,798 at December 31, 2002 and 2001,
    respectively |                   |        | 55,915  |   |   |        | 54,712  |  
|                                           | Accumulated deficit                                                                                           |                   |        | (39,519 | ) |   |        | (39,843 | )
|                                           | Accumulated other comprehensive loss                                                                          |                   |        | (789    | ) |   |        | (1,332  | )
|                                           | Notes receivable from shareholders                                                                            |                   |        | (125    | ) |   |        | (125    | )
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Total shareholders equity                                                                                    |                   |        | 15,482  |   |   |        | 13,412  |  
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|Total liabilities and shareholders equity |                                                                                                               | $                 | 29,163 |         |   | $ | 25,482 |        
|                                           |                                                                                                               |                   |        |         |   |   |        |        

See notes to consolidated financial statements

F-3



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##### Table of Contents



LASERSCOPE

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |        | 
|--------------------------------------------- | ----------------------------------- | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                              |                                     |                         
|                                              |                                     | Years Ended December 31,
|                                              |                                     |                         
|                                              |                                     | 2002                     |        | 2001   |  | 2000
|                                              |                                     |                          |        |        |  |     
|                                              |                                     |                         
|                                              |                                     | (Thousands, except per  
|                                              |                                     | share amounts)          
|Net revenues:                                 |                                     |                          |        |        |  |      |        |        |  |   |        |       
|                                              | Products                            |                          | $      | 37,262 |  |      | $      | 29,264 |  |   | $      | 29,694 | 
|                                              | Services                            |                          |        | 5,826  |  |      |        | 5,823  |  |   |        | 5,705  | 
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       
|                                              |                                     |                          | 43,088 |        |  |      | 35,087 |        |  |   | 35,399 |       
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       
|Cost of products and services:                |                                     |                          |        |        |  |      |        |        |  |   |        |       
|                                              | Products                            |                          |        | 16,832 |  |      |        | 13,661 |  |   |        | 14,914 | 
|                                              | Services                            |                          |        | 4,002  |  |      |        | 4,074  |  |   |        | 3,660  | 
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       
|                                              |                                     |                          | 20,834 |        |  |      | 17,735 |        |  |   | 18,574 |       
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       
|Gross margin                                  |                                     |                          | 22,254 |        |  |      | 17,352 |        |  |   | 16,825 |       
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       
|Operating expenses:                           |                                     |                          |        |        |  |      |        |        |  |   |        |       
|                                              | Research and development            |                          |        | 3,837  |  |      |        | 3,756  |  |   |        | 3,284  | 
|                                              | Selling, general and administrative |                          |        | 17,626 |  |      |        | 14,043 |  |   |        | 13,005 | 
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       
|                                              |                                     |                          | 21,463 |        |  |      | 17,799 |        |  |   | 16,289 |       
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       
|Operating income (loss)                       |                                     |                          | 791    |        |  |      | (447   | )      |  |   | 536    |       
|Interest income                               |                                     |                          | 10     |        |  |      |       |        |  |   | 11     |       
|Interest expense and other                    |                                     |                          | (392   | )      |  |      | (337   | )      |  |   | (361   | )     
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       
|Income (loss) before income taxes             |                                     |                          | 409    |        |  |      | (784   | )      |  |   | 186    |       
|Provision for income taxes                    |                                     |                          | 86     |        |  |      | 45     |        |  |   |       |       
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       
|Net income (loss)                             |                                     | $                        | 323    |        |  | $    | (829   | )      |  | $ | 186    |       
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       
|Basic and diluted net income (loss) per share |                                     | $                        | 0.02   |        |  | $    | (0.05  | )      |  | $ | 0.01   |       
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       
|Shares used in basic per share calculations   |                                     |                          | 16,441 |        |  |      | 15,953 |        |  |   | 15,489 |       
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       
|Shares used in diluted per share calculations |                                     |                          | 18,569 |        |  |      | 15,953 |        |  |   | 16,504 |       
|                                              |                                     |                          |        |        |  |      |        |        |  |   |        |       

See notes to consolidated financial statements

F-4



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##### Table of Contents



LASERSCOPE

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                          |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |         |        |  
|----------------------------------------- | -------------------------------------------------------------------------------------------------- | ---------------------------------------- | - | ------ | ------ | ---- | - | ------- | ----- | - | - | ------- | ------ | -
|                                          |                                                                                                    |                                         
|                                          |                                                                                                    | Years Ended December 31,                
|                                          |                                                                                                    |                                         
|                                          |                                                                                                    | 2002                                     |   | 2001   |        | 2000
|                                          |                                                                                                    |                                          |   |        |        |     
|                                          |                                                                                                    |                                         
|                                          |                                                                                                    | (In thousands)                          
|Cash flows from operating
    activities: |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |        
|                                          | Net income (loss)                                                                                  |                                          | $ | 323    |        |      | $ | (829    | )     |   | $ | 186     |       
|                                          | Adjustments to reconcile net income (loss) to
    cash provided by (used in) operating activities: |                                          |   |        |        |      |   |         |       |   |   |         |       
|                                          |                                                                                                    | Depreciation and amortization            |   |        | 1,051  |      |   |         | 938   |   |   |         | 1,569  |  
|                                          |                                                                                                    | Amortization of licenses and intangibles |   |        |       |      |   |         |      |   |   |         | 23     |  
|                                          |                                                                                                    | Amortization of debt issuance costs      |   |        | 134    |      |   |         | 140   |   |   |         | 118    |  
|                                          | Changes in assets and liabilities:                                                                 |                                          |   |        |        |      |   |         |       |   |   |         |       
|                                          |                                                                                                    | Accounts receivable, net                 |   |        | (1,635 | )    |   |         | 500   |   |   |         | (2,127 | )
|                                          |                                                                                                    | Inventories                              |   |        | (1,015 | )    |   |         | (987  | ) |   |         | (741   | )
|                                          |                                                                                                    | Prepayments and other current assets     |   |        | 305    |      |   |         | (329  | ) |   |         | (95    | )
|                                          |                                                                                                    | Other assets                             |   |        |       |      |   |         |      |   |   |         | (77    | )
|                                          |                                                                                                    | Accounts payable                         |   |        | 1,092  |      |   |         | 1,405 |   |   |         | (738   | )
|                                          |                                                                                                    | Accrued compensation                     |   |        | 445    |      |   |         | 298   |   |   |         | (163   | )
|                                          |                                                                                                    | Warranty                                 |   |        | 379    |      |   |         | 251   |   |   |         | 168    |  
|                                          |                                                                                                    | Deferred revenue                         |   |        | 377    |      |   |         | 9     |   |   |         | 305    |  
|                                          |                                                                                                    | Other accrued liabilities                |   |        | 366    |      |   |         | 29    |   |   |         | (88    | )
|                                          |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |        
|                                          | Cash provided by (used in) operating activities                                                    |                                          |   | 1,822  |        |      |   | 1,425   |       |   |   | (1,660  | )     
|                                          |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |        
|Cash flows from investing
    activities: |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |        
|                                          | Capital expenditures                                                                               |                                          |   | (776   | )      |      |   | (1,066  | )     |   |   | (401    | )     
|                                          | NWL divestiture                                                                                    |                                          |   |       |        |      |   |        |       |   |   | 3,133   |       
|                                          |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |        
|                                          | Cash provided by (used in) investing activities                                                    |                                          |   | (776   | )      |      |   | (1,066  | )     |   |   | 2,732   |       
|                                          |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |        
|Cash flows from financing
    activities: |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |        
|                                          | Payment on obligations under capital leases                                                        |                                          |   | (101   | )      |      |   | (295    | )     |   |   | (301    | )     
|                                          | Proceeds from the sale of common stock under
    stock plans                                       |                                          |   | 1,197  |        |      |   | 225     |       |   |   | 992     |       
|                                          | Proceeds from the sale of warrants                                                                 |                                          |   | 6      |        |      |   | 7       |       |   |   |        |       
|                                          | Proceeds from the sale of common stock in private
    placement                                    |                                          |   |       |        |      |   |        |       |   |   | 710     |       
|                                          | Proceeds from the sale of convertible
    subordinated debentures                                  |                                          |   |       |        |      |   |        |       |   |   | 2,632   |       
|                                          | Repayment and write-off of shareholder notes                                                       |                                          |   |       |        |      |   | 9       |       |   |   | 59      |       
|                                          | Proceeds from line of credit                                                                       |                                          |   | 7,020  |        |      |   | 12,700  |       |   |   | 18,162  |       
|                                          | Repayment of line of credit                                                                        |                                          |   | (8,155 | )      |      |   | (12,267 | )     |   |   | (21,781 | )     
|                                          |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |        
|                                          | Cash provided by (used in) financing activities                                                    |                                          |   | (33    | )      |      |   | 379     |       |   |   | 473     |       
|                                          |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |        
|                                          | Effect of exchange rate changes on cash                                                            |                                          |   | 240    |        |      |   | (28     | )     |   |   | (296    | )     
|                                          | Increase in cash and cash equivalents                                                              |                                          |   | 1,253  |        |      |   | 710     |       |   |   | 1,249   |       
|                                          | Cash and cash equivalents, beginning of year                                                       |                                          |   | 3,408  |        |      |   | 2,698   |       |   |   | 1,449   |       
|                                          |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |        
|                                          | Cash and cash equivalents, end of year                                                             |                                          | $ | 4,661  |        |      | $ | 3,408   |       |   | $ | 2,698   |       
|                                          |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |        
|Supplemental cash flow information:       |                                                                                                    |                                          |   |        |        |      |   |         |       |   |   |        
|                                          | Cash paid for income taxes, net of refunds                                                         |                                          | $ | 79     |        |      | $ | 11      |       |   | $ | 15      |       
|                                          | Cash paid for interest                                                                             |                                          | $ | 303    |        |      | $ | 365     |       |   | $ | 562     |       
|                                          | Non-cash reduction in assets relating to NWL sale                                                  |                                          | $ |       |        |      | $ |        |       |   | $ | 8,949   |       
|                                          | Non-cash reduction in liabilities relating to NWL
    sale                                         |                                          | $ |       |        |      | $ |        |       |   | $ | 5,415   |       
|                                          | Acquisition of minority interest in affiliate in
    exchange for accounts receivable              |                                          | $ |       |        |      | $ | 555     |       |   |   |        |       
|                                          | Non-cash financing, equipment lease                                                                |                                          | $ | 60     |        |      | $ |        |       |   | $ |        |       

See notes to consolidated financial statements

F-5



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##### Table of Contents



LASERSCOPE

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                                                   |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |      |     |      |  
|---------------------------------------------------------------------------------- | ----------------------- | ----------------------------------- | ------------------------ | ----------- |  | ------------- | ------- | ------------ | - | ------------- | ------ | ---- | - | - | ---- | - |  | - | ------ | ---- | --- | ---- | -
|                                                                                   |                         |                                     |                          |             |  | Accumulated   |         | Notes        |   |              
|                                                                                   |                         |                                     |                          |             |  | Other         |         | Receivable   |   | Total        
|                                                                                   |                         | Common                              |                          | Accumulated |  | Comprehensive |         | from         |   | Shareholders
|                                                                                   |                         | Stock                               |                          | Deficit     |  | Loss          |         | Shareholders |   | Equity       
|                                                                                   |                         |                                     |                          |             |  |               |         |              |   |              
|                                                                                   |                         |                                    
|                                                                                   |                         | (In thousands except share amounts)
|Balance at December 31, 1999                                                       |                         | $                                   | 52,467                   |             |  | $             | (39,200 | )            |   | $             | (1,027 | )    |   | $ | (193 | ) |  | $ | 12,047 |     
|Components of comprehensive loss:                                                  |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |     
|                                                                                   | Net income              |                                     |                          |             |  |               |         | 186          |   |               |        |      |   |   |      |   |  |   |        | 186  |    
|                                                                                   | Translation adjustments |                                     |                          |             |  |               |         |              |   |               |        | (191 | ) |   |      |   |  |   |        | (191 | )  
|                                                                                   |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |     
|                                                                                   |                         | Total comprehensive loss            |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |      | (5  | )   
|Issuance of 694,983 shares under stock plans                                       |                         |                                     | 992                      |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   | 992    |     
|Issuance of 995,000 shares in private
    placement, net of issuance costs         |                         |                                     | 710                      |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   | 710    |     
|Issuance of 240,000 warrants in connection with
    convertible debenture issuance |                         |                                     | 311                      |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   | 311    |     
|Repayment of shareholder notes                                                     |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   | 59   |   |  |   | 59     |     
|                                                                                   |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |     
|Balance at December 31, 2000                                                       |                         | $                                   | 54,480                   |             |  | $             | (39,014 | )            |   | $             | (1,218 | )    |   | $ | (134 | ) |  | $ | 14,114 |     
|Components of comprehensive loss:                                                  |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |     
|                                                                                   | Net loss                |                                     |                          |             |  |               |         | (829         | ) |               |        |      |   |   |      |   |  |   |        | (829 | )  
|                                                                                   | Translation adjustments |                                     |                          |             |  |               |         |              |   |               |        | (114 | ) |   |      |   |  |   |        | (114 | )  
|                                                                                   |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |     
|                                                                                   |                         |                                     | Total comprehensive loss |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |      |     | (943 | )
|Issuance of 197,772 shares under stock plans                                       |                         |                                     | 225                      |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   | 225    |     
|Issuance of 5,000 shares upon warrant
    exercises                                |                         |                                     | 7                        |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   | 7      |     
|Repayment of shareholder notes                                                     |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   | 9    |   |  |   | 9      |     
|                                                                                   |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |     
|Balance at December 31, 2001                                                       |                         | $                                   | 54,712                   |             |  | $             | (39,842 | )            |   | $             | (1,332 | )    |   | $ | (125 | ) |  | $ | 13,412 |     
|Components of comprehensive income:                                                |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |     
|                                                                                   | Net income              |                                     |                          |             |  |               |         | 323          |   |               |        |      |   |   |      |   |  |   |        | 323  |    
|                                                                                   | Translation adjustments |                                     |                          |             |  |               |         |              |   |               |        | 543  |   |   |      |   |  |   |        | 543  |    
|                                                                                   |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |     
|                                                                                   |                         | Total comprehensive income          |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |      | 866 |     
|Issuance of 737,526 shares under stock plans                                       |                         |                                     | 1,197                    |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   | 1,197  |     
|Issuance of 5,000 shares upon warrant
    exercises                                |                         |                                     | 6                        |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   | 6      |     
|                                                                                   |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |     
|Balance at December 31, 2002                                                       |                         | $                                   | 55,915                   |             |  | $             | (39,519 | )            |   | $             | (789   | )    |   | $ | (125 | ) |  | $ | 15,482 |     
|                                                                                   |                         |                                     |                          |             |  |               |         |              |   |               |        |      |   |   |      |   |  |   |        |     

See notes to consolidated financial statements

F-6



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##### Table of Contents






LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies



| |         
| | --------
| | Business

The Company primarily operates in one business
segment, the medical systems business. The Company develops,
manufactures, markets and supports aesthetic and surgical lasers
and other surgical systems, related instrumentation and
disposable supplies. The Company markets its products and
services in over thirty-five 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 inter-company transactions and balances have
been eliminated.



| |                                               
| | ----------------------------------------------
| | Potential Need to Raise Additional
    Capital

As of December 31, 2002, the Companys
total assets were $29.2 million and the total liabilities
were $13.7 million. As of the same date, working capital
was $15.7 million and cash and cash equivalents totaled
$4.7 million. Current and anticipated demand for the
Companys products as well as procurement and production
affect the need for capital. Changes in these or other factors
could have a material impact on capital requirements and may
require the Company to raise additional capital.

The Companys line of credit and debentures
contain certain financial covenants. The covenants associated
with the debentures include covenants relating to the
Companys debt-to-equity ratio, current ratio, and interest
coverage. In the event that the Company is unable to satisfy any
of these covenants, then it would be in default and the lender
would have the right to exercise various remedies including
declaring due all outstanding principal and interest.

While the Company believes that its existing cash
resources, including the bank line of credit, will be sufficient
to fund its operating needs for the next twelve months,
additional financing will be required for the Companys
currently envisioned long term needs.

There can be no assurance that any additional
financing will be available on terms acceptable to the Company,
or at all. In addition, future equity financings could result in
dilution to shareholders, and future debt financings could
result in certain financial and operational restrictions.



| |                 
| | ----------------
| | Use of Estimates

Preparation of the accompanying financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those
estimates.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

Carrying amounts of the Companys financial
instruments including cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities,
approximate their fair values due to their short maturities.
Based on the borrowing rates currently available to the Company
for loans with similar terms, the carrying values of the line of
credit, capital lease obligations, and convertible debentures
approximate their fair values.

F-7



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                          
| | -------------------------
| | Cash and Cash Equivalents

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.



| |                                             
| | --------------------------------------------
| | Revenue Recognition and Product
    Warranty

The Company recognizes revenue on products and
services when the persuasive evidence of an arrangement is in
place, the price is fixed or determinable, collectibility is
reasonably assured, remaining obligations are insignificant, and
title and risk of ownership has been transferred. Transfer of
title and risk of ownership generally occurs when the product is
shipped to the customer or when the customer receives the
product, depending on the nature of the arrangement. The Company
currently provides for the estimated cost to repair or replace
products under warranty at the time of sale. Service revenue is
recognized as the services are provided and for service
contracts on a pro rata basis over the period of the applicable
service contract.



| |                                          
| | -----------------------------------------
| | Research and Development
    Expenditures

Costs related to research, design and development
of products are charged to research and development expense as
incurred.



| |                       
| | ----------------------
| | 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 or useful life if shorter. Maintenance and repairs are
charged to operations as incurred.



| |            
| | -----------
| | Inventories

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



| |                            
| | ---------------------------
| | Net Income (loss) per Share

Basic net income (loss) per share is calculated
using the weighted average number of common stock outstanding.
Diluted net income (loss) per share is calculated using the
weighted average number of common stock outstanding plus
dilutive common equivalent shares from stock options and
warrants.

F-8



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table sets forth the computation of
basic and diluted net income (loss) per common share:

|                                    |                                                                                                   |                                    |   |        |  |      |   |        |   |  |   |        | 
|----------------------------------- | ------------------------------------------------------------------------------------------------- | ---------------------------------- | - | ------ |  | ---- | - | ------ | - |  | - | ------ | 
|                                    |                                                                                                   | 2002                               |   | 2001   |  | 2000
|                                    |                                                                                                   |                                    |   |        |  |     
|                                    |                                                                                                   |                                   
|                                    |                                                                                                   | (Thousands, except per share data)
|Numerator:                          |                                                                                                   |                                    |   |        |  |      |   |        |   |  |   |       
|                                    | Basic and diluted net income (loss)                                                               |                                    | $ | 323    |  |      | $ | (829   | ) |  | $ | 186    | 
|                                    |                                                                                                   |                                    |   |        |  |      |   |        |   |  |   |       
|Denominator:                        |                                                                                                   |                                    |   |        |  |      |   |        |   |  |   |       
|                                    | Denominator for basic net income (loss) per
    share  weighted average basis                    |                                    |   | 16,441 |  |      |   | 15,953 |   |  |   | 15,489 | 
|                                    |                                                                                                   |                                    |   |        |  |      |   |        |   |  |   |       
|                                    | Effect of dilutive securities:                                                                    |                                    |   |        |  |      |   |        |   |  |   |        | 
|                                    | Employee stock options                                                                            |                                    |   | 1,676  |  |      |   |       |   |  |   | 613    | 
|                                    | Warrants                                                                                          |                                    |   | 452    |  |      |   |       |   |  |   | 402    | 
|                                    |                                                                                                   |                                    |   |        |  |      |   |        |   |  |   |       
|                                    | Dilutive potential common shares                                                                  |                                    |   | 2,128  |  |      |   |       |   |  |   | 1,015  | 
|                                    |                                                                                                   |                                    |   |        |  |      |   |        |   |  |   |       
|                                    | Denominator for diluted net income (loss) per
    common share  Adjusted weighted-average shares |                                    |   | 18,569 |  |      |   | 15,953 |   |  |   | 16,504 | 
|                                    |                                                                                                   |                                    |   |        |  |      |   |        |   |  |   |       
|Net income (loss) per common share: |                                                                                                   |                                    |   |        |  |      |   |        |   |  |   |       
|                                    | Basic                                                                                             |                                    | $ | 0.02   |  |      | $ | (0.05  | ) |  | $ | 0.01   | 
|                                    | Diluted                                                                                           |                                    | $ | 0.02   |  |      | $ | (0.05  | ) |  | $ | 0.01   | 

The following outstanding options and warrants
(prior to the application to the treasury stock method) and
convertible debentures were excluded from the computation of
diluted net income (loss) per common share for the years ended
December 31, 2002, 2001 and 2000 because including them
would have had an antidilutive effect.

|                                       |  |                          |       |      |  |      |       |  |  |  |       | 
|-------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                       |  |                         
|                                       |  | Years Ended December 31,
|                                       |  |                         
|                                       |  | 2002                     |       | 2001 |  | 2000
|                                       |  |                          |       |      |  |     
|                                       |  |                         
|                                       |  | (Thousands)             
|Options to purchase common stock       |  |                          | 279   |      |  |      | 3,188 |  |  |  | 704   | 
|Warrants to purchase common stock      |  |                          |      |      |  |      | 458   |  |  |  |      | 
|Debentures convertible to common stock |  |                          | 2,400 |      |  |      | 2,400 |  |  |  | 2,400 | 
|                                       |  |                          |       |      |  |      |       |  |  |  |       | 
|                                       |  |                          | 2,679 |      |  |      | 6,046 |  |  |  | 3,104 | 
|                                       |  |                          |       |      |  |      |       |  |  |  |       | 



| |                             
| | ----------------------------
| | 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, a
component of the accumulated other comprehensive loss, and are
included in shareholders equity. Revenues and expenses are
translated at average exchange rates in effect during the
period. Foreign currency transaction gains and losses are
included in the statement of operations.



| |             
| | ------------
| | Income Taxes

The Company accounts for income taxes under the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and
liabilities are determined based on the differences between
financial reporting and tax basis of assets and liabilities,
measured at tax rates that will be in effect when the
differences are expected to reverse. Valuation

F-9



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LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be
realized.



| |                     
| | --------------------
| | Impairment of Assets

The Company recognizes impairment losses on
long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets
carrying amounts. There were no such losses recognized during
the years ended December 31, 2002, 2001 and 2000.



| |                                                           
| | ----------------------------------------------------------
| | Goodwill and Intangible Assets Related to
    Acquisitions

On September 17, 2001, the Company purchased
the remaining 25% minority interest in its subsidiary,
Laserscope France S.A. through the exercise of a buy-out option
of $555,000 which was paid through the assignment of accounts
receivable. Goodwill of $655,000 arose on the acquisition. The
Company adopted the rules of SFAS No. 142 that apply
to goodwill acquired after June 30, 2001 and has not
amortized this goodwill. The Company performs periodic
impairment assessments of the goodwill as prescribed by
SFAS No. 142. No impairment charges have been recorded
as of December 31, 2002.



| |                    
| | -------------------
| | Advertising Expense

Advertising costs are expensed as incurred.
Advertising costs were not significant in 2002, 2001 or 2000.



| |                         
| | ------------------------
| | Stock-based Compensation

The Company accounts for stock-based compensation
arrangements in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees and its
interpretations, and complies with the disclosure provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation. Under APB Opinion No. 25, compensation
expense is based on the difference, if any, on the date of
grant, between the fair value of the Companys stock and
the exercise price. SFAS No. 123 defines a fair
value based method of accounting for an employee stock
option or similar equity instrument. The Company accounts for
equity instruments issued to non-employees in accordance with
the provisions of SFAS No. 123 and EITF Issue
No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods and Services (EITF Issue
No. 96-18). Under SFAS No. 123 and EITF Issue
No. 96-18, the fair value of options granted to
non-employees is estimated using the Black-Scholes option
pricing model and is periodically remeasured as the options vest.



| |                            
| | ---------------------------
| | Comprehensive Income (loss)

Comprehensive income (loss) is defined as the
change in equity from transactions and other events and
circumstances other than those resulting from investments by
owners and distributions to owners. For the years ended
December 31, 2002, 2001 and 2000, comprehensive income
(loss) comprised of net income (loss) and foreign currency
translation adjustments.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In April 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 145,
Rescission of FASB Statement No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections which eliminates inconsistencies between the
required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe

F-10



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LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

their applicability under changed conditions. The
provisions of SFAS No. 145 are effective for fiscal
years beginning after May 15, 2002 and for transactions
occurring after May 15, 2002. The Company does not expect
adoption of SFAS No. 145 to have a material impact on
its financial statements.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Exit or Disposal
Activities which addresses the recognition, measurement,
and reporting of costs that are associated with exit and
disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance that the EITF
has set forth in EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 will be effective for
exit or disposal activities that are initiated after
December 31, 2002. The Company does not expect adoption of
SFAS No. 146 to have a material impact on its
financial statements.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that a liability be recorded
in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about
the guarantees that an entity has issued, including a
reconciliation of changes in the entitys product warranty
liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002,
irrespective of the guarantors fiscal year-end. The
disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after
December 15, 2002. The adoption of this standard had no
material impact on the Companys financial statements.

In November 2002, the Emerging Issues Task Force
(EITF) reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables.
EITF Issue No. 00-21 provides guidance on how to account
for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003. The Company believes that the adoption of
this standard will have no material impact on its financial
statements.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure.
SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148
requires disclosure of the pro forma effect in interim financial
statements. The transition and annual disclosure requirements of
SFAS No. 148 are effective for fiscal years ended
after December 15, 2002. The interim disclosure
requirements are effective for interim periods beginning after
December 15, 2002. The adoption of this standard had no
material impact on the Companys financial statements.

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN 46 requires
certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46
is effective immediately for all new variable interest entities
created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the
first interim or annual period beginning after June 15,
2003. The Company is currently evaluating the impact that the
adoption of this standard will have on its financial statements.

F-11



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                              
|-- | -----------------------------
|2. | Sale of NWL Laser-Technologie

On February 18, 2000, the Company signed an
agreement with Wavelight Laser Technologie AG
(Wavelight) to sell its interest in NWL Laser
Technologie GmbH (NWL). The sale, which was approved
by Wavelights shareholders on March 31, 2000, had an
effective date of January 1, 2000. As part of the
transaction, NWL continued to distribute Laserscopes
products in all countries covered by NWLs then current
distribution channels. The details of the transaction are as
follows (in thousands):

|                                           |                              |  |       |        |  
|------------------------------------------ | ---------------------------- |  | ----- | ------ | -
|Book value of assets and liabilities sold: |                              |  |       |       
|                                           | Cash                         |  | $     | 296    |  
|                                           | Accounts receivable          |  |       | 2,477  |  
|                                           | Inventory                    |  |       | 2,514  |  
|                                           | Other current assets         |  |       | 329    |  
|                                           | Property, plant & equipment  |  |       | 857    |  
|                                           | Licenses & intangible assets |  |       | 2,707  |  
|                                           | Accounts payable & accruals  |  |       | (1,255 | )
|                                           | Income taxes payable         |  |       | (323   | )
|                                           | Short-term bank loans        |  |       | (3,040 | )
|                                           | Long-term bank loans         |  |       | (863   | )
|                                           | Minority interest & other    |  |       | (37    | )
|                                           |                              |  |       |       
|                                           |                              |  | 3,662 |       
|Proceeds:                                  |                              |  |       |       
|                                           | Received May 2000            |  |       | 3,429  |  
|                                           |                              |  |       |       
|                                           | Net loss on disposal         |  | $     | 233    |  
|                                           |                              |  |       |       

The net loss on disposal of $233,000 was included
within selling, general and administrative expenses during the
year ended December 31, 2000.



|   |                    
|-- | -------------------
|3. | Segment information

Laserscopes revenue base is derived from
the sales of interrelated products and services on a world-wide
basis. Although discrete components that earn revenues and incur
expenses exist, significant expenses such as research and
development and corporate administration are not incurred by nor
allocated to these operating units but rather are employed by
the entire enterprise. Additionally, the chief operating
decision maker evaluates resource allocation not on a product or
geographic basis, but rather on an enterprise wide basis.
Therefore, the Company has concluded that it contains only one
reportable segment, which is the medical systems business.

F-12



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Revenues from sales to external customers by
similar products and services and by major geographic area for
the years ended December 31 were:

|                                 |       |                |        |        |  |      |        |        |  |   |        |        | 
|-------------------------------- | ----- | -------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                 |       | 2002           |        | 2001   |  | 2000
|                                 |       |                |        |        |  |     
|                                 |       |               
|                                 |       | (In thousands)
|By similar products and services |       |                |        |        |  |      |        |        |  |   |        |       
|Lasers & instrumentation         |       | $              | 29,842 |        |  | $    | 23,593 |        |  | $ | 22,932 |       
|Disposables                      |       |                | 7,420  |        |  |      | 5,671  |        |  |   | 6,762  |       
|Service                          |       |                | 5,826  |        |  |      | 5,823  |        |  |   | 5,705  |       
|                                 |       |                |        |        |  |      |        |        |  |   |        |       
|                                 | Total |                | $      | 43,088 |  |      | $      | 35,087 |  |   | $      | 35,399 | 
|                                 |       |                |        |        |  |      |        |        |  |   |        |       
|By major geographic area(1)      |       |                |        |        |  |      |        |        |  |   |        |       
|United States                    |       | $              | 31,714 |        |  | $    | 22,831 |        |  | $ | 22,007 |       
|Europe(2)                        |       |                | 8,584  |        |  |      | 8,831  |        |  |   | 9,756  |       
|Asia Pacific(2)                  |       |                | 2,380  |        |  |      | 2,685  |        |  |   | 2,871  |       
|Rest of world(2)                 |       |                | 410    |        |  |      | 740    |        |  |   | 765    |       
|                                 |       |                |        |        |  |      |        |        |  |   |        |       
|                                 | Total |                | $      | 43,088 |  |      | $      | 35,087 |  |   | $      | 35,399 | 
|                                 |       |                |        |        |  |      |        |        |  |   |        |       





| |     |                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------
| | (1) | Based on the location of the external customer.                                                            
|
| | (2) | Individual countries within each of these
    geographic regions represent less than 10% of total revenues.

Location of long lived assets by major geographic
area at December 31 were:

|              |  |                |       |      |  |      |       |  |  |   |       | 
|------------- |  | -------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|              |  | 2002           |       | 2001 |  | 2000
|              |  |                |       |      |  |     
|              |  |               
|              |  | (In thousands)
|United States |  | $              | 1,957 |      |  | $    | 2,412 |  |  | $ | 2,462 | 
|France        |  |                | 710   |      |  |      | 702   |  |  |   | 84    | 
|U.K.          |  |                | 76    |      |  |      | 22    |  |  |   | 52    | 
|              |  |                |       |      |  |      |       |  |  |   |       | 
|              |  | $              | 2,743 |      |  | $    | 3,136 |  |  | $ | 2,598 | 
|              |  |                |       |      |  |      |       |  |  |   |       | 



|   |                    
|-- | -------------------
|4. | Accounts Receivable

Accounts receivable at December 31 consisted
of:

|                                      |  |                |        |      |  |   |       |  
|------------------------------------- |  | -------------- | ------ | ---- |  | - | ----- | -
|                                      |  | 2002           |        | 2001
|                                      |  |                |        |     
|                                      |  |               
|                                      |  | (In thousands)
|Trade accounts receivable             |  | $              | 10,590 |      |  | $ | 8,801 |  
|Less: allowance for doubtful accounts |  |                | (303   | )    |  |   | (374  | )
|                                      |  |                |        |      |  |   |       |  
|                                      |  | $              | 10,287 |      |  | $ | 8,427 |  
|                                      |  |                |        |      |  |   |       |  

F-13



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |            
|-- | -----------
|5. | Inventories

Inventories at December 31 consisted of:

|                |  |                |        |      |  |   |       | 
|--------------- |  | -------------- | ------ | ---- |  | - | ----- | 
|                |  | 2002           |        | 2001
|                |  |                |        |     
|                |  |               
|                |  | (In thousands)
|Raw materials   |  | $              | 4,304  |      |  | $ | 4,743 | 
|Work-in-process |  |                | 3,340  |      |  |   | 2,345 | 
|Finished goods  |  |                | 2,801  |      |  |   | 2,140 | 
|                |  |                |        |      |  |   |       | 
|                |  | $              | 10,445 |      |  | $ | 9,228 | 
|                |  |                |        |      |  |   |       | 



|   |                       
|-- | ----------------------
|6. | Property and Equipment

Property and equipment at December 31
consisted of:

|                                               |  |                |         |      |  |   |         |  
|---------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                               |  | 2002           |         | 2001
|                                               |  |                |         |     
|                                               |  |               
|                                               |  | (In thousands)
|Machinery and equipment                        |  | $              | 4,325   |      |  | $ | 4,015   |  
|Office equipment and furniture                 |  |                | 10,991  |      |  |   | 10,469  |  
|Leasehold improvements                         |  |                | 1,238   |      |  |   | 1,238   |  
|                                               |  |                |         |      |  |   |         |  
|                                               |  |                | 16,554  |      |  |   | 15,722  |  
|Less accumulated depreciation and amortization |  |                | (14,746 | )    |  |   | (13,655 | )
|                                               |  |                |         |      |  |   |         |  
|                                               |  | $              | 1,808   |      |  | $ | 2,067   |  
|                                               |  |                |         |      |  |   |         |  



|   |         
|-- | --------
|7. | Goodwill

On September 17, 2001, the Company purchased
the remaining 25% minority interest in its subsidiary,
Laserscope France S.A. through the exercise of a buy-out
option of $555,000 which was paid through the assignment of
accounts receivable. Goodwill of $655,000 arose on the
acquisition. The Company adopted the rules of
SFAS No. 142 that apply to goodwill acquired after
June 30, 2001 and has not amortized this goodwill. The
Company has reviewed the goodwill for impairment as prescribed
by SFAS No. 142 and has concluded that no impairment
charge is required.



|   |                               
|-- | ------------------------------
|8. | Warranty and Service Contracts

Warranty

We have a direct field service organization that
provides service for our products. We generally provide a twelve
month warranty on our laser systems. After the warranty period,
maintenance and support is provided on a service contract basis
or on an individual call basis. Our warranties and premium
service contracts provide for a 99.0% Uptime
Guarantee on our laser systems. Under provisions of this
guarantee, we extend the term of the related warranty or service
contract if specified system uptime levels are not maintained.

F-14



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Company currently provides for the estimated
cost to repair or replace products under warranty at the time of
sale. The cost estimate is based on warranty costs experienced
in the prior 12 months, and the outstanding warranty liability
is revalued on a quarterly basis.

|                                                      |  |                |        |  
|----------------------------------------------------- |  | -------------- | ------ | -
|Warranty Reserve                                      |  | 2002          
|                                                      |  |               
|                                                      |  | (In thousands)
|Balance, December 31, 2001                            |  | $              | 748    |  
|Add: Accruals for warranties issued in 2002           |  |                | 1,753  |  
|Less: Accruals related to pre-existing
    warranties |  |                | (91    | )
|Settlements
    made during the period                |  |                | (1,283 | )
|                                                      |  |                |        |  
|Balance, December 31, 2002                            |  | $              | 1,127  |  
|                                                      |  |                |        |  



| |                  
| | -----------------
| | Service Contracts

The Company recognizes revenue on products and
services when the persuasive evidence of an arrangement is in
place, the price is fixed or determinable, collectibility is
reasonably assured, and title and risk of ownership has been
transferred. Transfer of title and risk of ownership generally
occurs when the product is shipped to the customer or when the
customer receives the product, depending on the nature of the
arrangement. Deferred service contract revenue is recognized on
a pro rata basis over the period of the applicable service
contract. Costs are recognized as incurred.

|                                           |  |                |        |  
|------------------------------------------ |  | -------------- | ------ | -
|Deferred Contract Revenue                  |  | 2002          
|                                           |  |               
|                                           |  | (In thousands)
|Balance, December 31, 2001                 |  | $              | 1,004  |  
|Add: Payments received                     |  |                | 2,665  |  
|Costs
    incurred under service contracts |  |                | 1,888  |  
|Less: Revenue recognized                   |  |                | (2,583 | )
|Settlements
    made during the period     |  |                | (1,888 | )
|                                           |  |                |        |  
|Balance, December 31, 2002                 |  | $              | 1,086  |  
|                                           |  |                |        |  



|   |               
|-- | --------------
|9. | Line of Credit

The Company has in place an asset based line of
credit which provides up to $5.0 million in borrowings and
expires September 2003. Credit is extended based on the
Companys eligible accounts receivable and inventory. At
December 31, 2002, the Company had approximately
$3.3 million in borrowing capacity available against
$1.2 million in letter of credit reserve requirements and
no borrowings, resulting in $2,100,000 of unused borrowing
capacity. The Companys assets collateralize the line of
credit which bears an interest rate equivalent to the
banks prime rate plus 1.50% per annum. The prime rate
at December 31, 2002 was 4.25%. Borrowings against the line
of credit are paid down as the Company collects its accounts
receivable. Provisions of the bank loan agreement prohibit the
payment of dividends on non-preferred stock, or the redemption,
retirement, repurchase or other acquisition of Company stock.
The agreement further requires the Company to maintain a minimum
tangible net worth. As of December 31, 2002, the Company
was in compliance with all covenants.

F-15



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                              
|--- | -----------------------------
|10. | Commitments and Contingencies



| |                  
| | -----------------
| | 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:

|                                                               |  |                |        |      |  |   |        |  
|-------------------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                               |  | 2002           |        | 2001
|                                                               |  |                |        |     
|                                                               |  |               
|                                                               |  | (In thousands)
|Leased equipment
    (Primarily office equipment and software) |  | $              | 1,657  |      |  | $ | 1,485  |  
|Accumulated amortization                                       |  |                | (1,381 | )    |  |   | (1,132 | )
|                                                               |  |                |        |      |  |   |        |  
|                                                               |  | $              | 276    |      |  | $ | 353    |  
|                                                               |  |                |        |      |  |   |        |  

There were additions to leased equipment of
$172,000 in 2002, zero in 2001 and $20,000 in 2000.

Amortization of equipment under capital leases is
included in depreciation expense.

The Company leases certain facilities and
equipment under non-cancelable operating leases. Rent expense
under these leases amounted to approximately $1,746,000,
$1,681,000 and $1,130,000 in the years ended December 31,
2002, 2001 and 2000, respectively.

Future minimum lease payments under capital and
operating leases were as follows at December 31, 2002:

|                                               |  |                |     |           |  |   |       | 
|---------------------------------------------- |  | -------------- | --- | --------- |  | - | ----- | 
|                                               |  | Capital        |     | Operating
|                                               |  | Leases         |     | Leases   
|                                               |  |                |     |          
|                                               |  |               
|                                               |  | (In thousands)
|2003                                           |  | $              | 123 |           |  | $ | 1,833 | 
|2004                                           |  |                | 62  |           |  |   | 1,853 | 
|2005                                           |  |                |    |           |  |   | 1,458 | 
|                                               |  |                |     |           |  |   |       | 
|                                               |  |                | 185 |           |  | $ | 5,144 | 
|                                               |  |                |     |           |  |   |       | 
|Less amount representing interest              |  |                | (9  | )         |  |   |       | 
|                                               |  |                |     |           |  |   |       | 
|Present value of future minimum lease payments |  |                | 176 |           |  |   |       | 
|                                               |  |                |     |           |  |   |       | 
|Less current portion                           |  |                | 116 |           |  |   |       | 
|                                               |  |                |     |           |  |   |       | 
|                                               |  | $              | 60  |           |  |   |       | 
|                                               |  |                |     |           |  |   |       | 



| |              
| | -------------
| | Contingencies

The Company is at times a party to legal
proceedings arising in the ordinary course of its business.
While it is not feasible to predict or determine the outcome of
the actions brought against the Company, management believes
that the ultimate resolution of these claims will not ultimately
have a material adverse effect on the Companys financial
position or results of operations or future cash flows.



|    |                                    
|--- | -----------------------------------
|11. | Convertible Subordinated Debentures

In February of 2000, the Company sold
$3 million of 8.00% convertible debentures in a
private placement. The debentures mature in February 2007 and
pay interest monthly. Starting in February 2003, 1% per
month of the outstanding principal was to be repaid. The
debentures are convertible at the option of the holder at any
time prior to the close of business on the maturity date, unless
previously repurchased, into

F-16



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

2.4 million shares of common stock at a
conversion price of $1.25, subject to adjustment in certain
circumstances. In connection with the sale of the convertible
debentures, the Company issued warrants to
purchase 240,000 shares of the Companys common
stock at $1.50 per share. The warrants expire in 2005. The
value of the warrants of $311,000 is being amortized as interest
expense in the statement of operations.

On March 18, 2003, Renaissance Capital
Group, Inc. and the Company agreed to amend the terms of the
convertible debentures agreement. Principal payments are to
start on August 11, 2003 instead of February 11, 2003.
No other terms of the agreement are changed. In this amendment
to the agreement, Renaissance also gave notice that it will
convert debentures with a face value of $200,000 into shares of
Laserscope common stock on March 31, 2003.

There are covenants associated with the
debentures for debt-to-equity ratio, current ratio, and interest
coverage. If the Company were unable to satisfy any of these
covenants, then it would be in default and the lender may
exercise various remedies including declaring due all
outstanding principal and interest. The interest coverage ratio
minimum requirement is 1.5 for the trailing twelve months, and
as of December 31, 2002 the Companys interest
coverage was 6.7. The debt-to-equity requirement is a
maximum or 1.5, and the current ratio requirement is a minimum
of 1.0. As of December 31, 2002, the Company was in
compliance with the covenants.

The holder of the debentures would have the right
to redeem the debentures under certain circumstances including
if one of the following were to occur: 1) the
Companys common stock is not listed on the NASDAQ National
Market System or quoted on the NASDAQ Small Cap System,
2) there is a change of at least two-thirds of the members
of the Companys Board of Directors, without the written
consent of the holder, 3) the Company is merged into
unaffiliated entities, without the written consent of the
holder, 4) the holder elects to receive more than 20% or
more of the outstanding common stock as a result of the
application of an anti-dilution provision of the debentures, and
the Company fails to obtain the vote or consent of its
shareholders necessary to approve the issuance to the holder. If
the holder were to redeem the debentures prior to maturity, the
amount payable to the holder would be equal to the principal
plus an amount equal to an 18% yield on the principal amount
through the date of redemption. The holders right to put
the debentures back to the Company represents an embedded
derivative. The Company believes that the embedded derivative
does not have significant value as of December 31, 2002.

The Company has the right to redeem the
debentures at 101% of par if all the following conditions are
satisfied: 1) the closing bid price for the common stock of
the Company for the 20 consecutive trading days prior to the
irrevocable notice of redemption exceeds an amount equal to 2.75
times the conversion price, 2) the average daily trading
volume for the 20 consecutive days prior to the irrevocable
notice shall be no less than 200,000 shares, 3) the
market price for the common stock at the time of notice reflects
a price-earnings-ratio of no greater than 30 times fully diluted
earnings per share, 4) the Company shall have filed a
registration statement covering the shares of common stock
issuable upon conversion of this debenture.

Long-term debt at December 31 consisted of:

|                                                                                                   |  |                |       |      |  |   |       | 
|-------------------------------------------------------------------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                                                                                   |  | 2002           |       | 2001
|                                                                                                   |  |                |       |     
|                                                                                                   |  |               
|                                                                                                   |  | (In thousands)
|Convertible debentures with 8% interest payable
    monthly from August 2003 through February 2007 |  | $              | 3,000 |      |  | $ | 3,000 | 
|                                                                                                   |  |                |       |      |  |   |       | 

F-17



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Required principal payments at December 31,
2002 are:

|     |  |                |       | 
|---- |  | -------------- | ----- | 
|     |  | Long-term debt
|     |  |               
|     |  | (In thousands)
|2003 |  |                | 147   | 
|2004 |  |                | 324   | 
|2005 |  |                | 287   | 
|2006 |  |                | 255   | 
|2007 |  |                | 1,987 | 
|     |  |                |       | 
|     |  | $              | 3,000 | 
|     |  |                |       | 



|    |                     
|--- | --------------------
|12. | Shareholders Equity

The Company has 30,000,000 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.



| |                                      
| | -------------------------------------
| | Private Placement of Common
    Stock

On January 14, 2000, the Company completed
the final closing of a private placement of common stock. In the
transaction, the Company received approximately
$1.8 million, net of expenses, of which approximately
$1.0 million was received in 1999, in exchange for
2.5 million shares of common stock, including placement
agent commission shares.



| |         
| | --------
| | Warrants

In 2000, in connection with common stock and
convertible debenture issuances, the Company issued 458,875
warrants to purchase Laserscope common stock at prices ranging
form $1.25 to $1.50 per share. The warrants expire in 2005.
As of 12/ 31/ 02, there remained 448,875 warrants outstanding.



| |                       
| | ----------------------
| | 1994 Stock Option Plan

During 1994, the Company adopted a stock option
plan 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 1994 plan vest
and become exercisable over periods of up to four years and
expire five years after the date of grant.

The Company has reserved 3,450,000 shares of
common stock of which there were 157,372 shares available
for issuance pursuant to its 1994 stock option plan as of
December 31, 2002.



| |                                     
| | ------------------------------------
| | 1999 Retention Stock Option
    Plan

During 1999, the Company adopted a stock option
plan under which the Board of Directors may grant non-statutory
options to purchase shares of common stock to non-officer
employees of the Company at a price not less than the fair value
of the shares as of the date of grant. Options issued pursuant
to the 1999 plan vest and become exercisable over periods of up
to four years and expire five years after the date of grant.

The Company has reserved 698,000 shares of
common stock of which there were 84,000 shares available
for issuance pursuant to its 1999 Retention Stock Option Plan as
of December 31, 2002.

F-18



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                  
| | ---------------------------------
| | Directors Stock Option
    Plans

The Company has reserved an aggregate of
840,000 shares of its common stock for issuance pursuant to
its 1999 and 1995 Directors Stock Option Plans. Under
these plans, non-employee directors of the Company have been
granted options to purchase up to 105,000 shares
(45,000 shares pursuant to the 1995 plan and
60,000 shares pursuant to the 1999 plan) of the
Companys common stock exercisable at the fair market value
of such shares on the respective grant dates. 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 a director and expire five to ten
years after the date of grant. Upon the adoption of the 1999
Directors Stock Option Plan, the 1995 Directors
Stock Option Plan expired with respect to future grants. There
were 260,000 shares available for issuance pursuant to the
1999 Directors Stock Option Plan at December 31, 2002.

The following table summarizes activity in the
Companys stock option plans during the years ended
December 31, 2002, 2001 and 2000:

|                           |           |             |           |                  |   |   |      |      | 
|-------------------------- | --------- | ----------- | --------- | ---------------- | - | - | ---- | ---- | 
|                           |           | Options     |           | Weighted Average
|                           |           | Outstanding |           | Exercise Price  
|                           |           |             |           |                 
|Balance, December 31, 1999 |           |             | 3,443,978 |                  |   | $ | 1.70 |     
|                           | Granted   |             |           | 692,066          |   |   | $    | 2.18 | 
|                           | Exercised |             |           | (568,507         | ) |   | $    | 1.50 | 
|                           | Canceled  |             |           | (747,931         | ) |   | $    | 2.14 | 
|                           |           |             |           |                  |   |   |      |     
|Balance, December 31, 2000 |           |             | 2,819,606 |                  |   | $ | 1.74 |     
|                           | Granted   |             |           | 603,500          |   |   | $    | 1.62 | 
|                           | Exercised |             |           | (72,355          | ) |   | $    | 1.10 | 
|                           | Canceled  |             |           | (162,346         | ) |   | $    | 1.57 | 
|                           |           |             |           |                  |   |   |      |     
|Balance, December 31, 2001 |           |             | 3,188,405 |                  |   | $ | 1.73 |     
|                           | Granted   |             |           | 572,800          |   |   | $    | 4.44 | 
|                           | Exercised |             |           | (603,266         | ) |   | $    | 1.42 | 
|                           | Canceled  |             |           | (302,623         | ) |   | $    | 3.78 | 
|                           |           |             |           |                  |   |   |      |     
|Balance, December 31, 2002 |           |             | 2,855,316 |                  |   | $ | 2.12 |     
|                           |           |             |           |                  |   |   |      |     

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, 2002:

|                    |  |                     |           |                  |  |                |      |             |  |                |      |  |  |  |           |  |  |   |      | 
|------------------- |  | ------------------- | --------- | ---------------- |  | -------------- | ---- | ----------- |  | -------------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                    |  |                    
|Options Outstanding |  | Options Exercisable
|                    |  |                    
|                    |  | Weighted            |           |                  |  |               
|                    |  | Average             |           |                  |  |               
|                    |  | Remaining           |           | Weighted         |  |                |      | Weighted   
|Range of            |  | Number              |           | Contractual Life |  | Average        |      | Number      |  | Average       
|Exercise Prices     |  | Outstanding         |           | (Years)          |  | Exercise Price |      | Exercisable |  | Exercise Price
|                    |  |                     |           |                  |  |                |      |             |  |               
|$0.69  $1.25       |  |                     | 516,669   |                  |  |                | 1.57 |             |  | $              | 1.14 |  |  |  | 491,026   |  |  | $ | 1.14 | 
|$1.28  $1.38       |  |                     | 309,310   |                  |  |                | 0.75 |             |  | $              | 1.29 |  |  |  | 305,417   |  |  | $ | 1.28 | 
|$1.50  $1.59       |  |                     | 438,373   |                  |  |                | 2.82 |             |  | $              | 1.50 |  |  |  | 402,876   |  |  | $ | 1.50 | 
|$1.60  $1.75       |  |                     | 634,323   |                  |  |                | 3.86 |             |  | $              | 1.63 |  |  |  | 251,457   |  |  | $ | 1.64 | 
|$1.80  $3.00       |  |                     | 419,518   |                  |  |                | 2.50 |             |  | $              | 2.33 |  |  |  | 329,497   |  |  | $ | 2.33 | 
|$3.50  $5.25       |  |                     | 537,123   |                  |  |                | 5.08 |             |  | $              | 4.48 |  |  |  | 49,380    |  |  | $ | 4.76 | 
|                    |  |                     |           |                  |  |                |      |             |  |                |      |  |  |  |           |  |  |   |      | 
|$0.69  $5.25       |  |                     | 2,855,316 |                  |  |                | 2.98 |             |  | $              | 2.12 |  |  |  | 1,829,653 |  |  | $ | 1.62 | 
|                    |  |                     |           |                  |  |                |      |             |  |                |      |  |  |  |           |  |  |   |      | 

F-19



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                      
| | -------------------------------------
| | 1999 Employee Stock Purchase
    Plan

During 1999, the Company adopted its Employee
Stock Purchase Plan under which qualified employees can purchase
up to a specified maximum amount of the Companys common
stock through payroll deductions at 85% of its fair market
value. The 1999 Employee Stock Purchase Plan replaced the 1989
Employee Stock Purchase Plan which expired in July 1999.
Laserscope has reserved 650,000 shares of common stock for
issuance pursuant to its 1999 Employee Stock Purchase Plan.
Under this plan, as of December 31, 2002, approximately
463,000 shares had been purchased.



| |                                       
| | --------------------------------------
| | Pro Forma Stock-Based
    Compensation

The Company has adopted the disclosure only
provisions of SFAS No. 123 for stock options granted
to employees. The Company has not recorded any stock
compensation costs during the years ended December 31,
2002, 2001, and 2000. Had compensation cost for the
Companys stock-based compensation plans been determined
based on the estimated fair value of the awards on the date of
grant, the Companys net income (loss) and net income
(loss) per share would have been as follows:

|                                                                                                                                                    |                       |                                       |      |       |   |      |        |       |   |   |        |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------------------- | ---- | ----- | - | ---- | ------ | ----- | - | - | ------ | ----- | -
|                                                                                                                                                    |                       | 2002                                  |      | 2001  |   | 2000
|                                                                                                                                                    |                       |                                       |      |       |   |     
|                                                                                                                                                    |                       |                                      
|                                                                                                                                                    |                       | (In thousands, except per share data)
|Net income (loss), as reported                                                                                                                      |                       | $                                     | 323  |       |   | $    | (829   | )     |   | $ | 186    |      
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                       | $                                     | (956 | )     |   | $    | (1,025 | )     |   | $ | (1,451 | )    
|                                                                                                                                                    |                       |                                       |      |       |   |      |        |       |   |   |        |      
|Pro forma net loss                                                                                                                                  |                       | $                                     | (633 | )     |   | $    | (1,854 | )     |   | $ | (1,265 | )    
|                                                                                                                                                    |                       |                                       |      |       |   |      |        |       |   |   |        |      
|Earnings per share:                                                                                                                                 |                       |                                       |      |       |   |      |        |       |   |   |        |      
|                                                                                                                                                    | Basic  as reported   |                                       | $    | 0.02  |   |      | $      | (0.05 | ) |   | $      | 0.01  |  
|                                                                                                                                                    |                       |                                       |      |       |   |      |        |       |   |   |        |      
|                                                                                                                                                    | Basic  pro forma     |                                       | $    | (0.04 | ) |      | $      | (0.12 | ) |   | $      | (0.08 | )
|                                                                                                                                                    |                       |                                       |      |       |   |      |        |       |   |   |        |      
|                                                                                                                                                    | Diluted  as reported |                                       | $    | 0.02  |   |      | $      | (0.05 | ) |   | $      | 0.01  |  
|                                                                                                                                                    |                       |                                       |      |       |   |      |        |       |   |   |        |      
|                                                                                                                                                    | Diluted  pro forma   |                                       | $    | (0.04 | ) |      | $      | (0.12 | ) |   | $      | (0.08 | )
|                                                                                                                                                    |                       |                                       |      |       |   |      |        |       |   |   |        |      

Pro forma information regarding net loss and
net loss per share as if the Company accounted for its employee
stock options granted subsequent to December 15, 1994 under
the fair value method is calculated based on the fair value of
the option grants at the date of grant using a Black-Scholes
multiple option pricing model with the following weighted
average assumptions:

|                         |  |      |      |      |  |      |      |   |  |  |      |  
|------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                         |  | 2002 |      | 2001 |  | 2000
|                         |  |      |      |      |  |     
|Risk free interest rate  |  |      | 3.20 | %    |  |      | 6.54 | % |  |  | 6.07 | %
|Dividend yield           |  |      |     |      |  |      |     |   |  |  |     |  
|Volatility               |  |      | 1.16 |      |  |      | 1.21 |   |  |  | 1.12 |  
|Expected life (in years) |  |      | 3.50 |      |  |      | 3.59 |   |  |  | 3.50 |  

The weighted average per share grant date fair
values of employee stock options granted in 2002, 2001, and 2000
were $3.39, $1.28 and $1.69, respectively.

F-20



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Pro forma compensation expense with respect to
the Companys 1999 Employee Stock Purchase Plan is
estimated using the fair value of the employees purchase
rights under the Black-Scholes model with the following weighted
average assumptions:

|                         |  |      |      |      |  |      |      |   |  |  |      |  
|------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                         |  | 2002 |      | 2001 |  | 2000
|                         |  |      |      |      |  |     
|Risk free interest rate  |  |      | 1.78 | %    |  |      | 4.74 | % |  |  | 6.09 | %
|Dividend yield           |  |      |     |      |  |      |     |   |  |  |     |  
|Volatility               |  |      | 0.87 |      |  |      | 0.99 |   |  |  | 1.49 |  
|Expected life (in years) |  |      | 0.50 |      |  |      | 0.50 |   |  |  | 0.50 |  

The weighted average per share fair values of
those purchase rights granted in 2002, 2001 and 2000 were $1.15,
$0.47 and $0.68, respectively.



| |                                 
| | --------------------------------
| | 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 would have become exercisable in certain limited
circumstances involving a potential business combination
transaction of the Company and were initially exercisable at a
price of $34.00 per share. The Rights expired on
November 20, 2001 and the Company did not adopt a
replacement shareholder rights plan.



|    |                                     
|--- | ------------------------------------
|13. | 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 5% of each employees base
compensation and were approximately $173,000, $171,000, and
$173,000 in the years ended December 31, 2002, 2001 and
2000, respectively.



|    |             
|--- | ------------
|14. | Income Taxes

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

|                           |  |      |    |      |  |      |    |  |  |   |   | 
|-------------------------- |  | ---- | -- | ---- |  | ---- | -- |  |  | - | - | 
|                           |  | 2002 |    | 2001 |  | 2000
|                           |  |      |    |      |  |     
|Current federal taxes      |  | $    |   |      |  | $    |   |  |  | $ |  | 
|Current state taxes        |  |      |   |      |  |      |   |  |  |   |  | 
|Current foreign taxes      |  |      | 86 |      |  |      | 45 |  |  |   |  | 
|                           |  |      |    |      |  |      |    |  |  |   |   | 
|Provision for income taxes |  | $    | 86 |      |  | $    | 45 |  |  | $ |  | 
|                           |  |      |    |      |  |      |    |  |  |   |   | 

Pretax loss from foreign operations was $46,000
in 2002, $106,000 in 2001 and $665,000 in 2000.

F-21



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Income taxes differ from the amount computed by
applying the statutory federal income tax rate of 35% to income
(loss) before taxes. The reasons for the differences and the tax
effect of each are as follows (in thousands):

|                                           |  |      |      |      |  |      |      |   |  |   |      |  
|------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                           |  | 2002 |      | 2001 |  | 2000
|                                           |  |      |      |      |  |     
|Computed expected tax                      |  | $    | 139  |      |  | $    | (274 | ) |  | $ | 65   |  
|Operating loss with no carryback benefit   |  |      | 95   |      |  |      | 274  |   |  |   | 162  |  
|Benefit of net operating loss carryforward |  |      | (209 | )    |  |      |     |   |  |   | (227 | )
|Foreign taxes in excess of U.S. rate       |  |      | (9   | )    |  |      | 45   |   |  |   |     |  
|Other                                      |  |      | 70   |      |  |      |     |   |  |   |     |  
|                                           |  |      |      |      |  |      |      |   |  |   |      |  
|Provision for income taxes                 |  | $    | 86   |      |  | $    | 45   |   |  | $ |     |  
|                                           |  |      |      |      |  |      |      |   |  |   |      |  

The components of the deferred tax asset
consisted of the following at December 31, 2002 and 2001
(in thousands):

|                     |                                                                           |      |   |         |   |  |   |         |  
|-------------------- | ------------------------------------------------------------------------- | ---- | - | ------- | - |  | - | ------- | -
|                     |                                                                           | 2002 |   | 2001   
|                     |                                                                           |      |   |        
|Deferred tax assets: |                                                                           |      |   |         |   |  |   |        
|                     | Net operating loss carryforwards                                          |      | $ | 8,881   |   |  | $ | 9,636   |  
|                     | General business credit carryforwards                                     |      |   | 2,256   |   |  |   | 2,187   |  
|                     | Inventory reserves and adjustments                                        |      |   | 1,198   |   |  |   | 1,217   |  
|                     | Other accruals and reserves not currently
    deductible for tax purposes |      |   | 1,485   |   |  |   | 850     |  
|                     | Capitalized research and development                                      |      |   | 734     |   |  |   | 913     |  
|                     | Depreciation & amortization                                               |      |   | 1,216   |   |  |   | 2,267   |  
|                     |                                                                           |      |   |         |   |  |   |        
|                     | Total deferred tax assets                                                 |      |   | 15,770  |   |  |   | 17,070  |  
|                     | Less valuation allowance                                                  |      |   | (15,770 | ) |  |   | (17,070 | )
|                     |                                                                           |      |   |         |   |  |   |        
|                     | Net deferred tax asset                                                    |      | $ |        |   |  | $ |        |  
|                     |                                                                           |      |   |         |   |  |   |        

The Company has provided a full valuation
allowance for its deferred tax assets since the realization of
these future benefits cannot be sufficiently assured.

As of December 31, 2002, the Company has net
operating loss carryforwards of approximately $25 million
and $6 million for federal and state tax purposes,
respectively. If not utilized, these carryforwards will begin to
expire in 2010 for federal tax purposes and in 2003 for state
tax purposes.

The Company has research and development tax
credit carryforwards of approximately $1.2 million and
$1.5 million for federal and state purposes, respectively.
If not utilized, the federal carryforward will expire in various
amounts beginning in 2010. The California credit can be carried
forward indefinitely.

The Tax Reform Act of 1986 limits the use of net
operating loss and tax credit carryforwards in certain
situations where changes occur in the stock ownership of a
company. In the event the Company has a change in ownership,
utilization of the carryforwards may be restricted.



|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|15. | Financial Instruments With Market Risk and
    Concentrations of Customer and 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. 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 in the opinion of management substantially alleviate
the concentration of

F-22



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

credit risk. In 2000, Laserscope had no customers
whose purchases amounted to 10% or more of our total annual
revenue. However, in 2002 and 2001, our U.S. distributor,
McKesson Corporation, made purchases from us of approximately
$12.6 million and $7.0 million which was 29% and 20%
of our total 2002 and 2001 revenue, respectively. We had no
other customers whose purchases were 10% or more of our annual
revenue. At December 31, 2002 and 2001 our McKesson
Corporation accounts receivable balance was approximately
$2,000,000 and $1,400,000 which represented 19% and 16% of
Laserscopes total gross accounts receivable respectively.
The Company performs ongoing credit evaluations of its customers
and maintains reserves for potential credit losses.
Historically, such losses have been within managements
expectations.

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.

The Company maintains its cash and cash
equivalents in accounts with major financial institutions in the
United States of America and in countries where subsidiaries
operate, in the form of demand deposits and money market
accounts. Deposits in these banks may exceed the amounts of
insurance provided on such deposits. The Company has not
experienced any losses on its deposits of cash and cash
equivalents.

The Company invests cash that is not required for
immediate operating needs principally in a diversified portfolio
of financial instruments issued by institutions with strong
credit ratings. By policy, the amount of credit exposure to any
one institution, with the exception of U.S. government
backed securities, is limited.

The Company is subject to risks common to
companies in the medical device industry including, but not
limited to dependence on key personnel and component suppliers,
protection of proprietary technology, compliance with government
regulations, uncertainty of market acceptance of products,
product liability and the need to obtain additional financing.



|    |                                                                     
|--- | --------------------------------------------------------------------
|16. | Consolidated Quarterly Statement of Operations
    Data (Unaudited):

|                                                |  |                    |       |          |  |          |        |          |  |   |        |   |  |   |        | 
|----------------------------------------------- |  | ------------------ | ----- | -------- |  | -------- | ------ | -------- |  | - | ------ | - |  | - | ------ | 
|                                                |  |                   
|                                                |  | Three Months Ended
|                                                |  |                   
|                                                |  | Mar. 31,           |       | Jun. 30, |  | Sep. 30, |        | Dec. 31,
|                                                |  |                    |       |          |  |          |        |         
|2002                                            |  |                    |       |          |  |          |        |          |  |   |        |   |  |   |        | 
|Net revenues                                    |  | $                  | 9,420 |          |  | $        | 10,529 |          |  | $ | 10,479 |   |  | $ | 12,660 | 
|Gross margin                                    |  |                    | 4,621 |          |  |          | 5,572  |          |  |   | 5,657  |   |  |   | 6,404  | 
|Net income (loss)                               |  |                    | (47   | )        |  |          | 128    |          |  |   | 192    |   |  |   | 50     | 
|Basic & diluted net income (loss) per
    share |  |                    | 0.00  |          |  |          | 0.01   |          |  |   | 0.01   |   |  |   | 0.00   | 
|                                               
|2001                                            |  |                    |       |          |  |          |        |          |  |   |        |   |  |   |        | 
|Net revenues                                    |  | $                  | 8,228 |          |  | $        | 9,302  |          |  | $ | 7,953  |   |  | $ | 9,604  | 
|Gross margin                                    |  |                    | 3,709 |          |  |          | 5,021  |          |  |   | 3,799  |   |  |   | 4,823  | 
|Net income ( loss)                              |  |                    | (490  | )        |  |          | 182    |          |  |   | (641   | ) |  |   | 120    | 
|Basic and diluted net income (loss) per share   |  |                    | (0.03 | )        |  |          | 0.01   |          |  |   | (0.04  | ) |  |   | 0.01   | 

F-23



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##### Table of Contents






SCHEDULE II

LASERSCOPE

VALUATION AND QUALIFYING ACCOUNTS

|                                            |                              |                |   |           |  |            |   |            |  |  |   |       |  |  |   |       | 
|------------------------------------------- | ---------------------------- | -------------- | - | --------- |  | ---------- | - | ---------- |  |  | - | ----- |  |  | - | ----- | 
|                                            |                              | Balance at     |   |           |  |            |   | Balance at
|                                            |                              | Beginning      |   |           |  |            |   | End of    
|Descriptions                                |                              | of Period      |   | Additions |  | Deductions |   | Period    
|                                            |                              |                |   |           |  |            |   |           
|                                            |                              |               
|                                            |                              | (In thousands)
|Allowance for doubtful accounts receivable: |                              |                |   |           |  |            |   |            |  |  |   |       |  |  |   |      
|                                            | Year ended December 31, 2000 |                | $ | 751       |  |            | $ | 49         |  |  | $ |      |  |  | $ | 800   | 
|                                            |                              |                |   |           |  |            |   |            |  |  |   |       |  |  |   |      
|                                            | Year ended December 31, 2001 |                | $ | 800       |  |            | $ |           |  |  | $ | 426   |  |  | $ | 374   | 
|                                            |                              |                |   |           |  |            |   |            |  |  |   |       |  |  |   |      
|                                            | Year ended December 31, 2002 |                | $ | 374       |  |            | $ | 115        |  |  | $ | 186   |  |  | $ | 303   | 
|                                            |                              |                |   |           |  |            |   |            |  |  |   |       |  |  |   |      
|Reserve for excess and obsolete inventory:  |                              |                |   |           |  |            |   |            |  |  |   |       |  |  |   |      
|                                            | Year ended December 31, 2000 |                | $ | 4,922     |  |            | $ |           |  |  | $ | 2,024 |  |  | $ | 2,898 | 
|                                            |                              |                |   |           |  |            |   |            |  |  |   |       |  |  |   |      
|                                            | Year ended December 31, 2001 |                | $ | 2,898     |  |            | $ |           |  |  | $ | 384   |  |  | $ | 2,514 | 
|                                            |                              |                |   |           |  |            |   |            |  |  |   |       |  |  |   |      
|                                            | Year ended December 31, 2002 |                | $ | 2,514     |  |            | $ | 134        |  |  | $ | 357   |  |  | $ | 2,291 | 
|                                            |                              |                |   |           |  |            |   |            |  |  |   |       |  |  |   |      

S-1



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##### Table of Contents






EXHIBIT INDEX

|        |        |             |  |                                                                                                                                                                              
|------- | ------ | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 2.1    |             |  | Acquisition Agreement between Laserscope and
    Heraeus Med GmbH.(8)                                                                                                        
|        | 2.1A   |             |  | Amendment Number One to Acquisition Agreement
    between Laserscope and Heraeus Med GmbH.(10)                                                                               
|        | 3.3    |             |  | Eighth Amended and Restated Articles of
    Incorporation of Registrant.(21)                                                                                                 
|        | 3.4    |             |  | By-laws of Registrant, as amended.(2)                                                                                                                                        
|        | 4.1    |             |  | Common Shares Rights Agreement dated as of
    October 31, 1991 between Laserscope and American Stock
    Transfer & Trust Company as Rights Agent.(5)                       
|        | 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.(6)
|        | 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.(7)
|        | 10.1A  |             |  | 1984 Stock Option Plan, as amended, and forms of
    Incentive Stock Option Agreement and Non-statutory Stock Option
    Agreement.(2)                                       
|        | 10.1B  |             |  | 1994 Stock Option Plan and forms of Incentive
    Stock Option Agreement and Non-statutory Stock Option
    Agreement.(3)                                                    
|        | 10.2   |             |  | 1984 Stock Purchase Plan and form of Common Stock
    Purchase Agreement.(1)                                                                                                 
|        | 10.3   |             |  | 1989 Employee Stock Purchase Plan and form of
    Subscription Agreement.(2)                                                                                                 
|        | 10.3A  |             |  | 1999 Employee Stock Purchase Plan and form of
    Subscription Agreement.(14)                                                                                                
|        | 10.4   |             |  | 401(k) Plan.(1)                                                                                                                                                              
|        | 10.6   |             |  | Net Lease Agreement between the Registrant and
    Realtec Properties dated June 20, 2000.(17)                                                                               
|        | 10.6A  |             |  | Net Lease Agreement between the Registrant and
    Realtec Properties dated October 18, 2000.(17)                                                                            
|        | 10.10  |             |  | Form of indemnification agreement.(1)                                                                                                                                        
|        | 10.11  |             |  | Amended and Restated Loan and Security Agreement
    between the Registrant and Silicon Valley Bank Dated
    November 23, 1996.(10)                                         
|        | 10.11A |             |  | Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated November 26,
    1997.(10)                                                              
|        | 10.11B |             |  | Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated March 18, 1998.(10)                                                                     
|        | 10.11C |             |  | Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated September 3,
    1998.(11)                                                              
|        | 10.11D |             |  | Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated November 25,
    1998.(12)                                                              
|        | 10.11E |             |  | Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated March 17, 1999.(12)                                                                     
|        | 10.11F |             |  | Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated March 30, 1999.(13)                                                                     
|        | 10.11G |             |  | Loan and Security Agreement between the
    Registrant and Silicon Valley Bank dated October 1,
    1999.(14)                                                                
|        | 10.11H |             |  | Amendment to Loan and Security Agreement between
    the Registrant and Silicon Valley Bank dated September 25,
    2000.(16)                                                
|        | 10.11I |             |  | Amendment to Loan and Security Agreement between
    the Registrant and Silicon Valley Bank dated September 26,
    2001.(18)                                                
|        | 10.11J |             |  | Amendment to Loan and Security Agreement between
    the Registrant and Silicon Valley Bank dated September 26,
    2002.(20)                                                
|        | 10.13  |             |  | 1990 Directors Stock Option Plan and form
    of Option Agreement.(2)                                                                                                       



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##### Table of Contents



|        |        |             |  |                                                                                         
|------- | ------ | ----------- |  | ----------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.14  |             |  | Form of Laserscope Management Continuity
    Agreement, as amended.(15)                 
|        | 10.14A |             |  | Form of Laserscope Management Continuity
    Agreement, as amended.(19)                 
|        | 10.18  |             |  | 1995 Directors Stock Option Plan and form
    of Option agreement.(4)                  
|        | 10.18A |             |  | 1999 Directors Stock Option Plan.(14)                                                  
|        | 10.19  |             |  | Common Stock Placement Agreement.(14)                                                   
|        | 10.19A |             |  | Form of Common Stock Purchase Agreement.(14)                                            
|        | 10.20  |             |  | Convertible Loan Agreement.(14)                                                         
|        | 10.20A |             |  | Amendment to Convertible Loan Agreement.(21)                                            
|        | 22.1   |             |  | Subsidiaries of Registrant, as amended.(17)                                             
|        | 23.1   |             |  | Consent of Independent Accountants.(21)                                                 
|        | 23.2   |             |  | Consent of Ernst & Young LLP.(21)                                                       
|        | 25.1   |             |  | Power of Attorney (see page 34).(21)                                                    
|        | 99.1   |             |  | Certification of Principal Executive Officer
    pursuant to 18 U.S.C. section 1350.(21)
|        | 99.2   |             |  | Certification of Principal Financial Officer
    pursuant to 18 U.S.C. section 1350.(21)



---



| |     |                                                                                                                                                                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | 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.
|
| | (2) | 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.                                                                                         
|
| | (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, 1994.                                                                                         
|
| | (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/ A for the year ended December 31, 1995.                                                                                      
|
| | (5) | Incorporated by reference to Exhibit 1 of
    the Registrants Registration Statement on Form 8-A
    filed November 15, 1991.                                                                                                                                                                      
|
| | (6) | 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.                                                                              
|
| | (7) | 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.                                                                                                                               
|
| | (8) | Incorporated by reference to Exhibit A to
    the Definitive Proxy Statement for the Special Meeting of
    Shareholders held August 29, 1996.                                                                                                                                                      
|
| | (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, 1996.                                                                                      



|     |                                                                                                                                                                                                                            
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | 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, 1997.             
|    
|(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
    September 30, 1998.
|    
|(12) | 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, 1998.             
|    
|(13) | 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 March 31,
    1999     
|    
|(14) | 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, 1999.                



---



##### Table of Contents





|     |                                                                                                                                                                                                                            
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(15) | 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 March 31,
    2000.    
|    
|(16) | 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
    September 30, 2000.
|    
|(17) | 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, 2000.                
|    
|(18) | 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
    September 30, 2001.
|    
|(19) | 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 March 31,
    2002.    
|    
|(20) | 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
    September 30, 2002.
|    
|(21) | Filed herewith.                                                                                                                                                                                                            

Reports on Form 8-K:

None.