##### Table of Contents









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,
    2003,                                            
|  
|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

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.     þ

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

The aggregate
market value of the Registrants voting and non-voting
common equity held by non-affiliates of the Registrant was
approximately $102,098,816 as of June 30, 2003, 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
20,459,686 shares of Registrants Common Stock issued
and outstanding as of March 1, 2004.



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TABLE OF CONTENTS



|                                                         |                                                                                                |  |  |  |  |  |  | 
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|DOCUMENTS INCORPORATED BY REFERENCE                     
|INTRODUCTORY STATEMENT AND REFERENCES                   
|REFERENCES                                              
|PART I                                                  
|                                                         | Item 1. Business.                                                                             
|                                                         | Item 2. Properties.                                                                           
|                                                         | Item 3. Legal Proceedings.                                                                    
|                                                         | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|PART II                                                 
|                                                         | Item 5. Market for the Registrants Common Stock and Related Shareholder Matters.             
|                                                         | Item 6. Selected Financial Data.                                                              
|                                                         | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|RISK FACTORS                                            
|                                                         | Item 7A. Quantitative and Qualitative Disclosures About Market Risk.                          
|                                                         | Item 8. Consolidated Financial Statements and Supplementary Data.                             
|                                                         | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 
|                                                         | Item 9A. Controls and Procedures.                                                             
|PART III                                                
|                                                         | Item 10. Directors and Executive Officers of the Registrant.                                  
|                                                         | Item 11. Executive Compensation.                                                              
|                                                         | Item 12. Security Ownership of Certain Beneficial Owners and Management.                      
|                                                         | Item 13. Certain Relationships and Related Transactions.                                      
|                                                         | Item 14. Principal Accountant Fees and Services.                                              
|PART IV                                                 
|                                                         | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.                    
|SIGNATURES                                              
|POWER OF ATTORNEY                                       
|REPORT OF INDEPENDENT AUDITORS                          
|CONSOLIDATED BALANCE SHEETS                             
|CONSOLIDATED STATEMENTS OF OPERATIONS                   
|CONSOLIDATED STATEMENTS OF CASH FLOWS                   
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY         
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              
|SCHEDULE II LASERSCOPE VALUATION AND QUALIFYING ACCOUNTS
|EXHIBIT INDEX                                           
|EXHIBIT 23.1                                            
|EXHIBIT 31.1                                            
|EXHIBIT 31.2                                            
|EXHIBIT 32.1                                            
|EXHIBIT 32.2                                            



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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 4, 2004.




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. All forward-looking statements included in this
report are based on information available to us on the date
hereof, and we assume no obligation to update any such
forward-looking statements.

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REFERENCES

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

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

Laserscope;

Dermastat;


Opthostat; 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;                                           |  | Gemini;        
|Aura i;                                          |  | GreenLight PVP;
|Coolspot;                                          |  | GreenLight PV; 
|Dermastat;                                         |  | StoneLight;    
|Endostat;                                          |  | SmartConnector;
|Venus i;                                         |  | StarPulse; and 
|VersaStat;                                         |  | Venus.         
|VersaStat i;                                     |  |                
|Orion;                                             |  |                
|Model 630 PDT Dye Module;                         
|Model 630XP PDT Dye Module;                       
|800 Series KTP/ YAG Surgical Laser System;
    and
|SmartScan                                         

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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 United States regulatory
clearances in 1987 and completed our initial public offering in
December 1989.

Market
Focus

In the first quarter of 2002, Laserscope began
selling the GreenLightTM Laser System and
ADDStatTM disposable fiber-optic delivery device used
to perform photoselective vaporization of the prostate
(PVPTM) for the treatment of benign
prostatic hyperplasia (BPH). Since that time, more
than 400 urologists collectively have performed more than
17,000 PVPTM procedures. Adoption of this
treatment continues to grow among urologists within in the
United States and international markets.

BPH affects more than 13 million men in
U.S. According to Health Research International, in 2002
there were approximately 2 million men treated for the
condition and that number is expected to grow to over
3 million men by 2008. Interventional treatments in the
U.S. during 2002 were estimated to be over 218,000.

The GreenLightTM procedure is a
virtually bloodless, minimally invasive, outpatient treatment
that provides dramatic improvement in urine flow and symptom
relief with an extremely low incidence of side effects. Patients
are usually released within a few hours of the procedure, often
without a catheter. Patients can usually return to normal,
non-strenuous activities within a couple of days.

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. Our
GeminiTM Laser System, introduced at the American
Academy of Dermatology Annual Meeting, held February 7-10,
2004, combines both the wavelengths and pulsing characteristics
of Laserscopes two leading

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aesthetic products, the Aura and Lyra laser
systems, into a single, higher power and faster product
platform. The GeminiTM, is currently FDA cleared for
17 different non-invasive aesthetic applications and is
awaiting clearance on the treatment of acne, wrinkle reduction
and permanent hair reduction on all skin types. As a percentage
of total revenues in 2003, the dermatology/ aesthetic surgery
market accounted for approximately 63% of revenues.


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.

Products

Laser
Platforms:

Our GreenLightTM System is a KTP
single wavelength laser used for PVPTM, a procedure
to treat BPH. BPH is a non-cancerous enlargement of the male
prostate. With age, the prostate, a walnut-size gland located
just below the bladder, 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 GeminiTM Laser System combines
both the wavelengths and pulsing characteristics of
Laserscopes two leading aesthetic products, the Aura and
Lyra laser systems, into a single, higher power and faster
product platform. The Gemini is currently FDA cleared for 17
different clinical aesthetic applications and is awaiting
clearance on the treatment of acne, wrinkle reduction and
permanent hair reduction on all skin types.

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.

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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 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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. Our
international operations, including export sales were 26% of
total revenues in each year ended December 31, 2003 and
2002 and were 35% of total revenue in 2001. We expect that
international sales will continue to represent a significant
percentage of net revenue in 2004.

Installed
Base of Lasers

We have more than 7,000 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
$4.4 million in 2003 and $3.8 million in each year of
2002 and 2001.

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 2004.

Employees

At December 31, 2003, Laserscope had 195
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;                                             
|
| |  | 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. 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

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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.


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 36
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, 2003 and 2002, we had
firm orders in our backlog worth approximately $4.1 million
and $1.8 million, respectively. We completely exhausted in
2003 the backlog that existed at the end of 2002, and we plan to
completely exhaust during 2004 the backlog that existed at the
end of 2003.

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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, 2003:

|                          |  |     |    |          |  |                                                                   
|------------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------
|Name                      |  | Age |    | Position
|                          |  |     |    |         
|Robert J. Pressley, Ph.D. |  |     | 71 |          |  | Chairman of the Board of Directors                                
|Eric M. Reuter            |  |     | 42 |          |  | President, Chief Executive Officer and Director                   
|Robert L. Mathews         |  |     | 58 |          |  | Executive Vice President                                          
|Ken Arnold                |  |     | 34 |          |  | Vice President, Research and Development                          
|Van Frazier               |  |     | 51 |          |  | Vice President, Quality and Regulatory Affairs                    
|Dennis LaLumandiere       |  |     | 50 |          |  | Vice President, Finance, Chief Financial Officer
    and Secretary
|Robert Mann               |  |     | 46 |          |  | Vice President, North American Sales and Marketing                
|William B. Kelley         |  |     | 48 |          |  | Vice President, International Sales 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.

William B. Kelley joined Laserscope as Vice
President, International Sales and Business Development in
November of 2003. Prior to joining Laserscope, from 2002 to 2003
he was Vice President of Sales and Marketing for DentalVeiw, a
provider of dental endoscopy equipment. From 1987 to 2001,
Mr. Kelley held various sales and executive positions at
Candela Corporation, a manufacturer and marketer of medical
lasers. His last position at Candela was as Vice President of
Sales, North and South America, and he also had direct reporting
of worldwide customer service. Mr. Kelley has also served
in various sales and sales management capacities at Hospital
Satellite Network, New England Medical Devices, Shiley
Incorporated, US Surgical Corporation and Parke-Davis
Corporation. Mr. Kelley has a BS in Biology and Chemistry
from Providence College, Providence RI.



| |                      
| | ---------------------
| | Available Information

Our website is www.laserscope.com. We make
available free of charge, on or through our website, our annual,
quarterly and current reports, and any amendments to those
reports, as soon as reasonably practicable after electronically
filing such reports with the Securities and Exchange Commission.
Information contained on our website is not part of this Report.






|        |            
|------- | -----------
|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 also lease
offices in the United Kingdom and France where our local sales
and marketing staff are based. We believe that these facilities
are suitable for our current operations and are adequate to
support those operations through at least the end of 2004.






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

Not Applicable.






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

Not Applicable.

9



---



##### Table of Contents






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 1, 2004,
Laserscope had approximately 600 shareholders of record and
the last reported sale of our Common Stock on the Nasdaq
National Market was $23.81 per share.

The following table shows Laserscopes high
and low selling prices for the years ended December 31,
2003 and December 31, 2002 as reported by the Nasdaq
National Market System:

|               |  |          |       |         |  |   |       | 
|-------------- |  | -------- | ----- | ------- |  | - | ----- | 
|               |  |         
|               |  | 2003    
|               |  |         
|               |  | High Bid |       | Low Bid
|               |  |          |       |        
|First Quarter  |  | $        | 5.30  |         |  | $ | 3.76  | 
|Second Quarter |  | $        | 8.20  |         |  | $ | 3.90  | 
|Third Quarter  |  | $        | 12.99 |         |  | $ | 7.50  | 
|Fourth Quarter |  | $        | 18.15 |         |  | $ | 10.64 | 

|               |  |          |      |         |  |   |      | 
|-------------- |  | -------- | ---- | ------- |  | - | ---- | 
|               |  |         
|               |  | 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 | 

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. At December 31,
2003, 373,212 warrants remained outstanding.

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.
(Renaissance) with gross proceeds to Laserscope of
$3.0 million. The debentures were to mature seven years
from issuance and had an interest rate of 8.00%. The debentures
were convertible into Laserscope common stock with an initial
conversion price, which was 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. As of December 31, 2003, 373,212
warrants remained outstanding.

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

In the first six months of 2003, $400,000 of the
debentures were converted to 320,000 shares of Laserscope
common stock by Renaissance. During December 2003, Renaissance
converted the remaining $2.6 million of debentures into
2,080,000 shares of Laserscope common stock.

10



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##### Table of Contents








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

Consolidated Statement of Operations
Data:

|                                    |  |                                       |        |      |  |      |        |         |  |         |        |   |  |   |        |  |  |   |        |  
|----------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ------ | ------- |  | ------- | ------ | - |  | - | ------ |  |  | - | ------ | -
|                                    |  | 2003                                  |        | 2002 |  | 2001 |        | 2000(1) |  | 1999(2)
|                                    |  |                                       |        |      |  |      |        |         |  |        
|                                    |  |                                      
|                                    |  | (Thousands, except per share amounts)
|Net revenues                        |  | $                                     | 57,427 |      |  | $    | 43,088 |         |  | $       | 35,087 |   |  | $ | 35,399 |  |  | $ | 40,990 |  
|Net income (loss)                   |  |                                       | 2,517  |      |  |      | 323    |         |  |         | (829   | ) |  |   | 186    |  |  |   | (7,573 | )
|Basic net income (loss) per share   |  |                                       | 0.14   |      |  |      | 0.02   |         |  |         | (0.05  | ) |  |   | 0.01   |  |  |   | (0.60  | )
|Diluted net income (loss) per share |  |                                       | 0.13   |      |  |      | 0.02   |         |  |         | (0.05  | ) |  |   | 0.01   |  |  |   | (0.60  | )

Consolidated Balance Sheet Data (at end of
period):

|                                           |  |      |        |      |  |      |        |         |  |         |        |  |  |   |        |  |  |   |        | 
|------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | ------- |  | ------- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                           |  | 2003 |        | 2002 |  | 2001 |        | 2000(1) |  | 1999(2)
|                                           |  |      |        |      |  |      |        |         |  |        
|Cash & cash equivalents                    |  | $    | 7,158  |      |  | $    | 4,661  |         |  | $       | 3,408  |  |  | $ | 2,698  |  |  | $ | 1,449  | 
|Working capital                            |  |      | 20,722 |      |  |      | 15,652 |         |  |         | 13,336 |  |  |   | 14,793 |  |  |   | 6,806  | 
|Total assets                               |  |      | 37,028 |      |  |      | 29,163 |         |  |         | 25,482 |  |  |   | 24,087 |  |  |   | 28,956 | 
|Capital leases (excluding current portion) |  |      |       |      |  |      | 60     |         |  |         | 60     |  |  |   | 277    |  |  |   | 534    | 
|Other long term debt                       |  |      |       |      |  |      | 2,853  |         |  |         | 3,000  |  |  |   | 3,000  |  |  |   | 862    | 
|Shareholders equity                       |  |      | 23,198 |      |  |      | 15,482 |         |  |         | 13,412 |  |  |   | 14,114 |  |  |   | 12,047 | 



---



|    |                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------
|(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.






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|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, product returns, 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.

Overview

Laserscope is a leading provider of medical laser
systems for surgical and aesthetic applications. Founded in
1984, we are a pioneer developer of innovative technologies with
over 7000 lasers installed worldwide in doctors offices,
out-patient surgical centers and hospitals. 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.

Laserscope primarily serves the needs of two
medical specialties: urology and aesthetic surgery. Our newest
product offers a breakthrough treatment for a urological
disorder called benign prostatic hyperplasia (BPH),
an enlargement of the prostate gland experienced by most men
after the age of fifty.

For aesthetic applications, we offer a full line
of products used to perform a wide variety of treatments
including the removal of leg and facial veins, unwanted hair,
pseudo-folliculitis and wrinkles.

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,

11



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##### Table of Contents



(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.

Critical Accounting Policies

Our critical accounting policies are as follows:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | revenue recognition;                                           
|
| |  | allowance for doubtful accounts;                               
|
| |  | allowance for laser returns;                                   
|
| |  | warranty obligation;                                           
|
| |  | excess and obsolete inventory;                                 
|
| |  | valuation of long-lived and intangible assets and
    goodwill;
|
| |  | allowance for litigation costs;                                
|
| |  | 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 warranty at
the time of sale. Service revenue is recognized as the services
are provided and for service contracts on a straight-line 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.

Allowance for Laser
Returns.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
and will instead return the laser system to us, we maintain an
allowance for losses on laser returns. We estimate losses based
on a two year history of actual laser returns. 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.

Warranty Obligation.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

12



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##### Table of Contents



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. Inventory
reserves are recorded when conditions indicate that selling
price may be less than cost due to factors such as estimates
about future demand, reductions in selling prices, physical
deterioration, usage and obsolescence. The reserves are equal to
the difference between the cost of inventory and the estimated
market value. If actual market conditions are less favorable
than those projected by management, additional inventory
reserves may be required and gross margin could be adversely
impacted. In contrast, higher gross margins could result if
actual market conditions are more favorable than those projected
by management.

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 an 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 United Kingdom
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 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

13



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##### Table of Contents



statements is included, as a component of
shareholders equity, 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
experiencing only a short history of profitability, management
believes that there is sufficient uncertainty regarding the
realization of deferred tax assets and a full valuation
allowance is appropriate. Management reviews its assumptions
regarding the realization of deferred tax assets on an ongoing
basis. Continued profitability and future changes in
managements assumptions may result in a partial or full
release of the deferred tax valuation allowance. A release of
the valuation allowance would have a favorable impact on the tax
provision within the statement of operations.

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:

|                                  |                                     |      |       |      |  |      |       |      |  |  |       |      | 
|--------------------------------- | ----------------------------------- | ---- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- | ---- | 
|                                  |                                     | 2003 |       | 2002 |  | 2001
|                                  |                                     |      |       |      |  |     
|Net revenues                      |                                     |      | 100.0 | %    |  |      | 100.0 | %    |  |  | 100.0 | %   
|Cost of products and services     |                                     |      | 48.1  |      |  |      | 48.4  |      |  |  | 50.5  |     
|                                  |                                     |      |       |      |  |      |       |      |  |  |       |     
|Gross margin                      |                                     |      | 51.9  |      |  |      | 51.6  |      |  |  | 49.5  |     
|Operating expenses:               |                                     |      |       |      |  |      |       |      |  |  |       |     
|                                  | Research and development            |      |       | 7.7  |  |      |       | 8.9  |  |  |       | 10.7 | 
|                                  | Selling, general and administrative |      |       | 39.5 |  |      |       | 40.9 |  |  |       | 40.0 | 
|                                  |                                     |      |       |      |  |      |       |      |  |  |       |     
|                                  |                                     |      | 47.2  |      |  |      | 49.8  |      |  |  | 50.7  |     
|Operating income (loss)           |                                     |      | 4.7   |      |  |      | 1.8   |      |  |  | (1.3  | )   
|Interest expense and other, net   |                                     |      | 0.0   |      |  |      | (0.9  | )    |  |  | (1.0  | )   
|                                  |                                     |      |       |      |  |      |       |      |  |  |       |     
|Income (loss) before income taxes |                                     |      | 4.7   |      |  |      | 0.9   |      |  |  | (2.3  | )   
|Provision for income taxes        |                                     |      | 0.3   |      |  |      | 0.2   |      |  |  | 0.1   |     
|                                  |                                     |      |       |      |  |      |       |      |  |  |       |     
|Net income (loss)                 |                                     |      | 4.4   | %    |  |      | 0.7   | %    |  |  | (2.4  | )%  
|                                  |                                     |      |       |      |  |      |       |      |  |  |       |     

We generally sell our products to hospitals,
outpatient surgery centers 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. 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 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%, 26% and
35% of our net revenues for 2003, 2002 and 2001, respectively.
We believe that international sales will continue to account for
a significant portion of our net

14



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##### Table of Contents



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, 2003, sales outside of
the United States have been denominated in the local currencies
of the United Kingdom and France and in United States Dollars
for the rest of the world. During 2003, 2002 and 2001
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 United States Dollars represented
over 91% of total revenues in 2003, 88% in 2002 and 86% in 2001,
market risk exists in foreign countries where we sell in United
States Dollars, and a major strengthening of the United States
Dollar could have a material negative 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, 2003, 2002 and 2001:

|                         |                          |                     |        |               |  |               |     |          |   |        |        |        |  |           |     |           |   |   |        |        |  |  |     |    |   |  |     |     |    |  |     |    |  
|------------------------ | ------------------------ | ------------------- | ------ | ------------- |  | ------------- | --- | -------- | - | ------ | ------ | ------ |  | --------- | --- | --------- | - | - | ------ | ------ |  |  | --- | -- | - |  | --- | --- | -- |  | --- | -- | -
|                         |                          |                     |        |               |  |              
|                         |                          | Twelve Months Ended |        |               |  |              
|                         |                          |                     |        |               |  |              
|                         |                          |                     |        |               |  |               |     |         
|                         |                          | Dec. 31, 2003       |        | Dec. 31, 2002 |  | Dec. 31, 2001 |     | % Change
|                         |                          |                     |        |               |  |               |     |         
|                         |                          | Amount              |        | %(a)          |  | Amount        |     | %(a)     |   | Amount |        | %(a)   |  | 2003-2002 |     | 2002-2001
|                         |                          |                     |        |               |  |               |     |          |   |        |        |        |  |           |     |          
|Revenues from sales of:  |                          |                     |        |               |  |               |     |          |   |        |        |        |  |           |     |           |   |   |        |        |  |  |     |    |   |  |     |     |    |  |     |   
|                         | Lasers & Instrumentation |                     | $      | 37,568        |  |               |     | 65       | % |        | $      | 29,842 |  |           |     | 69        | % |   | $      | 23,593 |  |  |     | 67 | % |  |     | 26  | %  |  |     | 26 | %
|                         | Disposable supplies      |                     |        | 13,536        |  |               |     | 24       | % |        |        | 7,420  |  |           |     | 17        | % |   |        | 5,671  |  |  |     | 16 | % |  |     | 82  | %  |  |     | 31 | %
|                         | Service                  |                     |        | 6,323         |  |               |     | 11       | % |        |        | 5,826  |  |           |     | 14        | % |   |        | 5,823  |  |  |     | 17 | % |  |     | 9   | %  |  |     |   | %
|                         |                          |                     |        |               |  |               |     |          |   |        |        |        |  |           |     |           |   |   |        |        |  |  |     |    |   |  |     |     |    |  |     |   
|Total net revenues       |                          | $                   | 57,427 |               |  |               | 100 | %        |   | $      | 43,088 |        |  |           | 100 | %         |   | $ | 35,087 |        |  |  | 100 | %  |   |  | 33  | %   |    |  | 23  | % 
|Gross margin:            |                          |                     |        |               |  |               |     |          |   |        |        |        |  |           |     |           |   |   |        |        |  |  |     |    |   |  |     |     |    |  |     |   
|                         | Product                  |                     | $      | 28,162        |  |               |     | 55       | % |        | $      | 20,430 |  |           |     | 55        | % |   | $      | 15,603 |  |  |     | 53 | % |  |     | 38  | %  |  |     | 31 | %
|                         | Service                  |                     |        | 1,626         |  |               |     | 26       | % |        |        | 1,824  |  |           |     | 31        | % |   |        | 1,749  |  |  |     | 30 | % |  |     | (11 | )% |  |     | 4  | %
|                         |                          |                     |        |               |  |               |     |          |   |        |        |        |  |           |     |           |   |   |        |        |  |  |     |    |   |  |     |     |    |  |     |   
|Total gross margin       |                          | $                   | 29,788 |               |  |               | 52  | %        |   | $      | 22,254 |        |  |           | 52  | %         |   | $ | 17,352 |        |  |  | 49  | %  |   |  | 34  | %   |    |  | 28  | % 
|Research & development   |                          | $                   | 4,443  |               |  |               | 8   | %        |   | $      | 3,837  |        |  |           | 9   | %         |   | $ | 3,756  |        |  |  | 11  | %  |   |  | 16  | %   |    |  | 2   | % 
|Selling, general & admin |                          | $                   | 22,638 |               |  |               | 39  | %        |   | $      | 17,626 |        |  |           | 41  | %         |   | $ | 14,043 |        |  |  | 40  | %  |   |  | 28  | %   |    |  | 26  | % 
|Net income (loss)        |                          | $                   | 2,517  |               |  |               | 4   | %        |   | $      | 323    |        |  |           | 1   | %         |   | $ | (829   | )      |  |  | 2   | %  |   |  | 679 | %   |    |  | 139 | % 



---



|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.



| |                              
| | -----------------------------
| | 2003 Results Compared to 2002

During 2003, total revenues increased
approximately $14.3 million, or 33%, from 2002.

During 2003, revenues from the sales of laser
equipment and instrumentation increased 26% to
$37.6 million, or 65% of total net revenues, compared to
$29.8 million, or 69%, of total net revenues in 2002.
Increases in revenues from sales of laser equipment and
instrumentation resulted from a commensurate increase in unit
shipments. The increasing success of the United States
distributor relationship which we formed with McKesson effective
December 2000 contributed to the higher aesthetic laser sales.
This also enabled us to sell more instruments that are used with
the aesthetic lasers. McKesson made purchases from Laserscope of
approximately $17.7 million and $12.6 million which
was 31% and 29% of our total 2003 and 2002 revenue,
respectively. In addition, we saw growth in unit shipments of
GreenLightTM Lasers which are used for BPH. Fiscal
2003 revenue shipments of GreenLightTM lasers was
98 units, which is an approximate three-fold increase over
the 2002 shipments of 32 units. In 2004, we believe that we
will continue to see

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moderate increases in our sales of lower-priced
office-based aesthetic lasers in all geographic markets. We also
believe we will see a continued trend of increasing
GreenLightTM laser shipments.


Net revenues from shipments of disposable
supplies were 82% higher in 2003 than 2002, and were
approximately $13.5 million, or 24%, of total revenues in
2003, compared to approximately $7.4 million, or 17% of
total revenues in 2002. These higher revenues are principally
due to increasing demand for the disposable fiber-optic devices
which are used with the GreenLightTM laser. The
GreenLightTM laser was introduced in January 2002.

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
resulted in lower sales of disposable supplies since office
lasers used in aesthetic procedures, generally do not create a
stream of sales of disposable supplies. However, with the
introduction of the GreenLightTM laser in early 2002,
we sold approximately 13,300 and 3,500 disposable fiber-optic
delivery devices in 2003 and 2002 respectively, which has
increased our disposables revenue. We believe that our future
sales of 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 were 9% higher in 2003 than
2002, and were approximately $6.3 million, or 11% of total
revenues in 2003, compared to $5.8 million, or 14% of
revenue in 2002. Service revenues increased in all geographic
regions, but the growth rate was marginally higher at our
foreign subsidiaries. We believe that future revenues will
depend on increases to the installed base of lasers as well as
customers purchasing service contracts.

Product gross margin as a percentage of net
product revenues was 55% in 2003 which was even with that of
2002. In 2003, gross margin increased due to
GreenLightTM fibers sold. However, this was offset by
less favorable manufacturing variances and higher warranty cost
which was driven by longer warranty periods associated with
promoting sales of GreenLightTM lasers. We expect
that product gross margin, as a percentage of net revenues in
2004, will be marginally higher than the level of 2003. However,
we expect that these amounts may vary from quarter to quarter
during 2004 and will depend on product demand and distribution
mix.

Gross margin from service activities as a
percentage of net service revenues was 26% in 2003 compared to
31% in 2002. The decrease reflects an increase in material and
overhead costs as a percentage of revenue. We expect that gross
margin, as a percentage of net revenues from service activities
in 2004, will be similar to 2003 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 2003, amounts spent on research and
development increased 16% from amounts spent in 2002. This was
primarily due to an increase in permanent staff and consultants
to work on development of the new Gemini laser as well as
continuing refinements to the GreenLightTM and
aesthetic lasers. We expect that amounts spent in research and
development during 2004 will be higher in absolute terms than
that spent in 2003 but lower as a percentage of net revenues.

Selling, general and administrative expenses
increased 28% in 2003 compared to 2002. This was due in part to
an increase in headcount as we increased the size of our sales
force and marketing staff in the United States and in our
foreign subsidiaries primarily to promote the
GreenLightTM laser. In addition, commission expenses
were higher following from an increase in revenue of both
GreenLightTM and aesthetic lasers. We expect selling,
general and administrative expenses during 2004 will be higher
in absolute terms than that of 2003 but lower as a percentage of
net revenues, as commissions expense continues to increase and
we continue to invest in educational support as well as
marketing programs for the GreenLightTM and other
lasers.

In 2003, we recorded an income tax provision of
$202,000. The United Kingdom subsidiary incurred a charge of
$76,000 for income taxes due its profitability. However, while
the United States operations reported a profit, due to net
operating loss carryforwards, the United States entitys
tax liability was limited to the alternative minimum tax. The
French subsidiary reported a net loss in 2003, and so no tax
provision was required for that entity. The United States and
the French entity have significant net operating loss carry

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forwards. In 2002, we recorded a tax provision of
$70,000 for our United Kingdom subsidiary and recorded no tax
provision for France. In the United States in 2002 we recorded a
tax provision of $16,000 for state tax, none for federal tax
since tax law at that time permitted alternative minimum tax to
be offset 100% by tax loss carry forwards. Due to only a short
history of profitability, management believes that there is
sufficient uncertainty regarding the realization of deferred tax
assets and a full valuation allowance is and was appropriate in
2003 and 2002.




| |                              
| | -----------------------------
| | 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 of the
GreenLightTM laser. In addition, as we sold more
aesthetic lasers, we also sold more instruments that are used
with the aesthetic lasers. The United States distributor
relationship which we formed with McKesson effective December
2000 contributed to the higher aesthetic laser sales.

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 GreenLightTM laser
which led to increased fiber-optic sales.

Prior to 2002, 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 GreenLightTM laser we sold approximately 3,500
disposable fiber-optic delivery devices in 2002 which has
increased our disposables revenue.

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 United States.

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
compared 2001. Historically, domestic product sales have higher
margins than international product sales.

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.

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.

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.

In 2002, we recorded an income tax provision of
$70,000 because of the profitability of our United Kingdom
subsidiary. The United States operations reported a slight
profit and the French subsidiary reported a net loss in 2002.
The United States and the French entity have significant net
operating loss carry forwards. In 2001, we recorded a tax
provision of $45,000 for our United Kingdom subsidiary.

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Financial Review  Liquidity and
Capital Resources

The following table contains selected balance
sheet information at December 31, 2003 and 2002 (in
thousands):

|                          |  |              |        |              |  |   |        | 
|------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | 
|                          |  | December 31, |        | December 31,
|                          |  | 2003         |        | 2002        
|                          |  |              |        |             
|Cash and cash equivalents |  | $            | 7,158  |              |  | $ | 4,661  | 
|Working capital           |  | $            | 20,722 |              |  | $ | 15,652 | 
|Total assets              |  | $            | 37,028 |              |  | $ | 29,163 | 

The net increase in cash and cash equivalents in
2003 compared to 2002 was due to cash provided by financing and
operating activities.

Cash provided by financing activities in 2003
totaled $1.7 million. This was the combined result of the
following sources: sale of common stock under stock
plans  $1.6 million; a repayment of shareholder
notes  $0.1 million; and exercise of
warrants  $0.1 million These sources were offset
by: payments on obligation under capital leases of 
$0.1 million.

Cash provided by operating activities totaled
$1.5 million. This was the combined result of the following
sources: net income  $2.5 million;
depreciation  $1.1 million; an increase in
accounts payable  $0.8 million, this is due to
an increase in material purchases; an increase of warranty
reserve-$0.8 million due to an increase in the number of
lasers sold that are under warranty; an increase of deferred
revenue  $0.6 million as a result of higher
volume of contract revenue bookings; an increase in accrued
compensation  $0.3 million; increase in
inventory reserve  $0.3 million; an increase in
other accrued liabilities  $0.3 million; and an
increase in tax provision  $0.1 million; an
increase in provision of doubtful accounts
receivable  $.1 million; and amortization of
debt issuance costs  $0.1 million. These sources
were offset by: an increase in inventory 
$3.0 million, due to a higher demand in our products; an
increase in accounts receivable  $2.2 million as
a result of higher revenue; and an increase in other current
assets  $0.3 million.

Cash used in investing activities totaled
$0.9 million and consisted of capital expenditures.

Laserscope has in place an asset based line of
credit which provides up to $5.0 million in borrowings and
expires in September 2004. 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 2.0%. The prime
rate at December 31, 2003 was 4.00%. 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, 2003, we
had no outstanding borrowings under the line and were in
compliance with all covenants.

Capital expenditures totaled $0.9 million in
2003 and $0.8 million in 2002. During 2003, Laserscope
purchased more office equipment and machinery and equipment
compared to 2002. While the level of capital expenditures in
2004 for normal on-going operations is expected to be on par
with that of 2003, we plan to begin the purchase and
implementation of a new enterprise resources planning system in
2004. Therefore, we expect the total level of capital
expenditures in 2004 to be higher than that of 2003.

Our R & D expenditures in 2003 and
2002 were $4.4M and $3.8M respectively. We expect the amounts
spent in research and development during 2004 will be higher in
absolute terms than that spent in 2003 but lower as a percentage
of net revenues.

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.

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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 with gross proceeds to Laserscope of
$3.0 million. The debentures were to mature seven years
from issuance and had an interest rate of 8.00%. The debentures
were convertible into Laserscope common stock with an initial
conversion price, which was 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.

In the first six months of 2003, $400,000 of the
debentures were converted to 320,000 shares of Laserscope
common stock by Renaissance. During December 2003, Renaissance
converted the remaining $2.6 million of debentures into
2,080,000 shares of Laserscope common stock.

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



| |                        
| | -----------------------
| | Contractual Obligations

The impact that our contractual obligations as of
December 31, 2003 are expected to have on our liquidity and
cash flow in future periods is as follows (in thousands):

|      |  |           |       |         |  |       |    |  |  |   |       | 
|----- |  | --------- | ----- | ------- |  | ----- | -- |  |  | - | ----- | 
|      |  | Operating |       | Capital |  |      
|      |  | Leases    |       | Leases  |  | Total
|      |  |           |       |         |  |      
|2004  |  | $         | 1,919 |         |  | $     | 60 |  |  | $ | 1,979 | 
|2005  |  |           | 1,515 |         |  |       |   |  |  |   | 1,515 | 
|      |  |           |       |         |  |       |    |  |  |   |       | 
|Total |  | $         | 3,434 |         |  | $     | 60 |  |  | $ | 3,494 | 
|      |  |           |       |         |  |       |    |  |  |   |       | 



| |                                   
| | ----------------------------------
| | Off-Balance Sheet
    Arrangements

As part of our ongoing business, we do not
participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities (SPEs), which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
As of December 31, 2003, we are not involved in any
unconsolidated SPE transactions.

Recent Accounting Pronouncements

In December 2003, the FASB issued a revised FASB
Interpretation No. 46 (FIN 46R),
Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51. The FASB published the
revision to clarify and amend some of the original provisions of
FIN 46, which was issued in January 2003, and to exempt
certain entities from its requirements. A variable interest
entity (VIE) refers to an entity subject to
consolidation according to the provisions of this
Interpretation. FIN 46R applies to entities whose equity
investment at risk is insufficient to finance that entitys
activities without receiving additional subordinated

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financial support provided by any parties,
including equity holders, or where the equity investors (if any)
do not have a controlling financial interest. FIN 46R
provides that if an entity is the primary beneficiary of a VIE,
the assets, liabilities, and results of operations of the VIE
should be consolidated in the entitys financial
statements. In addition, FIN 46R requires that both the
primary beneficiary and all other enterprises with a significant
variable interest in a VIE provide additional disclosures. The
provisions of FIN 46R are effective for the Companys
fiscal 2004 first quarter. The Company does not expect the
adoption of FIN 46R to have a material impact on the
Companys financial position or on its results of
operations.


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##### Table of Contents






RISK FACTORS

In determining whether to invest in our Common
Stock, you should carefully consider the information below in
addition to all other information provided to you in this
Report, including the information incorporated by reference in
this Report. The statements under this caption are intended to
serve as cautionary statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The following
information is not intended to limit in any way the
characterization of other statements or information under other
capitons as cautionary statements for such purpose.

Limited Working Capital; Potential Need to
Raise Additional Capital.

As of December 31, 2003, our total assets
were $37.0 million and our total liabilities were
$13.8 million. As of the same date, our working capital was
$20.7 million and our cash and cash equivalents totaled
$7.2 million. Current and anticipated demand for our
products as well as procurement and production affect 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
$1.9 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 pursuant to Regulation D of the Securities Act
of 1933, as amended, to affiliates of Renaissance with gross
proceeds to Laserscope of $3.0 million. The debentures were
to mature seven years from issuance and had an interest rate of
8.00%. The debentures were convertible into Laserscope common
stock with an initial conversion price, which was 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.

In the first six months of 2003, $400,000 of the
debentures were converted to 320,000 shares of Laserscope
common stock by Renaissance. During December 2003, Renaissance
converted the remaining $2.6 million of debentures into
2,080,000 shares of Laserscope common stock.

In 2003, 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
75,663 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.

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History of Losses; Uncertainty of Future
Profitability.

At December 31, 2003, we had an accumulated
deficit of $37.0 million. We reported net income of
$2.5 million for the year ended December 31, 2003, net
income of $0.3 million for the year ended December 31,
2002, and a net loss of $0.8 million for the year ended
December 31, 2001. 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 Food and Drug Administration 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

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other actions adversely affecting the marketing
and sale of our products. We also cannot predict the extent or
impact of future legislation or regulations.


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. In August 2003, the CMS announced adjusted
reimbursement rates for various BPH treatment alternatives.
These rates are due to become effective in January 2004. The
national average reimbursement rates for the PVP procedure in
2004 are now projected to be slightly higher in outpatient
hospital facilities. In November 2003, CMS notified Laserscope
that its application for assignment of PVP to treat BPH to a new
technology APC has been accepted. CMS has determined that PVP
meets the new technology APC qualification criteria and will be
assigned a new APC code effective April 1, 2004. We have
yet to be informed by CMS of the level of reimbursement under
the new code. Until that time, PVP will continue to be
reimbursed under current designated codes. Details regarding the
specific coding information and the new associated reimbursement
rates will be forthcoming prior to the reassignment. Over the
next few months, we will continue to work closely with CMS and
the American Urological Association to ensure that the hospital
outpatient and physician reimbursement rates for furnishing PVP
reflect the appropriate costs of performing the procedure.

If reimbursement rates are not increased soon, it
will likely have a short-term adverse effect on the adoption and
sales growth of the 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.

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 $4.4 million in 2003 and $3.8 million in each
year of 2002 and 2001. 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

23



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##### Table of Contents



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.

Potential Intellectual Property
Litigation.

Our industry has been characterized by frequent
demands for licenses and litigation. Our competitors or other
patent holders may assert that our products and the methods we
employ are covered by their patents. In addition, we do not know
whether our competitors will apply for and obtain patents that
will prevent, limit or interfere with our ability to make, use,
sell or import our products. Although we may seek to resolve any
potential future claims or actions, we may not be able to do so
on reasonable terms, or at all. If, following a successful
third-party action for infringement, we cannot obtain a license
or redesign our products, we may have to stop manufacturing and
marketing our products, and our business would suffer as a
result.

We may become involved in litigation not only as
a result of alleged infringement of a third partys
intellectual property rights but also to protect our own
intellectual property. We have and may hereafter become involved
in litigation to protect the trademark rights associated with
our company name or the names of our products. If we have to
change the name of our products, we may experience a loss in
goodwill associated with customer confusion and a loss of sales.

Infringement and other intellectual property
claims, with or without merit, can be expensive and
time-consuming to litigate, and could divert managements
attention from our core business. We do not know whether
necessary licenses would be available to us on satisfactory
terms, or whether we could redesign our products or processes to
avoid infringement. If we lose this kind of litigation, a court
could require us to pay substantial damages, and prohibit us
from using technologies essential to our products, any of which
would have a material adverse effect on our business, results of
operations and financial condition.

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.

24



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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. 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 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 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 2003, aesthetic product sales in the United States
accounted for approximately 47% of our total revenues and at
December 31, 2003, accounts receivable from McKesson
accounted for approximately 21% 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.

25



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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;                                   
|
| |  | 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

26



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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 United States 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;                     
|
| |  | 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

27



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##### Table of Contents



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 1, 2004, we had
20,459,686 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 each year ended December 31, 2003 and 2002. 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 United States 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.

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.

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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 2003 for each of the
quarters ended March 31, June 30, September 30
and December 31 was $3.76, $3.90, $7.50 and $10.64,
respectively, and our last traded price on March 1, 2004
was $23.81. 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 and warrants.

Other.

Other risks are detailed from time to time in our
press releases and other public disclosure filings with the
United States Securities and Exchange Commission
(SEC), copies of which are available upon request
from the Company.






|         |                                                                
|-------- | ---------------------------------------------------------------
|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
2003 and 2002, we did not use derivative financial instruments.
We invest our excess cash in money market funds. Our debt
financings generally consisted 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.

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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.

Foreign Currency Risk.

International revenues were 26% of total revenues
in each year of 2003 and 2002 compared to 35% of total revenues
during 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 United States 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.






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

Consolidated financial statements of Laserscope
at December 31, 2003 and 2002, and for each of the three
years ended December 31, 2003, 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.






|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures.

Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer,
after evaluating the effectiveness of the Companys
disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934, as amended (the
Exchange Act), Rules 13a-15(e) or 15d-15(e) as
of the end of the period covered by this report (the
Evaluation Date), have concluded that, as of the
Evaluation Date, our disclosure controls and procedures were
adequate based on the evaluation of these controls and
procedures required by paragraph (b) of Exchange Act
Rules 13a-15 or 13d-15.

30



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Changes in internal controls. No change in the
Companys internal control over financial reporting
identified in connection with the evaluation required by
paragraph (d) of Exchange Act Rules 13a-15 or 15d-15
that occurred during the Companys fourth fiscal quarter
has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial
reporting.

However, 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 in 2002 it had 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 were instituted in
2003, and these matters were discussed with our independent
accountants and the Audit Committee of the Board of Directors of
the Company.




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, 2004 pursuant to Regulation 14A (the
Proxy Statement) for its Annual Meeting of
Shareholders to be held June 4, 2004 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 2004 Annual Meeting of Shareholders under the
headings Election of Directors.
Management and Section 16(a) Beneficial
Ownership Reporting Compliance, respectively. See also
Item 1 above.

Code of Ethics.

The information required by this Item 10 is
incorporated by reference from the Companys Proxy
Statement for the 2004 Annual Meeting of Shareholders under the
heading Code of Ethics.






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

The information required by this Item 11 is
incorporated by reference from the Companys Proxy
Statement for the 2004 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 2004 Annual Meeting of Shareholders under the
heading Beneficial Ownership of Securities and
Equity Compensation Plan Information.






|         |                                                    
|-------- | ---------------------------------------------------
|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 2004 Annual Meeting of Shareholders under the
heading Certain Transactions.






|         |                                            
|-------- | -------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services.

The information required by this Item 14 is
incorporated by reference from the Companys Proxy
Statement for the 2004 Annual Meeting of Shareholders under the
heading Principal Auditor Fees and Services.

31



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PART IV






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

(a)(1) Consolidated Financial Statements:

|                                                                                                       |  |      |                  | 
|------------------------------------------------------------------------------------------------------ |  | ---- | ---------------- | 
|                                                                                                       |  | Page
|                                                                                                       |  |     
|Report of Independent Auditors                                                                         |  |      | F-1              | 
|Consolidated Balance Sheets at December 31,
    2003 and 2002                                          |  |      | F-2              | 
|Consolidated Statements of Operations
     Years ended December 31, 2003, 2002 and 2001               |  |      | F-3              | 
|Consolidated Statements of Cash Flows
     Years ended December 31, 2003, 2002 and 2001               |  |      | F-4              | 
|Consolidated Statements of Shareholders
    Equity
     Years ended December 31, 2003, 2002 and 2001 |  |      | F-5              | 
|Notes to Consolidated Financial Statements                                                             |  |      | F-6 through F-21 | 

(2) The following financial statement
schedule for the years ended December 31, 2003, 2002 and
2001 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)                                                                                                                                        

32



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##### 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)       
|        | 10.11K |             |  | Amendment to Loan and Security Agreement between
    the Registrant and Silicon Valley Bank dated September 25,
    2003.(22)       
|        | 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)                                                                                        
|        | 10.20B |             |  | Amendment to Convertible Loan Agreement. (22)                                                                                       
|        | 22.1   |             |  | Subsidiaries of Registrant, as amended.(17)                                                                                         
|        | 23.1   |             |  | Consent of Independent Accountants.(23)                                                                                             
|        | 25.1   |             |  | Power of Attorney (see page 36).(23)                                                                                                
|        | 31.1   |             |  | Certification of Principal Executive Officer
    pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.(23)                 
|        | 31.2   |             |  | Certification of Principal Financial Officer
    pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.(23)                 
|        | 32.1   |             |  | Certification of Principal Executive Officer
    pursuant to 18 U.S.C. section 1350.(23)                                            
|        | 32.2   |             |  | Certification of Principal Financial Officer
    pursuant to 18 U.S.C. section 1350.(23)                                            



---



| |     |                                                                                                                                                                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.

33



---



##### Table of Contents





| |     |                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                
|    
|(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) | 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, 2003.                
|    
|(22) | 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, 2003.
|    
|(23) | Filed herewith.                                                                                                                                                                                                            

34



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##### Table of Contents



Reports on Form 8-K:

The following current report on Form 8-K was
filed during the fourth quarter of 2003:



| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 23, 2003, the Company filed a
    current report on Form 8-K reporting the issuance of a
    press release dated October 23, 2003 announcing the
    Companys financial results for the fiscal quarter ended
    September 30, 2003.

35



---



##### 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 15, 2004




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 15, 2004
|                                                 
|/s/ ERIC M. REUTER(Eric M. Reuter)                |  | President, Chief Executive Officer and
    Director
    (Principal Executive Officer)                           |  | March 15, 2004
|                                                 
|/s/ DENNIS LALUMANDIERE(Dennis LaLumandiere)      |  | Vice President, Finance, Chief Financial Officer
    and Secretary (Principal Financial and Accounting Officer) |  | March 15, 2004
|                                                 
|/s/ JAMES BAUMGARDT(James Baumgardt)              |  | Director                                                                                                        |  | March 15, 2004
|                                                 
|/s/ ROBERT C. PEARSON(Robert C. Pearson)          |  | Director                                                                                                        |  | March 15, 2004
|                                                 
|/s/ RODNEY PERKINS(Rodney Perkins, M.D.)          |  | Director                                                                                                        |  | March 15, 2004

36



---



##### Table of Contents






REPORT OF INDEPENDENT AUDITORS

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 32 present fairly, in all
material respects, the financial position of Laserscope and its
subsidiaries at December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2003 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 32 presents fairly in all
material respects, the information set forth therein 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

March 12, 2004


F-1



---



##### Table of Contents



LASERSCOPE






CONSOLIDATED BALANCE SHEETS


|                                           |                                                                                                               |                   |        |         |   |   |        |         |  
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------- | ----------------- | ------ | ------- | - | - | ------ | ------- | -
|                                           |                                                                                                               |                  
|                                           |                                                                                                               | December 31,     
|                                           |                                                                                                               |                  
|                                           |                                                                                                               | 2003              |        | 2002   
|                                           |                                                                                                               |                   |        |        
|                                           |                                                                                                               |                  
|                                           |                                                                                                               | (Thousands except
|                                           |                                                                                                               | share amounts)   
|ASSETS                                    
|Current assets:                            |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Cash and cash equivalents                                                                                     |                   | $      | 7,158   |   |   | $      | 4,661   |  
|                                           | Accounts receivable, net                                                                                      |                   |        | 12,711  |   |   |        | 10,287  |  
|                                           | Inventories, net                                                                                              |                   |        | 13,368  |   |   |        | 10,445  |  
|                                           | Other current assets                                                                                          |                   |        | 1,315   |   |   |        | 1,027   |  
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Total current assets                                                                                          |                   |        | 34,552  |   |   |        | 26,420  |  
|Property and equipment, net                |                                                                                                               |                   | 1,645  |         |   |   | 1,808  |        
|Goodwill                                   |                                                                                                               |                   | 655    |         |   |   | 655    |        
|Other assets                               |                                                                                                               |                   | 176    |         |   |   | 280    |        
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|Total assets                               |                                                                                                               | $                 | 37,028 |         |   | $ | 29,163 |        
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|                                          
|LIABILITIES AND SHAREHOLDERS
    EQUITY  
|Current liabilities:                       |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Accounts payable                                                                                              |                   | $      | 4,094   |   |   | $      | 3,989   |  
|                                           | Accrued compensation                                                                                          |                   |        | 2,360   |   |   |        | 2,033   |  
|                                           | Warranty                                                                                                      |                   |        | 1,947   |   |   |        | 1,127   |  
|                                           | Other accrued liabilities                                                                                     |                   |        | 3,347   |   |   |        | 1,948   |  
|                                           | Deferred revenue                                                                                              |                   |        | 2,022   |   |   |        | 1,408   |  
|                                           | Convertible subordinated debentures, current
    portion                                                      |                   |        |        |   |   |        | 147     |  
|                                           | Current obligations under capital leases                                                                      |                   |        | 60      |   |   |        | 116     |  
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Total current liabilities                                                                                     |                   |        | 13,830  |   |   |        | 10,768  |  
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|Long-term liabilities:                     |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Convertible subordinated debentures, net of
    current portion                                               |                   |        |        |   |   |        | 2,853   |  
|                                           | Obligations under capital leases                                                                              |                   |        |        |   |   |        | 60      |  
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Total long-term liabilities                                                                                   |                   |        |        |   |   |        | 2,913   |  
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|Commitments and contingencies (Note 9)     |                                                                                                               |                   |        |         |   |   |        |        
|Shareholders equity:                      |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Common stock, no par value:                                                                                   |                   |        |         |   |   |        |         |  
|                                           | Authorized shares  30,000,000 at
    December 31, 2003 and 2002.                                             |                   |        |         |   |   |        |         |  
|                                           | Issued and outstanding shares 
    20,131,781 and 16,828,324 at December 31, 2003 and 2002,
    respectively |                   |        | 60,427  |   |   |        | 55,915  |  
|                                           | Accumulated deficit                                                                                           |                   |        | (37,002 | ) |   |        | (39,519 | )
|                                           | Accumulated other comprehensive loss                                                                          |                   |        | (227    | ) |   |        | (789    | )
|                                           | Notes receivable from shareholders                                                                            |                   |        |        |   |   |        | (125    | )
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|                                           | Total shareholders equity                                                                                    |                   |        | 23,198  |   |   |        | 15,482  |  
|                                           |                                                                                                               |                   |        |         |   |   |        |        
|Total liabilities and shareholders equity |                                                                                                               | $                 | 37,028 |         |   | $ | 29,163 |        
|                                           |                                                                                                               |                   |        |         |   |   |        |        

See notes to consolidated financial statements

F-2



---



##### Table of Contents



LASERSCOPE






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |        | 
|--------------------------------------------- | ----------------------------------- | ---------------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                              |                                     |                             
|                                              |                                     | Years Ended December 31,    
|                                              |                                     |                             
|                                              |                                     | 2003                         |        | 2002   |  | 2001
|                                              |                                     |                              |        |        |  |     
|                                              |                                     |                             
|                                              |                                     | (Thousands, except per share
|                                              |                                     | amounts)                    
|Net revenues:                                 |                                     |                              |        |        |  |      |        |        |  |   |        |       
|                                              | Products                            |                              | $      | 51,104 |  |      | $      | 37,262 |  |   | $      | 29,264 | 
|                                              | Services                            |                              |        | 6,323  |  |      |        | 5,826  |  |   |        | 5,823  | 
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|                                              |                                     |                              | 57,427 |        |  |      | 43,088 |        |  |   | 35,087 |       
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|Cost of products and services:                |                                     |                              |        |        |  |      |        |        |  |   |        |       
|                                              | Products                            |                              |        | 22,942 |  |      |        | 16,832 |  |   |        | 13,661 | 
|                                              | Services                            |                              |        | 4,697  |  |      |        | 4,002  |  |   |        | 4,074  | 
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|                                              |                                     |                              | 27,639 |        |  |      | 20,834 |        |  |   | 17,735 |       
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|Gross margin                                  |                                     |                              | 29,788 |        |  |      | 22,254 |        |  |   | 17,352 |       
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|Operating expenses:                           |                                     |                              |        |        |  |      |        |        |  |   |        |       
|                                              | Research and development            |                              |        | 4,443  |  |      |        | 3,837  |  |   |        | 3,756  | 
|                                              | Selling, general and administrative |                              |        | 22,638 |  |      |        | 17,626 |  |   |        | 14,043 | 
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|                                              |                                     |                              | 27,081 |        |  |      | 21,463 |        |  |   | 17,799 |       
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|Operating income (loss)                       |                                     |                              | 2,707  |        |  |      | 791    |        |  |   | (447   | )     
|Interest income                               |                                     |                              | 52     |        |  |      | 10     |        |  |   |       |       
|Interest expense and other                    |                                     |                              | (40    | )      |  |      | (392   | )      |  |   | (337   | )     
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|Income (loss) before income taxes             |                                     |                              | 2,719  |        |  |      | 409    |        |  |   | (784   | )     
|Provision for income taxes                    |                                     |                              | 202    |        |  |      | 86     |        |  |   | 45     |       
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|Net income (loss)                             |                                     | $                            | 2,517  |        |  | $    | 323    |        |  | $ | (829   | )     
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|Basic net income (loss) per share             |                                     | $                            | 0.14   |        |  | $    | 0.02   |        |  | $ | (0.05  | )     
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|Diluted net income (loss) per share           |                                     | $                            | 0.13   |        |  | $    | 0.02   |        |  | $ | (0.05  | )     
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|Shares used in basic per share calculations   |                                     |                              | 17,452 |        |  |      | 16,441 |        |  |   | 15,953 |       
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       
|Shares used in diluted per share calculations |                                     |                              | 21,838 |        |  |      | 18,569 |        |  |   | 15,953 |       
|                                              |                                     |                              |        |        |  |      |        |        |  |   |        |       

See notes to consolidated financial statements

F-3



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##### Table of Contents



LASERSCOPE






CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                          |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |         |       |  
|----------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----- | ----- | ------ | ---- | ----- | ------ | ------ | - | ----- | ------- | ----- | -
|                                          |                                                                                          |                                                        
|                                          |                                                                                          | Years Ended December 31,                               
|                                          |                                                                                          |                                                        
|                                          |                                                                                          | 2003                                                    |       | 2002  |        | 2001
|                                          |                                                                                          |                                                         |       |       |        |     
|                                          |                                                                                          |                                                        
|                                          |                                                                                          | (In thousands)                                         
|Cash flows from operating
    activities: |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |        
|                                          | Net income (loss)                                                                        |                                                         | $     | 2,517 |        |      | $     | 323    |        |   | $     | (829    | )    
|                                          | Adjustments to reconcile net income (loss) to
    cash provided by operating activities: |                                                         |       |       |        |      |       |        |        |   |       |         |      
|                                          |                                                                                          | Depreciation and amortization                           |       |       | 1,066  |      |       |        | 1,051  |   |       |         | 938   |  
|                                          |                                                                                          | Amortization of debt issuance costs                     |       |       | 91     |      |       |        | 134    |   |       |         | 140   |  
|                                          |                                                                                          | Provision for doubtful accounts-accounts
    receivable |       |       | 93     |      |       |        | 115    |   |       |         |      |  
|                                          |                                                                                          | Provision for inventory                                 |       |       | 288    |      |       |        | 134    |   |       |         |      |  
|                                          | Changes in assets and liabilities:                                                       |                                                         |       |       |        |      |       |        |        |   |       |         |      
|                                          |                                                                                          | Accounts receivable                                     |       |       | (2,204 | )    |       |        | (1,750 | ) |       |         | 500   |  
|                                          |                                                                                          | Inventories                                             |       |       | (2,967 | )    |       |        | (1,149 | ) |       |         | (987  | )
|                                          |                                                                                          | Prepayments and other current assets                    |       |       | (326   | )    |       |        | 305    |   |       |         | (329  | )
|                                          |                                                                                          | Accounts payable                                        |       |       | 829    |      |       |        | 1,092  |   |       |         | 1,405 |  
|                                          |                                                                                          | Accrued compensation                                    |       |       | 327    |      |       |        | 445    |   |       |         | 298   |  
|                                          |                                                                                          | Warranty                                                |       |       | 820    |      |       |        | 379    |   |       |         | 251   |  
|                                          |                                                                                          | Deferred revenue                                        |       |       | 614    |      |       |        | 377    |   |       |         | 9     |  
|                                          |                                                                                          | Other accrued liabilities                               |       |       | 235    |      |       |        | 366    |   |       |         | 29    |  
|                                          |                                                                                          | Tax payable                                             |       |       | 136    |      |       |        |       |   |       |         |      |  
|                                          |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |        
|Cash provided by operating activities     |                                                                                          |                                                         | 1,519 |       |        |      | 1,822 |        |        |   | 1,425 |        
|                                          |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |        
|Cash flows from investing
    activities: |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |        
|                                          | Capital expenditures                                                                     |                                                         |       | (873  | )      |      |       | (776   | )      |   |       | (1,066  | )    
|                                          |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |        
|                                          | Cash provided by (used in) investing activities                                          |                                                         |       | (873  | )      |      |       | (776   | )      |   |       | (1,066  | )    
|                                          |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |        
|Cash flows from financing
    activities: |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |        
|                                          | Payment on obligations under capital leases                                              |                                                         |       | (117  | )      |      |       | (101   | )      |   |       | (295    | )    
|                                          | Proceeds from the sale of common stock under
    stock plans                             |                                                         |       | 1,565 |        |      |       | 1,197  |        |   |       | 225     |      
|                                          | Proceeds from the exercise of warrants                                                   |                                                         |       | 97    |        |      |       | 6      |        |   |       | 7       |      
|                                          | Repayment of shareholder notes                                                           |                                                         |       | 125   |        |      |       |       |        |   |       | 9       |      
|                                          | Proceeds from line of credit                                                             |                                                         |       | 200   |        |      |       | 7,020  |        |   |       | 12,700  |      
|                                          | Repayment of line of credit                                                              |                                                         |       | (200  | )      |      |       | (8,155 | )      |   |       | (12,267 | )    
|                                          |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |        
|                                          | Cash provided by (used in) financing activities                                          |                                                         |       | 1,670 |        |      |       | (33    | )      |   |       | 379     |      
|                                          |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |        
|                                          | Effect of exchange rate changes on cash                                                  |                                                         |       | 181   |        |      |       | 240    |        |   |       | (28     | )    
|                                          | Increase in cash and cash equivalents                                                    |                                                         |       | 2,497 |        |      |       | 1,253  |        |   |       | 710     |      
|                                          | Cash and cash equivalents, beginning of year                                             |                                                         |       | 4,661 |        |      |       | 3,408  |        |   |       | 2,698   |      
|                                          |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |        
|                                          | Cash and cash equivalents, end of year                                                   |                                                         | $     | 7,158 |        |      | $     | 4,661  |        |   | $     | 3,408   |      
|                                          |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |        
|Supplemental cash flow information:       |                                                                                          |                                                         |       |       |        |      |       |        |        |   |       |        
|                                          | Cash paid for income taxes, net of refunds                                               |                                                         | $     | 67    |        |      | $     | 79     |        |   | $     | 11      |      
|                                          | Cash paid for interest                                                                   |                                                         | $     | 234   |        |      | $     | 303    |        |   | $     | 365     |      
|                                          | Acquisition of minority interest in affiliate in
    exchange for accounts receivable    |                                                         | $     |      |        |      | $     |       |        |   | $     | 555     |      
|                                          | Non-cash financing, equipment lease                                                      |                                                         | $     |      |        |      | $     | 60     |        |   | $     |        |      
|                                          | Debenture conversion                                                                     |                                                         | $     | 2,850 |        |      | $     |       |        |   | $     |        |      

See notes to consolidated financial statements

F-4



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##### Table of Contents



LASERSCOPE






CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                                                  |                         |                                     |        |             |  |               |         |                 |   |               |        |      |   |   |      |   |  |   |        |       |       |  
|--------------------------------------------------------------------------------- | ----------------------- | ----------------------------------- | ------ | ----------- |  | ------------- | ------- | --------------- | - | ------------- | ------ | ---- | - | - | ---- | - |  | - | ------ | ----- | ----- | -
|                                                                                  |                         |                                     |        |             |  | Accumulated   |         |                 |   |              
|                                                                                  |                         |                                     |        |             |  | Other         |         | Notes           |   | Total        
|                                                                                  |                         | Common                              |        | Accumulated |  | Comprehensive |         | Receivable from |   | Shareholders
|                                                                                  |                         | Stock                               |        | Deficit     |  | Loss          |         | Shareholders    |   | Equity       
|                                                                                  |                         |                                     |        |             |  |               |         |                 |   |              
|                                                                                  |                         |                                    
|                                                                                  |                         | (In thousands except share amounts)
|Balance at December 31, 2000                                                      |                         | $                                   | 54,480 |             |  | $             | (39,013 | )               |   | $             | (1,218 | )    |   | $ | (134 | ) |  | $ | 14,115 |      
|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 | ) |  | $ | 13,413 |      
|Components of comprehensive income:                                               |                         |                                     |        |             |  |               |         |                 |   |               |        |      |   |   |      |   |  |   |        |      
|                                                                                  | Net income              |                                     |        |             |  |               |         | 323             |   |               |        |      |   |   |      |   |  |   |        | 323   |      
|                                                                                  | Translation adjustments |                                     |        |             |  |               |         |                 |   |               |        | 543  |   |   |      |   |  |   |        | 543   |      
|                                                                                  |                         |                                     |        |             |  |               |         |                 |   |               |        |      |   |   |      |   |  |   |        |      
|                                                                                  |                         | Total comprehensive income          |        |             |  |               |         |                 |   |               |        |      |   |   |      |   |  |   |        |       | 866   |  
|Issuance of 737,526 shares 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 |      
|Components of comprehensive income:                                               |                         |                                     |        |             |  |               |         |                 |   |               |        |      |   |   |      |   |  |   |        |      
|                                                                                  | Net income              |                                     |        |             |  |               |         | 2,517           |   |               |        |      |   |   |      |   |  |   |        | 2,517 |      
|                                                                                  | Translation adjustments |                                     |        |             |  |               |         |                 |   |               |        | 562  |   |   |      |   |  |   |        | 562   |      
|                                                                                  |                         |                                     |        |             |  |               |         |                 |   |               |        |      |   |   |      |   |  |   |        |      
|                                                                                  |                         | Total comprehensive income          |        |             |  |               |         |                 |   |               |        |      |   |   |      |   |  |   |        |       | 3,079 |  
|Issuance of 827,794 shares under stock plans                                      |                         |                                     | 1,565  |             |  |               |         |                 |   |               |        |      |   |   |      |   |  |   | 1,565  |      
|Issuance of 75,663 shares upon warrant
    exercises                              |                         |                                     | 97     |             |  |               |         |                 |   |               |        |      |   |   |      |   |  |   | 97     |      
|Debenture conversion into 2,400,000 shares,
    net of unamortized issuance costs |                         |                                     | 2,850  |             |  |               |         |                 |   |               |        |      |   |   |      |   |  |   | 2,850  |      
|Repayment of shareholder notes                                                    |                         |                                     |        |             |  |               |         |                 |   |               |        |      |   |   | 125  |   |  |   | 125    |      
|                                                                                  |                         |                                     |        |             |  |               |         |                 |   |               |        |      |   |   |      |   |  |   |        |      
|Balance at December 31, 2003                                                      |                         | $                                   | 60,427 |             |  | $             | (37,002 | )               |   | $             | (227   | )    |   | $ |     |   |  | $ | 23,198 |      
|                                                                                  |                         |                                     |        |             |  |               |         |                 |   |               |        |      |   |   |      |   |  |   |        |      

See notes to consolidated financial statements

F-5



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##### Table of Contents



LASERSCOPE






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



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

Business

Laserscope (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, 2003, the Companys
total assets were $37.0 million and the total liabilities
were $13.8 million. As of the same date, working capital
was $20.7 million and cash and cash equivalents totaled
$7.2 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 contains
certain financial covenants. 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. At December 31, 2003, the Company had no
outstanding borrowing under the line of credit facility.

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 may 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 value of the capital
lease obligations, approximates its fair value.

F-6



---



##### 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 straight-line 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 shares of common stock outstanding
plus dilutive common equivalent shares from stock options,
warrants and debentures.

F-7



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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:

|                                    |                                                                                                   |                                    |      |        |     |      |      |        |   |   |       |        |   | 
|----------------------------------- | ------------------------------------------------------------------------------------------------- | ---------------------------------- | ---- | ------ | --- | ---- | ---- | ------ | - | - | ----- | ------ | - | 
|                                    |                                                                                                   | 2003                               |      | 2002   |     | 2001
|                                    |                                                                                                   |                                    |      |        |     |     
|                                    |                                                                                                   |                                   
|                                    |                                                                                                   | (Thousands, except per share data)
|Numerator:                          |                                                                                                   |                                    |      |        |     |      |      |        |   |   |       |       
|                                    | Basic net income (loss)                                                                           |                                    | $    | 2,517  |     |      | $    | 323    |   |   | $     | (829   | )
|                                    | Add back:                                                                                         |                                    |      |        |     |      |      |        |   |   |       |        |  
|                                    |                                                                                                   | Interest on convertible debentures |      |        | 219 |      |      |        |  |   |       |        |  | 
|                                    | Diluted net income (loss)                                                                         |                                    |      | 2,736  |     |      |      | 323    |   |   |       | (829   | )
|Denominator:                        |                                                                                                   |                                    |      |        |     |      |      |        |   |   |       |       
|                                    | Denominator for basic net income (loss) per
    share  weighted average basis                    |                                    |      | 17,452 |     |      |      | 16,441 |   |   |       | 15,953 |  
|                                    |                                                                                                   |                                    |      |        |     |      |      |        |   |   |       |       
|                                    | Effect of dilutive securities:                                                                    |                                    |      |        |     |      |      |        |   |   |       |        |  
|                                    | Employee stock options                                                                            |                                    |      | 1,881  |     |      |      | 1,676  |   |   |       |       |  
|                                    | Convertible debentures                                                                            |                                    |      | 2,068  |     |      |      |       |   |   |       |       |  
|                                    | Warrants                                                                                          |                                    |      | 437    |     |      |      | 452    |   |   |       |       |  
|                                    |                                                                                                   |                                    |      |        |     |      |      |        |   |   |       |       
|                                    | Dilutive potential common shares                                                                  |                                    |      | 4,386  |     |      |      | 2,128  |   |   |       |       |  
|                                    |                                                                                                   |                                    |      |        |     |      |      |        |   |   |       |       
|                                    | Denominator for diluted net income (loss) per
    common share  Adjusted weighted-average shares |                                    |      | 21,838 |     |      |      | 18,569 |   |   |       | 15,953 |  
|                                    |                                                                                                   |                                    |      |        |     |      |      |        |   |   |       |       
|Net income (loss) per common share: |                                                                                                   |                                    |      |        |     |      |      |        |   |   |       |       
|Basic                               |                                                                                                   | $                                  | 0.14 |        |     | $    | 0.02 |        |   | $ | (0.05 | )     
|Diluted                             |                                                                                                   | $                                  | 0.13 |        |     | $    | 0.02 |        |   | $ | (0.05 | )     

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, 2003, 2002 and 2001 because including them
would have had an antidilutive effect.

|                                       |  |              |     |      |  |      |       |  |  |  |       | 
|-------------------------------------- |  | ------------ | --- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                       |  |             
|                                       |  | Years Ended 
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2003         |     | 2002 |  | 2001
|                                       |  |              |     |      |  |     
|                                       |  |             
|                                       |  | (Thousands) 
|Options to purchase common stock       |  |              | 305 |      |  |      | 279   |  |  |  | 3,188 | 
|Warrants to purchase common stock      |  |              |    |      |  |      |      |  |  |  | 458   | 
|Debentures convertible to common stock |  |              |    |      |  |      | 2,400 |  |  |  | 2,400 | 
|                                       |  |              |     |      |  |      |       |  |  |  |       | 
|                                       |  |              | 305 |      |  |      | 2,679 |  |  |  | 6,046 | 
|                                       |  |              |     |      |  |      |       |  |  |  |       | 



| |                             
| | ----------------------------
| | 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.

F-8



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |             
| | ------------
| | 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 bases of assets and liabilities,
measured at tax rates that will be in effect when the
differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.



| |                  
| | -----------------
| | Long-Lived Assets

The Company periodically assesses the impairment
of its long-lived assets in accordance with the provisions of
SFAS No. 141, Accounting for the Impairment or
Disposal of Long-Lived Assets. An impairment review is
performed whenever events or changes in circumstances indicate
that the carrying value of the Companys long-lived assets
may not be recoverable. Indicators which could trigger an
impairment review include, but are not limited to, significant
underperformance relative to past or planned operating results,
significant changes in the strategy for the overall business,
significant negative industry trends and/or a significant
decline in the stock price of the Company for a sustained period
of time. When it is determined, based on one or more of these
indicators, that the carrying value of the Companys
long-lived assets may not be recoverable, impairment is measured
using the projected discounted cash flow method and charged to
operations.



| |                                                           
| | ----------------------------------------------------------
| | 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,
Goodwill and Other Intangible Assets
(SFAS No. 142) that apply to goodwill
acquired after June 30, 2001 and has not amortized this
goodwill. The Company performs an annual assessment at the
reporting unit level, or earlier if an event occurs or
circumstances change that would reduce the fair value of the
reporting unit below its carrying amount, as prescribed by
SFAS No. 142. No impairment charges have been recorded
as of December 31, 2003.



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

Advertising costs are expensed as incurred.
Advertising costs were not significant in 2003, 2002 or 2001.



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

During the year ended December 31, 2002, the
Company adopted SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure. 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.

F-9



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Had compensation cost for stock-based employee
compensation arrangements been determined based on the fair
value at the date of the awards consistent with the provisions
of SFAS No. 123, the impact on the Companys net
income would be as follows (in thousands, except per share data):

|                              |                                                                                                                            |                     |       |        |      |      |      |      |       |   |        |        |       |  
|----------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ------------------- | ----- | ------ | ---- | ---- | ---- | ---- | ----- | - | ------ | ------ | ----- | -
|                              |                                                                                                                            | 2003                |       | 2002   |      | 2001
|                              |                                                                                                                            |                     |       |        |      |     
|Net income (loss) as reported |                                                                                                                            | $                   | 2,517 |        |      | $    | 323  |      |       | $ | (829   | )     
|                              | Deduct: Total stock-based compensation
    expense determined under fair value based method for all awards,
    net of tax |                     |       | (1,352 | )    |      |      | (956 | )     |   |        | (1,025 | )    
|                              |                                                                                                                            |                     |       |        |      |      |      |      |       |   |        |       
|Pro forma net income (loss)   |                                                                                                                            | $                   | 1,165 |        |      | $    | (633 | )    |       | $ | (1,854 | )     
|                              |                                                                                                                            |                     |       |        |      |      |      |      |       |   |        |       
|Net income (loss) per share:  |                                                                                                                            |                     |       |        |      |      |      |      |       |   |        |       
|                              |                                                                                                                            | Basic-as reported   |       | $      | 0.14 |      |      | $    | 0.02  |   |        | $      | (0.05 | )
|                              |                                                                                                                            |                     |       |        |      |      |      |      |       |   |        |       
|                              |                                                                                                                            | Basic-pro forma     |       | $      | 0.07 |      |      | $    | (0.04 | ) |        | $      | (0.12 | )
|                              |                                                                                                                            |                     |       |        |      |      |      |      |       |   |        |       
|                              |                                                                                                                            | Diluted-as reported |       | $      | 0.13 |      |      | $    | 0.02  |   |        | $      | (0.05 | )
|                              |                                                                                                                            |                     |       |        |      |      |      |      |       |   |        |       
|                              |                                                                                                                            | Diluted-pro forma   |       | $      | 0.06 | *    |      | $    | (0.04 | ) |        | $      | (0.12 | )
|                              |                                                                                                                            |                     |       |        |      |      |      |      |       |   |        |       

* Pro forma net income includes interest on
convertible debentures of $219,000.

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:

|                         |  |      |      |      |  |      |      |   |  |  |      |  
|------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                         |  | 2003 |      | 2002 |  | 2001
|                         |  |      |      |      |  |     
|Risk free interest rate  |  |      | 2.60 | %    |  |      | 3.20 | % |  |  | 6.54 | %
|Dividend yield           |  |      |     |      |  |      |     |   |  |  |     |  
|Volatility               |  |      | 0.85 |      |  |      | 1.16 |   |  |  | 1.21 |  
|Expected life (in years) |  |      | 4.13 |      |  |      | 3.50 |   |  |  | 3.59 |  

The weighted average per share grant date fair
values of employee stock options granted in 2003, 2002, and 2001
were $5.35, $3.39 and $1.28, respectively.

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:

|                         |  |      |      |      |  |      |      |   |  |  |      |  
|------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                         |  | 2003 |      | 2002 |  | 2001
|                         |  |      |      |      |  |     
|Risk free interest rate  |  |      | 1.12 | %    |  |      | 1.78 | % |  |  | 4.74 | %
|Dividend yield           |  |      |     |      |  |      |     |   |  |  |     |  
|Volatility               |  |      | 0.63 |      |  |      | 0.87 |   |  |  | 0.99 |  
|Expected life (in years) |  |      | 0.50 |      |  |      | 0.50 |   |  |  | 0.50 |  

The weighted average per share fair values of
those purchase rights granted in 2003, 2002 and 2001 were $1.66,
$1.15 and $0.47, respectively.

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

F-10



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

years ended December 31, 2003, 2002 and
2001, comprehensive income (loss) comprised of net income (loss)
and foreign currency translation adjustments.



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

In December 2003, the Financial Accounting
Standards Board (FASB) issued a revised FASB
Interpretation No. 46 (FIN 46R),
Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51. The FASB published the
revision to clarify and amend some of the original provisions of
FIN 46, which was issued in January 2003, and to exempt
certain entities from its requirements.

A variable interest entity (VIE)
refers to an entity subject to consolidation according to the
provisions of this Interpretation. FIN 46R applies to
entities whose equity investment at risk is insufficient to
finance that entitys activities without receiving
additional subordinated financial support provided by any
parties, including equity holders, or where the equity investors
(if any) do not have a controlling financial interest.
FIN 46R provides that if an entity is the primary
beneficiary of a VIE, the assets, liabilities, and results of
operations of the VIE should be consolidated in the
entitys financial statements. In addition, FIN 46R
requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE
provide additional disclosures. The provisions of FIN 46R
are effective for the Companys fiscal 2004 first quarter.
The Company does not expect the adoption of FIN 46R to have
a material impact on the Companys financial position or on
its results of operations.



|   |                    
|-- | -------------------
|2. | Segment information

The Company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.

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

|                                 |       |                |        |        |  |      |        |        |  |   |        |        | 
|-------------------------------- | ----- | -------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                 |       | 2003           |        | 2002   |  | 2001
|                                 |       |                |        |        |  |     
|                                 |       |               
|                                 |       | (In thousands)
|By similar products and services |       |                |        |        |  |      |        |        |  |   |        |       
|Lasers & instrumentation         |       | $              | 37,568 |        |  | $    | 29,842 |        |  | $ | 23,593 |       
|Disposables                      |       |                | 13,536 |        |  |      | 7,420  |        |  |   | 5,671  |       
|Service                          |       |                | 6,323  |        |  |      | 5,826  |        |  |   | 5,823  |       
|                                 |       |                |        |        |  |      |        |        |  |   |        |       
|                                 | Total |                | $      | 57,427 |  |      | $      | 43,088 |  |   | $      | 35,087 | 
|                                 |       |                |        |        |  |      |        |        |  |   |        |       
|By major geographic area(1)      |       |                |        |        |  |      |        |        |  |   |        |       
|United States                    |       | $              | 42,398 |        |  | $    | 31,714 |        |  | $ | 22,831 |       
|Europe(2)                        |       |                | 11,221 |        |  |      | 8,584  |        |  |   | 8,831  |       
|Asia Pacific(2)                  |       |                | 3,214  |        |  |      | 2,380  |        |  |   | 2,685  |       
|Rest of world(2)                 |       |                | 594    |        |  |      | 410    |        |  |   | 740    |       
|                                 |       |                |        |        |  |      |        |        |  |   |        |       
|Total                            |       | $              | 57,427 |        |  | $    | 43,088 |        |  | $ | 35,087 |       
|                                 |       |                |        |        |  |      |        |        |  |   |        |       

F-11



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



---



|    |                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------
|(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:

|               |  |                |       |      |  |      |       |  |  |   |       | 
|-------------- |  | -------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|               |  | 2003           |       | 2002 |  | 2001
|               |  |                |       |      |  |     
|               |  |               
|               |  | (In thousands)
|United States  |  | $              | 1,553 |      |  | $    | 1,957 |  |  | $ | 2,412 | 
|France         |  |                | 859   |      |  |      | 710   |  |  |   | 702   | 
|United Kingdom |  |                | 64    |      |  |      | 76    |  |  |   | 22    | 
|               |  |                |       |      |  |      |       |  |  |   |       | 
|               |  | $              | 2,476 |      |  | $    | 2,743 |  |  | $ | 3,136 | 
|               |  |                |       |      |  |      |       |  |  |   |       | 



|   |                    
|-- | -------------------
|3. | Accounts Receivable

Accounts receivable at December 31 consisted
of:

|                                      |  |                |        |      |  |   |        |  
|------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                      |  | 2003           |        | 2002
|                                      |  |                |        |     
|                                      |  |               
|                                      |  | (In thousands)
|Trade accounts receivable             |  | $              | 12,979 |      |  | $ | 10,590 |  
|Less: allowance for doubtful accounts |  |                | (268   | )    |  |   | (303   | )
|                                      |  |                |        |      |  |   |        |  
|                                      |  | $              | 12,711 |      |  | $ | 10,287 |  
|                                      |  |                |        |      |  |   |        |  



|   |            
|-- | -----------
|4. | Inventories

Inventories at December 31 consisted of:

|                |  |                |        |      |  |   |        | 
|--------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                |  | 2003           |        | 2002
|                |  |                |        |     
|                |  |               
|                |  | (In thousands)
|Raw materials   |  | $              | 6,356  |      |  | $ | 4,304  | 
|Work-in-process |  |                | 3,213  |      |  |   | 3,340  | 
|Finished goods  |  |                | 3,799  |      |  |   | 2,801  | 
|                |  |                |        |      |  |   |        | 
|                |  | $              | 13,368 |      |  | $ | 10,445 | 
|                |  |                |        |      |  |   |        | 



|   |                       
|-- | ----------------------
|5. | Property and Equipment

Property and equipment at December 31
consisted of:

|                                               |  |                |         |      |  |   |         |  
|---------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                               |  | 2003           |         | 2002
|                                               |  |                |         |     
|                                               |  |               
|                                               |  | (In thousands)
|Machinery and equipment                        |  | $              | 4,773   |      |  | $ | 4,325   |  
|Office equipment and furniture                 |  |                | 10,551  |      |  |   | 10,991  |  
|Leasehold improvements                         |  |                | 1,258   |      |  |   | 1,238   |  
|                                               |  |                |         |      |  |   |         |  
|                                               |  |                | 16,582  |      |  |   | 16,554  |  
|Less accumulated depreciation and amortization |  |                | (14,937 | )    |  |   | (14,746 | )
|                                               |  |                |         |      |  |   |         |  
|                                               |  | $              | 1,645   |      |  | $ | 1,808   |  
|                                               |  |                |         |      |  |   |         |  

F-12



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |         
|-- | --------
|6. | 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.



|   |                               
|-- | ------------------------------
|7. | Warranty and Service Contracts

Warranty

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

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           |  |                                            
|                           |  |                                            
|                           |  | (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 | 
|Add:                       |  | Accruals for warranties issued in 2003      |       |  | 2,659  |  
|                           |  | Accruals related to pre-existing warranties |       |  | 100    |  
|Less:                      |  | Settlements made during the period          |       |  | (1,939 | )
|                           |  |                                             |       |  |        |  
|Balance, December 31, 2003 |  | $                                           | 1,947 | 
|                           |  |                                             |       | 

F-13



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Service
Contracts

Deferred service contract revenue is recognized
on a straight-line basis over the period of the applicable
service contract. Costs are recognized as incurred.

|                           |  |                                        |       |  |        |  
|-------------------------- |  | -------------------------------------- | ----- |  | ------ | -
|                           |  |                                       
|Deferred Contract Revenue  |  |                                       
|                           |  |                                       
|                           |  | (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 | 
|Add:                       |  | Payments received                      |       |  | 3,266  |  
|                           |  | Costs incurred under service contracts |       |  | 1,969  |  
|Less:                      |  | Revenue recognized                     |       |  | (2,919 | )
|                           |  | Settlements made during the period     |       |  | (1,969 | )
|                           |  |                                        |       |  |        |  
|Balance, December 31, 2003 |  | $                                      | 1,433 | 
|                           |  |                                        |       | 



|   |               
|-- | --------------
|8. | Line of Credit

The Company has in place an asset based line of
credit which provides up to $5.0 million in borrowings
off-set against $1.0 million in letter of credit reserve
requirements. The line of credit expires September 2004. Credit
is extended based on the Companys eligible accounts
receivable and inventory. At December 31, 2003, the Company
had approximately $4.0 million in borrowing capacity and no
borrowings, resulting in $4.0 million 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 2.0%. The prime rate at
December 31, 2003 was 4.00%. 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, 2003 and 2002, the
Company was in compliance with all covenants and had no
outstanding borrowings under the line of credit facility.



|   |                              
|-- | -----------------------------
|9. | 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:

|                         |                                           |                |        |       |  |   |        |       | 
|------------------------ | ----------------------------------------- | -------------- | ------ | ----- |  | - | ------ | ----- | 
|                         |                                           | 2003           |        | 2002 
|                         |                                           |                |        |      
|                         |                                           |               
|                         |                                           | (In thousands)
|Leased equipment         |                                           |                |        |       |  |   |        |      
|                         | (Primarily office equipment and software) |                | $      | 1,656 |  |   | $      | 1,657 | 
|Accumulated amortization |                                           |                | (1,580 | )     |  |   | (1,381 | )    
|                         |                                           |                |        |       |  |   |        |      
|                         |                                           | $              | 76     |       |  | $ | 276    |      
|                         |                                           |                |        |       |  |   |        |      

There were no additions to leased equipment in
2003, $172,000 in 2002 and zero in 2001.

F-14



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 $1,938,000,
$1,746,000 and $1,681,000 in the years ended December 31,
2003, 2002 and 2001, respectively.

Future minimum lease payments under capital and
operating leases were as follows at December 31, 2003:

|                                               |  |                |    |           |  |   |       | 
|---------------------------------------------- |  | -------------- | -- | --------- |  | - | ----- | 
|                                               |  | Capital        |    | Operating
|                                               |  | Leases         |    | Leases   
|                                               |  |                |    |          
|                                               |  |               
|                                               |  | (In thousands)
|2004                                           |  | $              | 63 |           |  | $ | 1,919 | 
|2005                                           |  |                |   |           |  |   | 1,515 | 
|                                               |  |                |    |           |  |   |       | 
|                                               |  |                | 63 |           |  | $ | 3,434 | 
|                                               |  |                |    |           |  |   |       | 
|Less amount representing interest              |  |                | (3 | )         |  |   |       | 
|                                               |  |                |    |           |  |   |       | 
|Present value of future minimum lease payments |  |                | 60 |           |  |   |       | 
|                                               |  |                |    |           |  |   |       | 
|Less current portion                           |  |                | 60 |           |  |   |       | 
|                                               |  |                |    |           |  |   |       | 
|                                               |  | $              |   |           |  |   |       | 
|                                               |  |                |    |           |  |   |       | 



| |                 
| | ----------------
| | Indemnifications

In the ordinary course of business, the Company
enters into contractual arrangements under which the Company may
agree to indemnify the third party to such arrangement from any
losses incurred relating to the services they perform on behalf
of the Company or for losses arising from certain events as
defined within the particular contract, which may include, for
example, patents, litigation or claims relating to past
performance. Such indemnification obligations may not be subject
to maximum loss clauses. Historically, payments made related to
these indemnifications have been immaterial.

The Company has entered into indemnification
agreements with its directors and officers that may require the
Company: to indemnify its directors and officers against
liabilities that may arise by reason of their status or service
as directors or officers, other than liabilities arising from
willful misconduct of a culpable nature; to advance their
expenses incurred as a result of any proceeding against them as
to which they could be indemnified; and to make good faith
determination whether or not it is practicable for the Company
to obtain directors and officers insurance. The
Company currently has directors and officers
insurance.



| |              
| | -------------
| | 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.



|    |                                    
|--- | -----------------------------------
|10. | Convertible Subordinated Debentures

In February of 2000, the Company sold
$3 million of 8.00% convertible debentures in a
private placement. The debentures were originally scheduled to
mature in February 2007 and interest is paid monthly. 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 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

F-15



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 was amortized as interest expense in the
statement of operations over the original term of the debentures.

In the first six months of 2003, $400,000 of the
debentures were converted to 320,000 shares of the
Companys common stock at $1.25 per share. During
December 2003, the holders converted the remaining
$2.6 million of debentures into 2,080,000 shares of
the Companys common stock. Upon conversion, of the
remaining debentures, $150,054 of remaining unamortized issuance
and warrants costs were transferred to additional paid-in
capital.

Convertible subordinate debentures at
December 31 consisted of:

|                                                                       |  |                |   |      |  |   |       | 
|---------------------------------------------------------------------- |  | -------------- | - | ---- |  | - | ----- | 
|                                                                       |  | 2003           |   | 2002
|                                                                       |  |                |   |     
|                                                                       |  |               
|                                                                       |  | (In thousands)
|Convertible debentures with 8% interest, maturing
    in February 2007 |  | $              |  |      |  | $ | 3,000 | 
|                                                                       |  |                |   |      |  |   |       | 



|    |                     
|--- | --------------------
|11. | 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.



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

In connection with common stock and convertible
debenture issuances in 2000, the Company issued 458,875 warrants
to purchase the Companys common stock at prices ranging
from $1.25 to $1.50 per share. The warrants expire in 2005.
As of December 31, 2003, there remained 373,212 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 3,750,000 shares of
common stock of which there were 38,854 shares available
for issuance pursuant to its 1994 stock option plan as of
December 31, 2003.



| |                                     
| | ------------------------------------
| | 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 23,636 shares available
for issuance pursuant to its 1999 Retention Stock Option Plan as
of December 31, 2003.

F-16



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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, 2003.

The following table summarizes activity in the
Companys stock option plans during the years ended
December 31, 2003, 2002 and 2001:

|                           |  |             |           |                  |  |   |      | 
|-------------------------- |  | ----------- | --------- | ---------------- |  | - | ---- | 
|                           |  | Options     |           | Weighted Average
|                           |  | Outstanding |           | Exercise Price  
|                           |  |             |           |                 
|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 | 
|Granted                    |  |             | 556,583   |                  |  | $ | 8.50 | 
|Exercised                  |  |             | (740,841  | )                |  | $ | 1.49 | 
|Canceled                   |  |             | (77,701   | )                |  | $ | 3.53 | 
|                           |  |             |           |                  |  |   |      | 
|Balance, December 31, 2003 |  |             | 2,593,357 |                  |  | $ | 3.63 | 
|                           |  |             |           |                  |  |   |      | 

F-17



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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, 2003:

|                         |                 |                     |  |                  |           |          |  |             |      |          |  |   |       |  |  |  |           |  |  |   |      | 
|------------------------ | --------------- | ------------------- |  | ---------------- | --------- | -------- |  | ----------- | ---- | -------- |  | - | ----- |  |  |  | --------- |  |  | - | ---- | 
|                         |                 |                    
|Options Outstanding      |                 | Options Exercisable
|                         |                 |                    
|                         |                 | Weighted            |  |                  |           |         
|                         |                 | Average             |  | Weighted         |           |          |  | Weighted   
|                         |                 | Remaining           |  | Average          |           |          |  | Average    
|                         |                 | Number              |  | Contractual Life |           | Exercise |  | Number      |      | Exercise
|Range of Exercise Prices |                 | Outstanding         |  | (Years)          |           | Price    |  | Exercisable |      | Price   
|                         |                 |                     |  |                  |           |          |  |             |      |         
|                         | $ 0.99 - $ 1.38 |                     |  |                  | 296,640   |          |  |             | 0.69 |          |  | $ | 1.17  |  |  |  | 288,129   |  |  | $ | 1.17 | 
|                         | $ 1.50 - $ 1.50 |                     |  |                  | 400,528   |          |  |             | 1.94 |          |  | $ | 1.50  |  |  |  | 400,528   |  |  | $ | 1.50 | 
|                         | $ 1.59 - $ 1.62 |                     |  |                  | 345,357   |          |  |             | 2.54 |          |  | $ | 1.60  |  |  |  | 186,205   |  |  | $ | 1.60 | 
|                         | $ 1.63 - $ 2.00 |                     |  |                  | 375,936   |          |  |             | 2.66 |          |  | $ | 1.81  |  |  |  | 308,297   |  |  | $ | 1.84 | 
|                         | $ 2.20 - $ 4.19 |                     |  |                  | 391,498   |          |  |             | 3.49 |          |  | $ | 3.46  |  |  |  | 213,704   |  |  | $ | 3.26 | 
|                         | $ 4.52 - $ 5.25 |                     |  |                  | 460,001   |          |  |             | 3.82 |          |  | $ | 4.98  |  |  |  | 127,014   |  |  | $ | 5.06 | 
|                         | $ 7.53 - $14.33 |                     |  |                  | 269,897   |          |  |             | 4.64 |          |  | $ | 10.05 |  |  |  | 16,914    |  |  | $ | 9.70 | 
|                         | $16.42 - $16.42 |                     |  |                  | 53,500    |          |  |             | 4.95 |          |  | $ | 16.42 |  |  |  |          |  |  | $ |     | 
|                         |                 |                     |  |                  |           |          |  |             |      |          |  |   |       |  |  |  |           |  |  |   |      | 
|                         | $ 0.99 - $16.42 |                     |  |                  | 2,593,357 |          |  |             | 2.89 |          |  | $ | 3.63  |  |  |  | 1,540,791 |  |  | $ | 2.14 | 
|                         |                 |                     |  |                  |           |          |  |             |      |          |  |   |       |  |  |  |           |  |  |   |      | 



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

During 1999, the Company adopted its 1999
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.
The Company has reserved 750,000 shares of common stock for
issuance pursuant to its 1999 Employee Stock Purchase Plan.
Under this plan, as of December 31, 2003, approximately
550,000 shares had been purchased.



|    |                                     
|--- | ------------------------------------
|12. | 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 $201,000, $173,000, and
$171,000 in the years ended December 31, 2003, 2002 and
2001, respectively.



|    |             
|--- | ------------
|13. | Income Taxes

The geographic distribution of net income (loss)
before provision for taxes were as follows:

|                                                           |  |      |       |      |  |      |     |   |  |   |      |  
|---------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | --- | - |  | - | ---- | -
|                                                           |  | 2003 |       | 2002 |  | 2001
|                                                           |  |      |       |      |  |     
|United States income (loss) before provision for
    taxes |  | $    | 3,077 |      |  | $    | 455 |   |  | $ | (678 | )
|Foreign loss before provision for taxes                    |  |      | (358  | )    |  |      | (46 | ) |  |   | (106 | )
|                                                           |  |      |       |      |  |      |     |   |  |   |      |  
|Net income (loss) before provision for taxes               |  | $    | 2,719 |      |  | $    | 409 |   |  | $ | (784 | )
|                                                           |  |      |       |      |  |      |     |   |  |   |      |  

F-18



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                           |  |      |     |      |  |      |    |  |  |   |    | 
|-------------------------- |  | ---- | --- | ---- |  | ---- | -- |  |  | - | -- | 
|                           |  | 2003 |     | 2002 |  | 2001
|                           |  |      |     |      |  |     
|Current federal taxes      |  | $    | 91  |      |  | $    |   |  |  | $ |   | 
|Current state taxes        |  |      | 35  |      |  |      | 16 |  |  |   |   | 
|Current foreign taxes      |  |      | 76  |      |  |      | 70 |  |  |   | 45 | 
|                           |  |      |     |      |  |      |    |  |  |   |    | 
|Provision for income taxes |  | $    | 202 |      |  | $    | 86 |  |  | $ | 45 | 
|                           |  |      |     |      |  |      |    |  |  |   |    | 

Income taxes differ from the amount computed by
applying the statutory federal income tax rate of 34% to income
(loss) before taxes. The reasons for the differences and the tax
effect of each are as follows (in thousands):

|                                           |  |      |        |      |  |      |      |   |  |   |      |  
|------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                           |  | 2003 |        | 2002 |  | 2001
|                                           |  |      |        |      |  |     
|Computed expected tax                      |  | $    | 924    |      |  | $    | 139  |   |  | $ | (274 | )
|Operating loss with no carryback benefit   |  |      | 252    |      |  |      | 95   |   |  |   | 274  |  
|Benefit of net operating loss carryforward |  |      | (1,028 | )    |  |      | (209 | ) |  |   |     |  
|Foreign taxes in excess of U.S. rate       |  |      | (53    | )    |  |      | (9   | ) |  |   | 45   |  
|Other                                      |  |      | 107    |      |  |      | 70   |   |  |   |     |  
|                                           |  |      |        |      |  |      |      |   |  |   |      |  
|Provision for income taxes                 |  | $    | 202    |      |  | $    | 86   |   |  | $ | 45   |  
|                                           |  |      |        |      |  |      |      |   |  |   |      |  

The components of the deferred tax asset
consisted of the following at December 31, 2003 and 2002
(in thousands):

|                     |                                                                           |      |   |         |   |  |   |         |  
|-------------------- | ------------------------------------------------------------------------- | ---- | - | ------- | - |  | - | ------- | -
|                     |                                                                           | 2003 |   | 2002   
|                     |                                                                           |      |   |        
|Deferred tax assets: |                                                                           |      |   |         |   |  |   |        
|                     | Net operating loss carryforwards                                          |      | $ | 8,505   |   |  | $ | 8,881   |  
|                     | General business credit carryforwards                                     |      |   | 2,483   |   |  |   | 2,256   |  
|                     | Inventory reserves and adjustments                                        |      |   | 1,243   |   |  |   | 1,198   |  
|                     | Other accruals and reserves not currently
    deductible for tax purposes |      |   | 2,012   |   |  |   | 1,485   |  
|                     | Capitalized research and development                                      |      |   | 497     |   |  |   | 734     |  
|                     | Depreciation & amortization                                               |      |   | 969     |   |  |   | 1,216   |  
|                     |                                                                           |      |   |         |   |  |   |        
|                     | Total deferred tax assets                                                 |      |   | 15,709  |   |  |   | 15,770  |  
|                     | Less valuation allowance                                                  |      |   | (15,709 | ) |  |   | (15,770 | )
|                     |                                                                           |      |   |         |   |  |   |        
|                     | 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, 2003, the Company has net
operating loss carryforwards of approximately $24 million
and $5 million for federal and state tax purposes,
respectively. If not utilized, these carryforwards will begin to
expire in 2010 for federal and in 2003 for state purposes.

The Company has research and development tax
credit carryforwards of approximately $1.3 million and
$1.6 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 Company has not provided for United States
federal income and foreign withholding taxes on non-United
States subsidiaries undistributed earnings as calculated
for income tax purposes, because, in

F-19



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

accordance with the provisions of Accounting
Principles Board Opinion No. 23, Accounting for Income
Taxes  Special Areas (APB 23) the
Company intends to reinvest these earnings outside the United
States indefinitely. If the Company encounters a significant
domestic need for liquidity that the Company cannot fulfill
through borrowings, equity offerings, or other internal or
external sources, the Company may experience unfavorable tax
consequences as cash invested outside the United States is
transferred to the United States. This adverse consequence would
occur if the transfer of cash into the United States were
subject to income tax without sufficient foreign tax credits
available to offset the United States tax liability.

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.



|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|14. | 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 of America, 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 credit risk. In 2003, 2002 and
2001, the Companys United States distributor, McKesson,
made purchases from the Company of approximately
$17.7 million, $12.6 million and $7.0 million
which was 31%, 29% and 20% of total 2003, 2002 and 2001 revenue,
respectively. The Company had no other customers whose purchases
were 10% or more of annual revenue. At December 31, 2003
and 2002, McKessons accounts receivable balance was
approximately $2.7 million and $2.0 million which
represented 21% and 19% of the Companys total net 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 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 United States government
backed securities, is limited.

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 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.

F-20



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##### Table of Contents



LASERSCOPE


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                                                     
|--- | --------------------------------------------------------------------
|15. | Consolidated Quarterly Statement of Operations
    Data (Unaudited):

|                                                |  |                                       |        |          |  |          |        |          |  |   |        |  |  |   |        | 
|----------------------------------------------- |  | ------------------------------------- | ------ | -------- |  | -------- | ------ | -------- |  | - | ------ |  |  | - | ------ | 
|                                                |  |                                      
|                                                |  | Three Months Ended                   
|                                                |  |                                      
|                                                |  | Mar. 31,                              |        | Jun. 30, |  | Sep. 30, |        | Dec. 31,
|                                                |  |                                       |        |          |  |          |        |         
|                                                |  |                                      
|                                                |  | (In thousands, except per share data)
|2003                                            |  |                                       |        |          |  |          |        |          |  |   |        |  |  |   |        | 
|Net revenues                                    |  | $                                     | 12,456 |          |  | $        | 12,862 |          |  | $ | 14,293 |  |  | $ | 17,816 | 
|Gross margin                                    |  |                                       | 6,265  |          |  |          | 6,455  |          |  |   | 7,503  |  |  |   | 9,565  | 
|Net income                                      |  |                                       | 135    |          |  |          | 348    |          |  |   | 533    |  |  |   | 1,501  | 
|Basic net income per share                      |  |                                       | 0.01   |          |  |          | 0.02   |          |  |   | 0.03   |  |  |   | 0.08   | 
|Diluted net income per share                    |  |                                       | 0.01   |          |  |          | 0.02   |          |  |   | 0.03   |  |  |   | 0.07   | 
|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   | 

F-21



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##### Table of Contents






SCHEDULE II

LASERSCOPE

VALUATION AND QUALIFYING ACCOUNTS

(In thousands)


|                                             |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |        | 
|-------------------------------------------- | ---------------------------- | ---------- | - | --------- |  | ---------- | - | ---------- |  |  | - | ----- |  |  | - | ------ | 
|                                             |                              | Balance at |   |           |  |            |   | Balance at
|                                             |                              | Beginning  |   |           |  |            |   | End of    
|Descriptions                                 |                              | of Period  |   | Additions |  | Deductions |   | Period    
|                                             |                              |            |   |           |  |            |   |           
|Allowance for doubtful accounts receivable:  |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |       
|                                             | Year ended December 31, 2001 |            | $ | 800       |  |            | $ |           |  |  | $ | 426   |  |  | $ | 374    | 
|                                             |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |       
|                                             | Year ended December 31, 2002 |            | $ | 374       |  |            | $ | 115        |  |  | $ | 186   |  |  | $ | 303    | 
|                                             |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |       
|                                             | Year ended December 31, 2003 |            | $ | 303       |  |            | $ | 93         |  |  | $ | 127   |  |  | $ | 268    | 
|                                             |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |       
|Reserve for excess and obsolete inventory:   |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |       
|                                             | Year ended December 31, 2001 |            | $ | 2,898     |  |            | $ |           |  |  | $ | 384   |  |  | $ | 2,514  | 
|                                             |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |       
|                                             | Year ended December 31, 2002 |            | $ | 2,514     |  |            | $ | 134        |  |  | $ | 357   |  |  | $ | 2,291  | 
|                                             |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |       
|                                             | Year ended December 31, 2003 |            | $ | 2,291     |  |            | $ | 288        |  |  | $ | 713   |  |  | $ | 1,866  | 
|                                             |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |       
|Valuation allowance for deferred tax assets: |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |       
|                                             | Year ended December 31, 2001 |            | $ | 17,158    |  |            | $ |           |  |  | $ | 88    |  |  | $ | 17,070 | 
|                                             |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |       
|                                             | Year ended December 31, 2002 |            | $ | 17,070    |  |            | $ |           |  |  | $ | 1,300 |  |  | $ | 15,770 | 
|                                             |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |       
|                                             | Year ended December 31, 2003 |            | $ | 15,770    |  |            | $ |           |  |  | $ | 61    |  |  | $ | 15,709 | 
|                                             |                              |            |   |           |  |            |   |            |  |  |   |       |  |  |   |       

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 | .11K        |  | Amendment to Loan and Security Agreement between
    the Registrant and Silicon Valley Bank dated September 25,
    2003.(22)                                                
|        | 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)                                                                       
|        | 10 | .20B        |  | Amendment to Convertible Loan Agreement.(22)                                                                       
|        | 22 | .1          |  | Subsidiaries of Registrant, as amended.(17)                                                                        
|        | 23 | .1          |  | Consent of Independent Accountants.(23)                                                                            
|        | 25 | .1          |  | Power of Attorney (see page 36).(23)                                                                               
|        | 31 | .1          |  | Certification of Principal Executive Officer
    pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.(23)
|        | 31 | .2          |  | Certification of Principal Financial Officer
    pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.(23)
|        | 32 | .1          |  | Certification of Principal Executive Officer
    pursuant to 18 U.S.C. section 1350.(23)                           
|        | 32 | .2          |  | Certification of Principal Financial Officer
    pursuant to 18 U.S.C. section 1350.(23)                           



---



| |     |                                                                                                                                                                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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     



---



##### Table of Contents





|     |                                                                                                                                                                                                                            
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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) | 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, 2003.                
|    
|(22) | 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, 2003.
|    
|(23) | Filed herewith.