SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


                                    FORM 10-K

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE  ACT OF 1934  FOR  THE  TRANSITION  PERIOD  FROM  ____________  TO
     ____________.


                           Commission File No. 1-10428


                    Sunrise Technologies International, Inc.
             (Exact name of Registrant as specified in its charter)


                  Delaware                                      77-0148208
       (State or other jurisdiction of                       (I.R.S. Employer
       incorporation or organization)                     Identification Number)

47257 Fremont Boulevard, Fremont, California                       94538
  (Address of principal executive offices)                      (Zip Code)

       Registrant's telephone number, including area code: (510) 623-9001


           Securities registered pursuant to Section 12(g) of the Act:
                                  Common Stock
                                (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      X      No
                                 -----       -----

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

The  aggregate   market  value  of  the   Registrant's   Common  Stock  held  by
non-affiliates of the Registrant was  approximately  $34,836,000 as of March 21,
1997 based upon the closing price on the OTC Bulletin Board for that date.

There  were  27,868,613  shares of the  Registrant's  Common  Stock  issued  and
outstanding on March 21, 1997.

                       DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12, and 13 of Part III  incorporate  information by reference from
the Proxy Statement for the 1997 Annual Meeting of Stockholders.


<PAGE>
                                     PART I

ITEM 1.  BUSINESS

Overview

     Sunrise   Technologies   International,   Inc.  (the  "Company")  develops,
manufactures  and markets laser systems for  applications in  ophthalmology  and
dentistry.  In addition, the Company has developed,  manufactures and markets an
air abrasive  cavity  preparation  system for  dentistry  (the  "MicroPrep(R)").
Through  the  end  of  1991,  the  Company  was  the  exclusive   developer  and
manufacturer  of dental laser  systems for American  Dental  Technologies,  Inc.
("ADT"),   formerly   known  as  American   Dental  Laser,   Inc.,  and  derived
substantially  all of its  revenues  from the sale of the dLase 300 Dental Laser
system (the "dLase 300 system") to ADT for distribution in the United States and
overseas  markets.  ADT  commenced  foreign  sales of the  dLase  300  system in
December 1988 for the treatment of caries (tooth decay) and soft tissue (such as
gingivectomies).  Following  the  clearance  by the United  States Food and Drug
Administration  ("FDA") to market the product for soft tissue applications,  the
Company commenced distributing the product in the United States in May 1990. The
Company filed a Pre-Market Approval  application ("PMA") for commercial sales of
the dLase 300 in the United States for treatment of hard tissue in October 1988,
which  was not  recommended  for  approval  in August  1990 and again  denied in
February 1996. The Company is currently  evaluating this development in relation
to its overall marketing of the dental laser.

     Since  mid-1992,  the  Company  has  focused a  significant  portion of its
efforts on engineering and development of its laser corneal shaping product (the
"LTK system") for the treatment of refractive errors of the eye, such as myopia,
hyperopia  and  astigmatism.  The LTK system is based upon  patented  technology
acquired in the  Company's  acquisitions  of  in-process  technology  from Laser
Biotech, Inc. and Emmetropix  Corporation in 1992. The LTK system was introduced
overseas  in the  fourth  quarter of 1993 for the  treatment  of  hyperopia  and
astigmatism.  The Company conducted Phase IIa clinical trials of this system for
the treatment of hyperopia in the United States  pursuant to an  Investigational
Device  Exemption  ("IDE")  from the FDA through  1994.  In February  1995,  the
Company filed its request with the FDA to commence Phase IIb clinical trials. In
a March  1995  letter,  the FDA  cited  various  deficiencies  in the  Company's
February  letter and requested  additional  information.  In December  1995, the
Company submitted the requested additional information. In January 1996, the FDA
responded to the Company's submittal by requesting current follow-up data on all
Phase IIa patients.  In March 1996, the Company  provided the current  follow-up
data on all Phase IIa patients. On September 5, 1996, the FDA authorized Sunrise
to treat an  additional  100  subjects  at five  United  States  locations  in a
continuation of Phase IIa clinical trials using a treatment  algorithm developed
by Sunrise in the course of the  initial  Phase IIa  clinical  trials and in the
course of studies  conducted by  ophthalmologists  in Mexico,  Great Britain and
Canada.  The  continued  clinical  trial is  limited to the  treatment  of forty
subjects  for the +1  diopter  treatment  group  and sixty  subjects  for the +2
diopter treatment group (See "Products",  "Government Regulation",  "Patents and
Licenses" and "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations").

     In April  1993,  the  Company  commenced  development  of the  MicroPrep(R)
pursuant to a joint  development  and  exclusive  manufacturing  agreement  with
Danville  Engineering,  Inc. The Company filed a 510(k) application with the FDA
in June 1993,  and received FDA market  clearance  during the second  quarter of
1994 (See  "Products"  and  "Government  Regulation").  Initial  shipment of the
product  began in June  1994.  In  October  1995,  the  Company  introduced  the
Associate, a table-top version of the MicroPrep(R).

     The Company has incurred  substantial  losses in the past three years which
have  seriously  depleted  its working  capital.  Sales of its  existing  dental
products at current  levels will not be  sufficient to sustain both the existing
business and the continued  development  and regulatory  licensing of additional
products  including the LTK system.  Historically,  the Company has been able to
raise  additional  working  capital for all aspects of its business  through the
private  placement  of  its  common  stock.   These  private  placements  raised
approximately  $15.3  million  in  1994,  1995 and  1996 in new  equity  for the
Company.  In February  and March 1997,  the Company  raised  approximately  $3.7
million through private placements of 5% convertible notes due 1999 (convertible
into  common  stock) and  warrants  to  purchase  common  stock (the "1997 Notes
Placement").  The Company is seeking to raise additional working capital for all
aspects of its business.  If the Company is unable to obtain additional  working
capital,  it may be  required to reduce  substantially,  or  eliminate,  certain
business,  limit or suspend its  operations in their  entirety or, under certain
circumstances, seek protection from creditors under the Bankruptcy Act.

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<PAGE>

     Proposed Sale of Dental Assets

     On March 26, 1997,  the Company  entered into an asset  purchase  agreement
with Lares Research, a California corporation ("Lares"),  providing for the sale
of the  Company's  assets  associated  with its dental  laser,  air abrasion and
composite  curing  systems  (the  "Dental  Assets").  Lares is a privately  held
company located in Chico,  California.  Consummation of the proposed dental sale
is  subject to Lares'  ability  to raise  $4,000,000  to fund the  closing  date
payment  described  below.  There is no  assurance  that  Lares  will be able to
attract the  required  financing  from banking  institutions  and members of the
Lares family, and, if Lares is unsuccessful, the transaction will be abandoned.

     If Lares is able to raise the required capital,  the Company would transfer
to Lares all of the Dental Assets except for cash and accounts  receivable (book
value at December 31, 1996 of approximately $1,904,000).  All liabilities of the
Company related to its operations associated with tbe Dental Assets (the "Dental
Business")  would be retained  by the  Company,  except for certain  obligations
relating to royalties and a supply contract.  Lares would pay Sunrise $4,000,000
at closing and would issue $1.5 million in notes ("Lares Notes"). The $1,000,000
Lares Note would be payable  three years from the date of closing,  and interest
at the rate of 8% per  annum  would  begin  to  accrue  at the end of the  first
quarter following the closing and would be payable quarterly. The $500,000 Lares
Note would be payable  four years from the date of closing,  and interest at the
rate of 8% per annum would be accrued for the first two years following the date
of closing, with interest payable quarterly  thereafter.  The Company intends to
recognize proceeds from the sale and interest on the notes as cash is received.

     In the event the  transaction  with Lares is not  consummated,  the Company
will seek to sell the Dental Assets to another purchaser.

     The  Company's  revenues  are  substantially  derived  from the sale of its
dental laser and air abrasive products.  In 1996, these sales represented 98% of
the  Company's  revenues.   If  the  proposed  sale  of  the  Dental  Assets  is
consummated,  $4,000,000  of the  purchase  price will be paid in cash which the
Company  will use to fund its  ophthalmic  activities;  however,  by selling the
Dental Assets, the Company will lose a significant source of continued revenue.


PRODUCTS

Dental

     SunLase Dental Laser Systems

     The SunLase  series of dental  laser  systems are  portable  laser  systems
designed to be used in dentistry,  without the use of local anesthetic, for hard
tissue   applications   such  as  treatment  of  dental  caries  (cavities)  and
pre-carious  dental  lesions (the  precursor  of  cavities)  and for soft tissue
cutting procedures in the oral cavity.

     The Company  introduced the SunLase 800 for sales in international  markets
during the third  quarter  of 1992 for hard and soft  tissue  applications.  The
SunLase 800, which was developed using technology from the Company's  ophthalmic
and surgical laser  technologies,  uses a pulsed Nd:YAG with a variable power of
0.3 watts to 8 watts and  provides a choice of pulse  rates from 10 to 50 pulses
per second.  The  SunLase  800  incorporates  a memory  feature  that allows the
practitioner  the choice of up to eight  programmable  treatment  settings.  The
application of solid-state  laser technology  provides  low-cost,  efficient and
reliable  operations.  No special utilities are required and the unit plugs into
any standard electrical outlet.

     In March 1993,  the Company  introduced two new dental laser systems in the
United States market for soft tissue applications--the  SunLase 400, a four watt
dental  laser system and the SunLase  Master,  an eight watt dental laser system
with a pulse rate of from 10 pulses per  second to 100  pulses per  second.  The
Company  obtained  FDA  clearance  to  market  these  procedures  prior to their
introduction.

     MicroPrep(R) Dental Applications

     The  Company  entered  into a joint  development  agreement  with  Danville
Engineering  in April 1993, to develop the  MicroPrep(R),  a low-cost,  compact,
microprocessor-controlled  air  abrasive  unit.  Pursuant  to the  terms  of the
agreement,   Danville   Engineering   provides  the  air  abrasive   module  for
incorporation into the 

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<PAGE>

MicroPrep(R).  In  addition,  Danville  Engineering  may act as a  non-exclusive
distributor  of the  product.  The  MicroPrep(R)  uses a high  speed air  stream
containing  small  particles  which,  when  directed at teeth,  have an abrasive
action that can be used to cut enamel and dentin,  thereby  prepare a cavity for
restorative  material.  The air abrasive  method allows for rapid cutting of the
tooth structure with minimal heat,  vibration and pressure,  thereby  permitting
cavity  preparation  without the use of local anesthetic in most cases. In cases
where the tooth is  hypersensitive,  pulpal  stimulation  can be  controlled  by
reducing the pressure of abrasive material delivered to the tooth structure.

     The MicroPrep(R) Director is approximately  suitcase-sized  (similar to the
Company's dental laser  packaging) and has a built-in  compressor which improves
the portability of the system as compared to the competitive  product which uses
the dentist's  existing  compressed air supply. The Director utilizes a standard
115 volt  outlet,  delivers  abrasive at from 80 psi to 120 psi, and operates at
three different pressures,  three different abrasive concentrations and also has
a pulsed mode to allow the dentist innumerable variations on delivering abrasive
to the target tooth  structure.  The Company filed a 510(k) with the FDA in June
1993 and received  clearance to market the product in May 1994.  Initial product
shipment  began in June 1994.  In  October  1995,  the  Company  introduced  the
"Associate(R)," a table-top version of the MicroPrep(R).

Ophthalmic

     Ophthalmic Laser System for Glaucoma

     In 1990, the Company  developed the gLase 210 ophthalmic system (the "gLase
210 system"),  a holmium laser system designed to perform a filtering  procedure
for the  treatment of glaucoma.  Conventional  filtering  procedures,  whereby a
permanent  drainage  duct is created to relieve  the  pressure  in the eye, is a
difficult  surgical procedure and is currently being performed only by a limited
number of  glaucoma  specialists.  The gLase 210  system  emits  radiation  at a
wavelength that is highly absorbed by water, and therefore by all tissues in the
body because water is the main  constituent  of all body tissues.  The goal of a
filtering  procedure is to relieve the pressure inside the eye by making a small
hole in the sclera, the strong wall of the eye. The pulsed nature of the holmium
laser  combined with the  wavelength,  provide an effective and efficient way of
creating a hole in the sclera with minimal  disturbance to surrounding  tissues.
The laser beam is brought to the target  inside the eye with a 200 micron  fiber
built into a special  probe  that  emits the laser beam at a right  angle to the
fiber axis.

     The design  characteristics and the unique delivery device of the gLase 210
system  enables the  ophthalmologist  to perform this procedure on an outpatient
basis,  thus  avoiding  the use of an  operating  room  and the  hospitalization
sometimes  required with  traditional  filtering  surgery.  Foreign sales of the
gLase 210 system commenced on a limited basis during the second quarter of 1990;
domestic  sales  commenced  in  December  1990  when the  Company  received  FDA
clearance to begin  commercial sale of the product line in the United States for
the filtering procedure. The gLase 210 system is currently marketed directly and
through dealers,  distributors and manufacturer's  representatives in the United
States and through distributors  internationally.  Sales of the gLase 210 system
have been limited and never represented more than 11% of revenues in any year.

     Corneal Shaping System

     In April 1992,  the Company  acquired  Laser  Biotech,  Inc.,  a California
corporation ("Laser Biotech"),  through a merger of a wholly-owned subsidiary of
the Company with Laser Biotech (the "Merger"). Laser Biotech was founded in 1986
by Bruce J.  Sand,  M.D.,  FACS,  to  research  and  develop a  precision  laser
instrument  for eye surgery.  In  connection  with the Merger,  the Company also
acquired  certain  patent and patent  applications  held by Dr. Sand  covering a
patented technique for reshaping the cornea using a laser. The technique, called
Laser Thermal  Keratoplasty ("LTK" or the "Corneal Shaping System"),  alters the
shape  of  the  cornea  to  correct  refractive   disorders  such  as  hyperopia
(farsightedness),  astigmatism  and  presbyopia  (decline  in near vision due to
aging) without removing corneal tissue. The procedure employs a laser to shrink,
selectively,  the collagen in the cornea,  changing the  curvature of the cornea
and thereby  changing the refractive  power of the eye. By  comparison,  excimer
laser systems for corneal reshaping developed by Summit  Technologies,  Inc. and
VISX, Inc.  remove parts of the cornea to achieve  changes in refraction.  Laser
Biotech conducted pre-clinical studies to

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gain  preliminary  information on the efficacy and safety of the product,  which
resulted  in positive  indications  the  Corneal  Shaping  System can be applied
successfully and safely to correct refractive errors.

     In May 1992,  the  Company  acquired  substantially  all of the  in-process
technology  of  Emmetropix  Corporation,  a  Texas  corporation  ("Emmetropix"),
including an assignment of certain patent  applications  and related  technology
from an  Emmetropix  shareholder  which the Company  believes  will be useful in
developing the LTK system.

     The Company  received an IDE from the FDA to begin Phase I clinical  trials
on human subjects in the first quarter of 1992. Phase I trials commenced in June
1992 using a prototype  LTK System  designed and  developed by the Company.  The
Company  completed Phase I of the clinical work for the LTK system and filed its
results  with the FDA in June 1993.  In  September  1993,  the Company  received
clearance to begin Phase IIa clinical trials for the treatment of hyperopia. The
trials were  conducted at Doheny Eye Institute at USC and Baylor  University and
completed in November 1994. In February 1995, the Company filed its request with
the FDA to  commence  Phase IIb  clinical  trials.  In March  1995 the FDA cited
various  deficiencies in the Company's February letter and requested  additional
information  which the Company  submitted in December 1995. In January 1996, the
FDA responded to the Company's submittal by requesting current follow-up data on
all  Phase IIa  patients.  In March  1996,  the  Company  provided  the  current
follow-up  data on all  Phase  IIa  patients.  On  September  5,  1996,  the FDA
authorized the Company to treat an additional 100 subjects at five United States
locations  in a  continuation  of Phase IIa  clinical  trials  using a treatment
algorithm  developed  by the  Company  in the  course of the  initial  Phase IIa
clinical trials and in the course of studies  conducted by  ophthalmologists  in
Mexico, Great Britain and Canada. The continued clinical trial is limited to the
treatment  of forty  subjects  for the +1  diopter  treatment  group  and  sixty
subjects for the +2 diopter treatment group.

     In addition,  clinical  trials were initiated  outside the United States in
early 1993 and are ongoing.  The Company has  obtained  FDA export  clearance to
market the Corneal  Shaping  System in most European  countries,  Turkey,  Saudi
Arabia, Canada, Mexico, Brazil, Japan, China, Korea, Hong Kong, the Bahamas, and
other  countries,  although such sales are subject to the individual  regulatory
authority of each country. Following regulatory approvals, the Company commenced
marketing the Corneal  Shaping  System  overseas,  primarily in Europe,  for the
treatment  of hyperopia  and  astigmatism  in December  1993.  Some  preliminary
experiments have been done on myopia.

     The Corneal Shaping System  incorporates the Sun 1000, a modified gLase 210
system as the laser source into a delivery  system that is built into a standard
slit-lamp to perform the LTK  procedure.  A slit-lamp is a binocular  microscope
used  regularly by  ophthalmologists  to examine an eye  binocularly  under high
magnification.  The Corneal  Shaping System  delivers eight  simultaneous  laser
beams  disposed in a circle of varying  diameter.  This  system  allows for easy
alignment on the patient's eye and the delivery of a two second exposure for the
treatment. To date,  international sales of the Corneal Shaping System have been
limited.  Revenue in the United States  cannot be expected  until the Company is
granted  approval  from the FDA to market in the U.S.,  which  will not be until
1999 at the earliest.

      There can be no assurance the Company will successfully  develop or market
the Corneal  Shaping  System,  the FDA will  approve  the  results of  continued
clinical  trials,  or the PMA will be approved  which will result in the Company
marketing the product in the future. (See "Government Regulation" and "Marketing
and Sales").


GOVERNMENT REGULATION

     The Company's products are subject to significant  government regulation in
the United States and other countries. In order to test clinically,  produce and
market  products  for human  diagnostic  and  therapeutic  use, the Company must
comply with mandatory procedures and safety standards established by the FDA and
comparable  state and foreign  regulatory  agencies.  Typically,  such standards
require products be approved by the government  agency as safe and effective for
their intended use before being marketed for human  applications.  The clearance
process is expensive and time consuming,  and no assurance can be given that any
agency will grant  clearance for the sale of the Company's  products for routine
clinical applications or the time the clearance process will require will not be
extensive.

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     No clinical  testing of the Company's  products on humans may be undertaken
without  first  obtaining an IDE from the FDA. To date,  sales of the  Company's
dental and ophthalmic laser systems in the United States for clinical testing on
humans have been pursuant to approved IDE's.

     The Company is subject to regulation under the Radiation Control for Health
and Safety Act  administered  by the FDA which requires laser  manufacturers  to
file new  product  and annual  reports;  to maintain  quality  control,  product
testing and sales records;  to incorporate certain design and operating features
in lasers  sold to  end-users;  and to  certify  and label each laser sold to an
end-user as  belonging to one of four  classes,  based on the level of radiation
from the laser that is  accessible  to users.  Various  warning  labels  must be
affixed and certain protective devices installed,  depending on the class of the
product.  The CDRH (Center for Devices and Radiological  Health) is empowered to
seek fines and other remedies for violations of the regulatory requirements.

     Foreign  sales of the  Company's  dental and  ophthalmic  laser systems are
subject  in each  case to  clearance  by the FDA  for  export  to the  recipient
country.   Regulatory  requirements  vary  widely  among  the  countries,   from
electrical  approvals to clinical  applications  similar to the PMA  application
filed with the FDA for sales in the United States. There can be no assurance the
Company will be successful in obtaining  such  approvals for its products in the
future.


MARKETING AND SALES

     The  Company's  strategy  is to market  its  products  through  established
medical or dental equipment  distributors  overseas.  In the United States,  the
Company  sells its dental  products  through a small direct sales force  coupled
with distributors and dealers where appropriate. 

     Through 1992, substantially all of the Company's revenues were derived from
sales of dental laser systems to ADT.

     In  September  1992,  the  Company   commenced  sale  of  the  SunLase  800
internationally  through  distributors  for hard and soft  tissue  applications.
Following  settlement  of its  dispute  with ADT in February  1993,  the Company
expanded its network of established  international  distributors for sale of its
dental laser systems and commenced  marketing dental laser systems in the United
States for soft tissue applications.

     Unlike  ophthalmology  where  lasers  have  been used for many  years,  the
introduction of laser systems for dental  applications  represents a significant
innovative  treatment method. The ultimate success of the Company in penetrating
the dental market is dependent upon a well-trained and educated direct sales and
distributor  organizations.  The Company  believes dental trade shows as well as
local dental organization trade meetings also represent an important opportunity
to provide  dentists with an  understanding  of the application of the Company's
products to their practice and the dental market currently lacks the educational
programs  necessary to provide the  practitioner  with an  understanding  of the
benefits  of the  Company's  products  not  only  to the  patient  but to  their
practice. Furthermore, the Company's initial marketing efforts indicate dentists
have been confused by the variety of lasers offered for dental  applications and
the market for dental lasers may not expand significantly until FDA approval for
hard tissue applications has been obtained.  This marketing program will require
significant  effort and expenses in order to establish a market  presence in the
United States.

     For  ophthalmic  and  medical  applications,  the  extent and nature of the
Company's marketing efforts are determined by a number of factors, including the
number  of  specialists  in the  area  and  the  characteristics  of  the  laser
applications.  The  ophthalmic  market  for the gLase 210 has been  impacted  by
reimbursement pricing pressures, the continued need for publication of long term
follow-up  data,  and  increased  educational  

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requirements on the part of the practitioner  regarding  follow-up  requirements
and patient  monitoring.  The Company  markets its ophthalmic  products  through
distributors.  The  establishment of a successful  distributor  network requires
providing the distributors  with sales  instruments  (brochures,  clinical data,
research papers,  educational  videos).  Such marketing  efforts are expected to
include  presentations  at  conventions  and trade shows,  customer  training by
Company personnel and sponsorship of teaching seminars,  clinical presentations,
and research by others.  The Company also hires  additional  marketing and sales
consultants from time to time to assist in the introduction of its products.

     There can be no assurance the Company can  effectively  market its existing
and planned new products.


ENGINEERING AND DEVELOPMENT

     The  Company's  success  will  depend  substantially  upon its  ability  to
develop, produce and market innovative new products.

     For the years ended December 31, 1994, 1995 and 1996, the Company  expended
$1,561,000,   $1,218,000  and  $1,326,000,   respectively,  on  engineering  and
development relating to dental and ophthalmic lasers and MicroPrep(R) as well as
research on a variety of medical and dental applications.  The Company continues
to explore several other types of lasers with varying  characteristics  in order
to find the optimal  interactions  with  tissues in specific  medical and dental
applications. Clinical testing and sale of the Company's products are subject to
obtaining applicable regulatory  approvals,  of which there can be no assurance.
The Company's research and development activities are conducted in house as well
as by outside sources, including consultants and universities.

     The  laser  industry  is  characterized  by  extensive  research  and rapid
technological  change.  Development  by  others  of  new or  improved  products,
processes or technologies  may make product  development by the Company obsolete
or less competitive.  The Company will be required to devote continuing  efforts
and funds to further developments and enhancements for its existing products and
for its research and development of new technologies and products.  There can be
no assurance the Company will be able to  successfully  adapt its  operations to
evolving  markets  and  technologies  and fund the  development  of new  medical
products to achieve possible technological advantages.


PRODUCTION

     The Company  manufactures its dental and ophthalmic lasers and MicroPrep(R)
systems  from parts,  components  and  subassemblies  obtained  from a number of
unaffiliated suppliers, and the Company designs the software incorporated into a
microprocessor  purchased  from an  unaffiliated  third party.  Engineering  and
development,  prototype production, and all manufacturing,  assembly and testing
activities  take place at its  Fremont,  California  facility.  Although all the
parts and components  used by the Company are available  from multiple  sources,
several are  currently  being  purchased  from only one source to obtain  volume
discounts.  Lack of  availability  of certain  components  could  require  minor
redesign of the products resulting in production delays.

     In late 1993,  the Company  realigned its  production  structure  through a
reduction in production manpower to more accurately reflect short-term demand as
well as the realignment of responsibilities.

     The Company's  dental laser  systems,  ophthalmic  laser  systems,  and the
MicroPrep(R)  products have been designed in a modular fashion to facilitate the
assembly process. The Company intends to utilize modular design and construction
concepts in connection with its future products.


POTENTIAL LIABILITY

     The testing and use of human health care  products  entail an inherent risk
of physical  injury to patients and resultant  product  liability or malpractice
litigation.  While the Company has obtained  product  liability  coverage 

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in  the  amount  of  $5,000,000  with  an  umbrella  policy  for  an  additional
$5,000,000,  such  coverage  is  limited,  and  there can be no  assurance  such
coverage  will be  sufficient  to  protect  it from all risks to which it may be
subject.  Those costs of  defending a product  liability or  malpractice  action
could have a material adverse impact on the Company, even if the Company were to
ultimately prevail.


PATENTS AND LICENSES

     Pursuant to agreements with ADT, the Company  assisted ADT and its founders
in the preparation of several patent applications,  which have been filed in the
United States Patent and  Trademark  Office and in certain  countries in Europe.
From these applications, several patents have been issued and have been assigned
to ADT.  Pursuant to the terms of its settlement  with ADT in February 1993, the
Company obtained a royalty bearing non-exclusive,  worldwide license under ADT's
patents and patent applications covering the manufacture,  sale or use of dental
laser products.  There can be no assurance any additional patents will be issued
or any such patents will afford protection or benefit to the Company.

     The Company has two issued patents on its gLase 210 ophthalmic product.

     In the acquisition of Laser Biotech,  the Company  acquired a United States
patent and pending  United  States and foreign  patent  applications  previously
licensed to Laser  Biotech by Dr.  Bruce Sand,  its founder.  The issued  patent
covers a method  for using a laser to  shrink  collagen  in the body.  Since the
acquisition, two more patents filed by Dr. Sand have been allowed, and have been
assigned to the Company.  In the Emmetropix  acquisition,  the Company  acquired
three United States patent  applications as well as foreign patent  applications
previously licensed to Emmetropix,  which the Company believes will be useful in
developing its laser thermal keratoplasty product. In addition,  the Company has
filed a patent  application  covering the corneal shaping system it developed to
make use of the LTK procedure.


COMPETITION

     The medical and dental laser and equipment industries are generally subject
to intense competition and are characterized by rapid technological  change. The
Company's products will compete with conventional  treatment methods, as well as
with   products   marketed  by  other   medical  and  dental   laser   equipment
manufacturers, most of which have significantly greater financial resources than
the Company. While the Company believes its compact products,  which can be used
in the doctor's office,  offer better treatment  characteristics  than currently
available systems and offer comparable  treatment at lower cost, there can be no
assurance the Company will be successful in marketing its dental and  ophthalmic
products.

     Dentistry

     Since 1990,  the  Company's  dental laser systems have been marketed in the
United States for soft tissue  applications  and overseas for both hard and soft
tissue  applications.  Soft  tissue  applications  include  gingivectomies,  gum
contouring and minor surgical cuts such as  frenectomies.  The Company  believes
its system,  which employs a lightweight  contact probe,  offers advantages over
traditional  surgical  methods  in that it allows the  dentist  to perform  such
procedures  with minimal  bleeding  and without  anesthesia  in most cases.  The
Company  currently  competes  with ADT among  others with  respect to its dental
laser systems.

     In recent  periods,  competition in the dental laser industry has increased
significantly,  as various  dental laser systems have been  introduced  into the
market,  primarily  for soft  tissue  applications.  These  include  pulsed  and
continuous  wave Nd:YAG,  carbon dioxide and argon lasers.  The  introduction of
these systems has to some extent generated confusion and delays among end-users,
who  must  sort  through  various  claims  and  complex  technologies  prior  to
purchasing a dental laser system. There are several other competitors  marketing
dental laser systems for soft tissue  applications  including ADT. The Company's
products also compete with established methods of treating caries, primarily the
dentist's drill, certain chemical solutions and with CO2 laser systems currently
marketed  for other  dental  procedures.  There are no laser  systems  currently
marketed  in the United  States for hard  tissue  applications  and the  Company
believes  the market  for its  dental  laser  systems  may be minimal  until FDA
clearance to market for such application can be obtained.

                                       8
<PAGE>

     The  Company's  products will be required to compete with respect to price,
ease of use and  rapid  effective  treatment.  There can be no  assurance  other
companies will not introduce new products that compete with the Company.

     The Company currently markets the MicroPrep(R),  an abrasive-action  cavity
preparation unit that competes with ADT's KCP 2000.

     Ophthalmology

     Use of the holmium laser for LTK will compete with or  supplement  existing
treatments for refractive disorders, including eyeglasses, contact lenses, other
refractive   surgeries  (such  as  radial  keratotomy)  and  other  technologies
currently  under  development,  such as corneal  implants and surgery  involving
other laser techniques.  The industry is characterized by extensive research and
rapid  technological  change.  Newer technologies could be developed with better
performance for refractive surgery than LTK. The significant competitive factors
in the industry  will include  price,  convenience,  success  relative to vision
correction, acceptance of new technologies,  patient satisfaction and ability to
receive regulatory approval.

     Aside from using  eyeglasses  and  contact  lenses,  refractive  errors are
currently being treated by a surgical approach called Radial Keratotomy  ("RK"),
photo  refractive  keratectomy  ("PRK") and LASIK  which  treat  nearsightedness
(myopia).

     Currently,  the  dominant  laser  approach  for  the  treatment  of  myopic
refractive  disorders  is the use of the excimer  laser.  In the United  States,
VISX,  Incorporated  ("VISX") and Summit  Technology,  Inc.  ("Summit")  are the
leading  manufacturers  of excimer  refractive  surgical  systems.  The  Company
believes the LTK process for the  treatment of hyperoptic  refractive  disorders
offers several  distinct  advantages over the use of excimer  lasers,  including
ease of use and less  invasiveness.  Both  VISX and  Summit  have  significantly
greater financial  resources than the Company.  In October 1995, both Summit and
VISX announced that the FDA had approved their PMA  applications to commercially
market and sell their excimer laser systems in the U.S. for correctional  myopic
refractive disorders.  In 1997, VISX received approval to treat astigmatism.  It
is unclear what effect these developments will have on the Company's business.

     The Company believes the potential use of the process of shrinking collagen
is more  attractive  than  competitive  methods  because it can address  certain
refractive errors with minimal damage to the cornea.  There can be no assurance,
however,  the method can be reduced to practice using a reliable laser system or
the Company will receive  regulatory  approvals  or  successfully  market such a
product.


BACKLOG

     On December 31, 1996 the Company had a backlog of approximately $200,000.

                                       9
<PAGE>

WARRANTY AND SERVICE

     The Company provides a limited  warranty on its dental laser systems.  This
warranty  is limited to 12 months  from date of  shipment  by the  Company.  The
Company provides  services to systems out of warranty in the United States.  The
Company's laser products include  microprocessors and software that perform self
checks upon  startup and during  operation.  In  addition,  the systems  feature
software  that allows  service  personnel  to perform  diagnostic  checks in the
field. The Company currently provides support services by telephone to customers
with operational and service  problems and makes necessary  repairs at its plant
or at the laser site. To date,  actual costs  incurred  related to warranty work
have been minimal.

     The Company provides  similar  warranties and support services to end-users
concerning its direct sales of the gLase ophthalmic laser systems;  however,  in
the case of sales by the  distributors,  all product service will be provided by
the distributor.


EMPLOYEES

     At December 31, 1996 the Company had 42 full-time employees  (including its
executive officers); 13 in manufacturing,  5 in engineering and development,  18
in marketing, sales and regulatory, and 6 in administration.

     The Company is primarily  dependent upon its  engineering  and  development
employees and  consultants  for the  development  and improvement of current and
proposed products.  The Company's future success is partially dependent upon its
ability to  attract  and  retain  highly  qualified  scientific  and  management
personnel.


EXPORT SALES

     In 1996,  approximately 47% of the Company's revenues were international as
compared to approximately 69% in 1995 and 68% in 1994.


CAUTIONARY STATEMENTS-RISK FACTORS

     In the interest of  providing  the  Company's  shareholders  and  potential
investors with certain Company information, including management's assessment of
the Company's future potential,  certain  statements set forth herein contain or
are  based on  projections  of  revenue,  income,  earnings  per share and other
financial items or relate to management's  future plans and objectives or to the
Company's  future economic  performance.  Such  statements are  "forward-looking
statements"  within the meaning of Section 27A(I) of the Securities Act of 1933,
as amended,  and in Section  21E(I) of the  Securities  Exchange Act of 1934, as
amended.

     Although  any  forward-looking  statements  contained  herein or  otherwise
expressed  by or on behalf  of the  Company  are,  to the  knowledge  and in the
judgment of the  officers and  directors of the Company,  expected to prove true
and to come to pass,  management is not able to predict the future with absolute
certainty.   Accordingly,   shareholders  and  potential  investors  are  hereby
cautioned  that certain  events or  circumstances  could cause actual results to
differ   materially   from  those   projected   or   predicted.   In   addition,
forward-looking  statements are based on management's  knowledge and judgment as
of  the  date   hereof,   and  the  Company   does  not  intend  to  update  any
forward-looking statements to reflect events occurring or circumstances existing
hereafter.

     In  particular,  the Company  believes  the  following  facts could  impact
forward-looking statements made herein or in future written or oral releases and
by hindsight, prove such statements to be overly optimistic and unachievable.

History of Losses; Profitability Uncertain; Cash Flow Deficits

     Since 1992, the Company has incurred substantial losses which have depleted
its  working  capital and reduced  its  stockholders'  equity.  Losses have been
incurred in both segments of the Company's business, dental and ophthalmic.  The
Company's  management  believes that the Dental  Business will operate at a loss

                                       10

<PAGE>

during 1997. In addition,  the Company's ophthalmic business will continue to be
a  significant  consumer  of cash as the  revenues  from this  business  are not
expected to be  sufficient  to cover its  operating  costs  unless and until FDA
approval is  obtained to permit  domestic  sale of the Sunrise  Corneal  Shaping
System, which approval is not expected until 1999 at the earliest.

     The  negative  cash flows of the Company  have been funded  during 1995 and
1996 by the sale of  additional  equity.  At December  31,  1996,  cash and cash
equivalents of the Company was  approximately  $650,000,  and at March 21, 1997,
after  consummation  of the 1997 Notes  Placement  (approximate  net proceeds of
$3,743,740),  cash  and  cash  equivalents  of  the  Company  was  approximately
$2,150,000. The Company anticipates that it will be required to raise additional
working  capital to fund its  activities  for 1997 and  beyond.  Any  additional
equity financing may be dilutive to the Company's shareholders. No assurance can
be given that additional  financing will be available or that, if available,  it
will be available on terms  favorable  to the Company and its  stockholders.  If
funds are not  available  to satisfy  the  Company's  short-term  and  long-term
operating requirement,  the Company may be required to reduce substantially,  or
eliminate,  certain business,  limit or suspend its operations in their entirety
or, under certain  circumstances,  be forced to seek  protection  from creditors
under the Bankruptcy Act.

Continuing Losses Expected

     The Company expects to report operating losses during 1997 and beyond.  The
losses will come  primarily  from the expenses of the FDA  approval  process and
underlying  clinical studies related to the Sunrise Corneal Shaping System.  The
Company  will not have any domestic  revenues  from this product line unless and
until FDA  approval  is  obtained  and the  international  revenues  will not be
sufficient to cover the cost of the approval  process.  The Company  anticipates
the sale of the assets of its Dental Business during 1997, of which there can be
no assurance,  will fund  continuing  clinical  studies for the Sunrise  Corneal
Shaping  System.  Even if the  Dental  Business  is  retained  and  can  operate
profitably,  consolidated  operating losses would be anticipated at least during
1997.

Going Concern Report

     The Company's  independent auditors have included an explanatory  paragraph
in its report  covering the Company's  financial  statements  for the year ended
December  31,  1996,  which  paragraph  emphasizes  substantial  doubt as to the
Company's  ability  to  continue  as a going  concern,  based  primarily  on the
recurring  operating  losses  that have been  incurred  by the  Company.  If the
company is unable to achieve future profitability or obtain other financing, the
Company may be required to reduce substantially, or eliminate, certain business,
limit  or  suspend  its   operations   in  their   entirety  or,  under  certain
circumstances,  be forced to seek protection from creditors under the Bankruptcy
Act.

Loss of Dental Revenues

     The  Company's  revenues  are  substantially  derived  from the sale of its
dental laser and air abrasive products.  In 1996, these sales represented 98% of
the  Company's  revenues.   If  the  proposed  sale  of  the  Dental  Assets  is
consummated,  a portion  of the  purchase  price  will be paid in cash which the
Company  can use to fund its  ophthalmic  activities;  however,  by selling  the
Dental Assets, the Company will lose a significant source of continued revenue.

No Assurance of Proposed Dental Sale

     If the proposed sale transaction is not  consummated,  the Company may seek
to sell the Dental Assets to another  purchaser.  There can be no assurance that
another such potential  purchaser can be found, or that such potential purchaser
would be interested in the Dental Assets on terms similar to those  contained in
the current  proposed sale of dental assets.  In any event, the Company would be
required to fund any continuing  losses of the Dental Business,  and may have to
terminate such Dental Business in its entirety,  without  receiving any 

                                       11

<PAGE>

payment.  In  addition,  management  would be  required  to  continue to spend a
significant amount of time dealing with the Dental Business.

Effects of FDA Approval  Requirements and Government Regulation on Marketability
of the Company's Systems

     The Company's activities are subject to extensive regulation by the FDA and
similar health  authorities in certain  foreign  countries.  The Sunrise Corneal
Shaping  System is regulated as a Class III medical  device by the FDA under the
FDC Act. Class III medical  devices require a PMA by the FDA prior to commercial
sale in the U.S. The PMA approval process (and underlying  clinical  studies) is
lengthy and  uncertain  and requires  substantial  commitments  of the Company's
financial  resources and  management's  time and effort.  Delays in obtaining or
failure to obtain  required  regulatory  approvals or clearances in the U.S. and
other  countries  would postpone or prevent the marketing of the Sunrise Corneal
Shaping  System and other  devices  and would  impair the  Company's  ability to
generate  funds from  operations,  which in turn  would have a material  adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance the Company will be able to obtain in a timely manner,
if at all,  required  premarket  approval  in the  United  States  or Japan  for
intended uses of the Sunrise Corneal  Shaping  System,  or for any other devices
for which the Company may seek approvals or clearances.

     The Company has been issued an IDE by the FDA to permit it to generate data
necessary  to  support  a PMA  application  for  the use  and  marketing  of the
Company's holmium laser corneal shaping product in LTK application.  The FDA has
advised the  Company the initial  Phase IIa  clinical  trials  conducted  by the
Company did not produce enough statistically  significant data to enable the FDA
to determine that the treatment algorithms employed in such clinical trials were
predictable  or effective for the treatment of hyperopia.  On September 5, 1996,
the FDA  authorized  the  Company to treat an  additional  100  subjects at five
United States  locations in a continuation  of Phase IIa clinical trials using a
treatment  algorithm developed by the Company in the course of the initial Phase
IIa clinical trials and in the course of studies  conducted by  ophthalmologists
in Mexico,  Great Britain and Canada. The continued clinical trial is limited to
the  treatment of forty  subjects for the +1 diopter  treatment  group and sixty
subjects for the +2 diopter treatment group.

     The FDA will grant a PMA with respect to a particular  procedure  performed
with the Sunrise Corneal Shaping System only if and when it is satisfied the use
of the  device  for that  procedure  is safe  and  effective  treatment  for the
condition  indicated.  In  granting  a PMA,  the FDA may  restrict  the types of
patients  who may be  treated  thereby  limiting  the market  acceptance  of the
Sunrise  Corneal Shaping  System.  Even if FDA approval is obtained,  a marketed
product is subject to continual  review.  Later discovery of previously  unknown
problems or failure to comply with applicable regulatory requirements may result
in  restrictions on the marketing of a product or withdrawal of the product from
the  market,  in  addition  to  possible  criminal  and/or  civil   proceedings.
Modifications  to a device that is the subject of an approved PMA, its labeling,
or  manufacturing  process may require approval by the FDA of PMA supplements or
new PMA's. Supplements to a PMA often require the submission of the same type of
information  required for an initial  PMA,  except the  supplement  is generally
limited to  information  needed to support the proposed  change from the product
covered by the  original  PMA.  There can be no  assurance  the Sunrise  Corneal
Shaping  System  will be  shown  to be safe  and  effective,  or that it will be
approved or cleared by the FDA or foreign  regulatory  bodies,  for the intended
uses for which it is being investigated. Modifications could also be required if
the Company is unable to reach a  satisfactory  licensing  arrangement  with the
University of Miami on a jointly developed component of the delivery system (See
"Patent Concerns").

     Any products  manufactured or distributed by the Company will be subject to
pervasive  and  continuing  regulation by the FDA. The FDC Act also requires the
Company to manufacture its products in registered establishments,  in accordance
with the FDA's Good Manufacturing Practices ("GMP") regulations, and to list its
devices  with the FDA.  Such  manufacturing  facilities  are subject to periodic
requirements with respect to manufacturing and quality assurance activities. The
FDA has proposed  changes to the GMP regulations  which will likely increase the
cost of compliance with GMP  requirements.  Labeling and promotional  activities
are subject to scrutiny  by the FDA and,  in certain  instances,  by the Federal
Trade Commission.

     In  addition,  the  introduction  of  the  Company's  products  in  foreign
countries may require  obtaining  individual  foreign  regulatory  clearances in
numerous  countries.  These products have been sold in 

                                       12

<PAGE>

approximately 15 foreign countries. Sales of the Sunrise Corneal Shaping Systems
are restricted in several countries in addition to the United States,  including
Japan, Canada,  Taiwan and Mexico. There can be no assurance the Company will be
able to obtain  regulatory  clearances  for its products in the United States or
foreign markets.

Uncertain Market Acceptance of the Corneal Shaping System

     Although the Company has other ophthalmic  laser products,  the Company has
and intends to concentrate its efforts primarily on the development of a holmium
laser  corneal  shaping  product for the  correction  of  hyperopia  and will be
dependent upon the successful  development of that system to generate  increased
revenues.   Use  of  the  Sunrise  Corneal  Shaping  System  for  laser  thermal
keratoplasty has not yet been introduced  commercially in the United States, and
there can be no  assurance  that if  approved  by the FDA,  such  system will be
accepted by either the  ophthalmic  community  or the general  population  as an
alternative to existing methods of treating  refractive vision  disorders.  Many
ophthalmologists  may have already  invested  significant  time and resources in
developing expertise in other corrective ophthalmic  techniques.  The acceptance
of LTK may be affected  adversely by its cost,  concerns  relating to its safety
and efficacy,  the lack of third party reimbursement for LTK, general resistance
to use of laser products on the eye, the effectiveness of alternative methods of
correcting refractive vision disorders, the lack of long-term follow-up data and
the  possibility  of unknown side effects.  Promotional  efforts by suppliers of
products or procedures  which are  alternatives  to the Sunrise  Corneal Shaping
System,  including  eyeglasses and contact lenses, may also adversely affect the
market  acceptance  of LTK.  The  Company's  failure  to  achieve  broad  market
acceptance of LTK will have a material adverse effect on the Company's business,
financial condition and results of operations.

Safety and Efficacy Concerns; Lack of Long-Term Follow-Up

     The Company has developed only limited  clinical data to date on the safety
and efficacy of the Sunrise Corneal Shaping System in correcting farsightedness,
and related  long-term  safety and efficacy data. The FDA has not yet determined
whether the Sunrise  Corneal  Shaping  System will prove to be safe or effective
for the predictable  and reliable  treatment of  farsightedness  or other common
vision problems.  Potential  complications  and side effects from the use of the
Company's  Sunrise  Corneal  Shaping System include  post-operative  discomfort,
decreases in contrast  sensitivity,  temporary increases in intraocular pressure
in reaction to  post-procedure  medication,  modest  fluctuations  in refractive
capabilities during healing, unintended over or under-corrections, regression of
effect, and induced astigmatism. There can be no assurance that long-term safety
and efficacy  data when  collected  will be consistent  with the clinical  trial
results  previously  obtained or will  demonstrate  that the LTK Corneal Shaping
System can be used safely and successfully to treat hyperopia in a broad segment
of the population on a long-term basis.

Limited Trading Market; Application of the Penny Stock Rules

     On July 8, 1995,  the  company's  common stock was delisted from The Nasdaq
Stock Market because the Company was unable to maintain the requisite  standards
for continuing  listing.  Accordingly,  trading of the Company's common stock is
now conducted on an electronic bulletin board established for securities that do
not meet the Nasdaq listing  requirements.  As a result, an investor may find it
more difficult to dispose of, or to obtain  accurate  quotations as to the price
of, the Company's common stock.

     While the Company  intends to pursue  being  relisted  on The Nasdaq  Stock
Market,  the Company's  securities  are now subject to the  Commission's  "penny
stock   rules"  that  impose   additional   sales   practice   requirements   on
broker-dealers  who sell such  securities  to  persons  other  than  established
customers and accredited  investors (generally defined as an investor with a net
worth in excess of $1,000,000 or annual income exceeding  $200,000,  or $300,000
together  with  a  spouse).   For   transactions   covered  by  this  rule,  the
broker-dealer  must make a special  suitability  determination for the purchaser
and must have received the purchaser's  written consent to the transaction prior
to sale.  Consequently,  the  Company's  delisting  may  affect  the  ability of
broker-dealers to sell the Company's securities.  There can be no assurance that
the Company will be successful  in being  relisted on The Nasdaq Stock Market in
the near future, if at all.

                                       13
<PAGE>

     The Commission has adopted  regulations that define "penny stock" to be any
equity  security  that has a market  price (as  defined)  of less than $5.00 per
share or an  exercise  price of less than  $5.00 per  share,  subject to certain
exceptions.  For any  transaction  involving a penny stock,  unless exempt,  the
rules require the delivery,  prior to the transaction,  of a disclosure schedule
relating to the penny stock  market.  The  broker-dealer  also must disclose the
commissions payable to both the broker-dealer and the registered representative,
current  quotations  of the  securities  and, if the  broker-dealer  is the sole
market-maker,  the  monthly  statements  must be sent  disclosing  recent  price
information  for the penny  stock held in the  account  and  information  on the
limited market in penny stocks.  As a result of these  regulations,  an investor
may find it difficult to dispose of the Company's common stock.

Competition

     Vision Correction Market

     The vision correction industry is subject to intense competition.  Patients
with hyperopia  (farsightedness)  can achieve vision correction with eyeglasses,
contact lenses and radial  keratotomy,  as well as with other  technologies  and
surgical  techniques  currently under development,  such as corneal implants and
surgery using different types of lasers. Most of the Company's  competitors have
substantially  greater  product  development   capabilities  and  financial  and
marketing  resources  than the  Company,  which may enable such  competitors  to
market  their  products or  procedures  to the  consumer  and to the  ophthalmic
community in a more effective manner.  The success of any competing  alternative
to LTK for  treating  hyperopia  would  have a  material  adverse  effect on the
Company's  business,   financial  condition  and  results  of  operations.   The
significant  competitive  factors in the industry  include  price,  convenience,
success relative to vision correction,  acceptance of new technologies,  patient
satisfaction and government approval.

     The  excimer  laser  is the  dominant  laser  used  for  the  treatment  of
refractive disorders,  although it is not currently used to treat hyperopia.  In
the United  States,  VISX and Summit are the  leading  manufacturers  of excimer
refractive  surgical systems.  While the Company believes the LTK process offers
several  distinct  advantages  over  the  use of  excimer  lasers  for  treating
hyperopia,  including  ease of use and  decreased  invasiveness,  both  VISX and
Summit have significantly  greater financial resources than the Company and have
received FDA approval for their  respective  excimer laser products for treating
myopia.  Although the VISX and Summit  excimer laser  products are not currently
approved for treating hyperopia in the United States, any alternative  treatment
offered by VISX or Summit will have a competitive  advantage because of the name
recognition  being created by the current promotion of excimer laser product for
correcting refractive errors using lasers.

     Dental Products Market

     The  Company's  dental  products  include  laser  systems  for soft  tissue
applications  such  as  gingivectomies   and  gum  contouring  and  the  Sunrise
MicroPrep(R) System for cavity  preparation.  The Company's sale of dental laser
systems  has  decreased  significantly  in the  past few  years  as a result  of
increased competition as well as a decrease in the size of the total market. The
Sunrise MicroPrep(R) System, introduced in 1994, has experienced increased sales
levels as a result of  growing  market  acceptance  of this new  alternative  to
standard  drilling  technique.  The Company's  primary  competitor in the dental
market is American Dental Technologies, its former distributor and the holder of
basic air  abrasion  patents  (for which the Company has a license).  ADT offers
product  competitive  with the Company's  laser and air abrasive  products.  The
Company's  dental  products  compete with respect to price,  ease of use, rapid,
effective  treatment  and breadth of  application.  In addition,  the  Company's
dental products compete with  conventional  dentist drills and conventional soft
tissue surgery.

Patent Concerns

     Although the Company  believes it holds all of the U.S. process patents for
the use of holmium lasers in cornea  shaping,  foreign  process patents and U.S.
and foreign  apparatus  patents for shaping the cornea with holmium  lasers have
been  issued to others.  If patents  held by others  were  considered  valid and
interpreted broadly in an adversarial proceeding,  they could be deemed to cover
one or more aspects of the Company's  holmium laser corneal  shaping  systems or
use of  such  systems  to  perform  LTK or  other  procedures.  There  can 

                                       14
<PAGE>

be no assurance the Company and Laser Biotech will not be subject to one or more
claims for patent  infringement,  or that the  Company and Laser  Biotech  would
prevail in any such action or that its patents  will afford  protection  against
competitors with similarly technology.

     In addition,  the Company has attempted to negotiate with the University of
Miami to reach agreement  regarding the  non-exclusive use of a component of the
delivery  system used in the Sunrise  Corneal  Shaping  System which was jointly
developed by the Company and the University.  The Company  believes that it will
be able to make reasonable  arrangements with the University.  If, however,  the
Company is unable to conclude negotiations with the University successfully, the
University  may seek to prohibit the  manufacture,  sale and use of the delivery
system  presently  configured  in the Sunrise  Corneal  Shaping  System.  If the
Company is forced to redesign the Sunrise Corneal Shaping System,  such redesign
efforts could be time consuming, expensive and prolong FDA review.

     In the event the Sunrise  Corneal  Shaping System is adjudged to infringe a
patent in a particular  market,  the Company and its  customers  may be enjoined
from  making,  selling,  and using such  system in such market or be required to
obtain  a   royalty-bearing   license,   if  available  on   acceptable   terms.
Alternatively,  in the event a license is not offered or available,  the Company
might be required  to redesign  those  aspects of the  Sunrise  Corneal  Shaping
System held to infringe so as to avoid  infringement.  Any redesign  could delay
reintroduction  of the  Company's  products into certain  markets,  or may be so
significant as to be  impractical.  If redesign  efforts were  impractical,  the
Company  could be  prevented  from  manufacturing  and  selling  the  infringing
products,  which would have a material adverse effect on the Company's business,
financial condition and results of operations.


ITEM 2.  FACILITIES

     The  Company  leases  26,000  square feet for all its  business  activities
including   executive   offices  as  well  as   engineering   and   development,
manufacturing,  assembly  and testing  activities  in Fremont,  California  at a
rental of approximately $26,000 per month, including expenses. The lease expires
in January 1998.


ITEM 3.  LEGAL PROCEEDINGS

                                    Not Applicable


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

                                    Not Applicable

                                       15
<PAGE>


                                     PART II

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

Market Information

     As of December 31, 1996,  there were 715 holders of record of the Company's
common stock.  Price  information for the Company's common stock may be obtained
from the OTC Bulletin  Board.  The table below sets forth the reported  high and
low bid quotations of the Company's common stock as reported on the OTC Bulletin
Board for the periods indicated.

                             Prices for Common Stock

         Quarter Ended                     Low Bid(1)       High Ask(1)
         -------------                     ----------       -----------
         
         March 31, 1995                      $0.69             $1.97
         
         June 30, 1995                       $0.56             $1.25
         
         September 30, 1995                  $0.50             $2.37
         
         December 31, 1995                   $0.94             $2.44
         
         March 31, 1996                      $1.34             $1.44
         
         June 30, 1996                       $1.13             $2.31
         
         September 30, 1996                  $0.88             $2.00
         
         December 31, 1996                   $0.81             $2.13
         
         March 31, 1997                      $0.75             $1.72

----------

(1)  Bid and ask prices are quoted on the OTC Bulletin  Board in  increments  of
     1/32.  Certain  of the bid and ask prices set forth in this table have been
     rounded to the nearest cent.

     On March 31,  1997,  the closing  price of the  Company's  common  stock as
reported on the OTC Bulletin Board was $1 3/16 (approximately  $1.19) per share.
The over-the-counter  market quotations provided herein may reflect inter-dealer
prices, without retail mark-up,  mark-down or commission and may not necessarily
represent actual transactions.

Dividends

     In the past three  years,  the  Company  has not  declared or paid any cash
dividend on the common stock.  Sunrise  currently  intends to retain any and all
future  earnings  to finance its  business.  Accordingly,  the Company  does not
anticipate paying cash or other dividends on its common stock in the foreseeable
future.

Recent Sales of Unregistered Securities

     The  Company  did not sell any  unregistered  securities  during the fourth
quarter of 1996.


                                       16

<PAGE>

<TABLE>
ITEM 6.  SELECTED FINANCIAL DATA

     The following table summarizes certain selected financial data derived from
the audited  financial  statements for the years ended December 31, 1992,  1993,
1994, 1995 and 1996.
<CAPTION>

                                                                               Year Ended December 31,
                                                                      (In thousands, except per share amounts)
                                                         -------------------------------------------------------------
                                                           1992         1993         1994         1995         1996
                                                           ----         ----         ----         ----         ----

<S>                                                      <C>          <C>          <C>          <C>          <C>     
              Net revenues                               $  8,550     $ 11,860     $  7,578     $  5,294     $  5,654

              Gross profit                                  3,604        5,009        1,340        1,637        1,638

              Purchase of in-process                        8,466         --           --           --           --
              technology

              Operating costs and expenses                 16,941       11,461        8,257        5,824        7,658

              Income (loss) from operations               (13,337)      (6,452)      (6,917)      (4,187)      (6,020)

              Income tax expense (benefit)                 (1,612)         232         --           --           --

              Net income (loss)                           (11,640)      (6,624)      (6,910)      (4,130)      (5,968)

              Net income (loss) per share                   (1.44)       (0.74)       (0.68)       (0.28)       (0.23)

              Shares used in calculation of                 8,111        8,955       10,129       14,935       26,414
              net income (loss) per share

              Total assets                                 10,339        5,511        3,822        6,689        3,741

              Long term obligations                            79           18         --           --           --

              Total stockholders' equity                    9,038        2,708        1,357        4,745        1,272

              Working capital                               7,877        1,965        1,101        4,541        1,073

</TABLE>

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

Overview

     The Company has  incurred  substantial  losses in the past five years which
have  seriously  depleted  its working  capital.  Sales of its  existing  dental
products at current  levels will not be  sufficient to sustain both the existing
business and the continued  development  and regulatory  licensing of additional
products  including the LTK system.  Historically,  the Company has been able to
raise  additional  working  capital for all aspects of its business  through the
private  placement  of  its  common  stock.   These  private  placements  raised
approximately  $15,546,000 in gross proceeds  (approximately  $15,296,000 in net
proceeds)  between 1994 and 1996 in new equity for the Company.  Pursuant to the
1997 Notes Placement, consisting of two-year convertible notes and warrants, the
Company raised approximately $3,743,740 in net procees.

     On March  12,  1997  the  Company  announced  that it had  entered  into an
agreement for the sale of the Dental Assets to Lares,  a privately  held company
located in Chico,  California,  pursuant  to which  Lares will pay the Company a
total of $5.5  million,  consisting  of $4.0 million in cash and $1.5 million in
notes  payable  over four  years.  The  transaction  is subject  to  stockholder
approval.

     Since  its  inception,   the  Company  has  generated   revenues  from  the
manufacture  and sale of laser  systems for  applications  in dental and medical
fields.  In 1994,  the Company  introduced  an air abrasive  cavity 

                                       17
<PAGE>

preparation system for the dental market.  After an initial period of commercial
success,   laser  product  sales  have   decreased   steadily  from  a  high  of
approximately  $20 million in 1991 to approximately  $2 million in 1996.  During
1996, the FDA Dental  Advisory  Panel voted to reject the Company's  application
for the  utilization of its dental laser  products for hard tissue  application,
which further limits the potential  market for these products.  The Company does
not anticipate significant increases in revenues from existing laser products in
1997.

     In 1992, the Company  acquired  patented  technology  covering the use of a
holmium laser to reshape the cornea,  which the Company  believes will be useful
in the  treatment  of  hyperopia,  presbyopia  and over  correction  from  photo
refractive keratectomy  (previously defined as "PRK"). The Company filed its PMA
Application  with the FDA in 1992 and commenced  Phase I clinical trials in that
year.  The FDA  approval  process is expected to continue  through at least 1999
with the cost of clinical studies increasing as the number of sites and patients
increases  during the period.  Although the Company has had limited sales of its
Corneal Shaping System outside the United States, significant revenues cannot be
expected  unless and until FDA  approval is obtained to market the system in the
United States.

     The following  table sets forth certain  operations data as a percentage of
net revenue for the periods indicated.



                                                    Year Ended December 31,

                                                   1996      1995     1994
                                                   ----      ----     ----


     Net Revenues                                   100%     100%     100%

     Cost of revenues                                71       69       82
                                                   ----------------------

     Gross profits                                   29       31       18
                                                   ----------------------

     Other costs and expenses:

          Engineering and development                24       23       20

          Sales, marketing and regulatory            64       43       50

          General and Administration                 48       44       39
                                                   ----------------------

     Total other costs and expenses                 135      110      109
                                                   ----------------------

     Loss from operations                          (106)     (79)     (91)

     Interest income, net of expense                  1        1     --
                                                   ----------------------

     Loss before taxes on income                   (105)     (78)     (91)

     Income tax expense (benefit)                  --       --       --
                                                   ----------------------

     Net Loss                                      (105%)    (78%)    (91%)
                                                   ======================



Revenues

     The Company's revenues have historically been comprised  primarily of sales
related  to its  dental  products  (98% in 1996,  76% in 1995 and 79% in  1994).
Revenues  fell from  $7,578,000  in 1994 to  $5,294,000  in 1995,  a decrease of
approximately  31%.  The  decrease  is  attributable  to reduced  demand for the
Company's  dental laser  products,  which was  partially  offset by sales of the
Company's dental air abrasive products,  first shipped in mid-1994.  The Company
had  achieved  significant  sales of dental  laser  products in Germany in 1994.
These sales levels in Germany were not achieved in later  periods.  During 1995,
the Company  terminated  its  relationship  with its  exclusive  distributor  in
Germany. Sales of the Company's ophthalmic products, primarily non-U.S. sales of
the Corneal Shaping System, were also lower in 1995 than 1994.  Non-dental sales

                                       18

<PAGE>

represented 20% of revenue in 1994 and 22% in 1995.

     Revenues  increased  from  $5,294,000  in 1995 to  $5,655,000  in 1996,  an
increase  of  approximately  7%.  Sales of  dental  laser  systems  during  1996
increased  slightly  from  prior  levels.  Sales  of  ophthalmic  products  were
insignificant in 1996 as the Company  concentrated its limited  resources on its
FDA clinical studies rather than overseas  marketing.  Significant  increases in
sales of the  Company's air abrasive  products  during 1996 more than offset the
decrease in sales of its ophthalmic products.  The introduction of the MicroPrep
Associate(R)  in the first quarter of 1996 provided the impetus for the increase
in sales of the air abrasive product line.

Gross Profit

     Gross  profit  margins  were  18%,  31%  and 29% in  1994,  1995  and  1996
respectively.  The 1995  improvement in gross profit,  when compared to 1994, is
attributed to introduction of the cost-reduced MicroPrep(R) Director,  increased
pricing though direct distribution and improved manufacturing efficiencies.

     Gross  profit  margins  decreased  in 1996 to 29%  primarily as a result of
increased  sales of dental  products  through  distributors  and the decrease in
sales of Corneal  Shaping  Systems which carry a higher gross margin than dental
products.

Engineering and Development

     Engineering  and  development  expenses  were  $1,561,000,  $1,218,000  and
$1,326,000 for the years ended 1994,  1995 and 1996,  respectively.  Engineering
and  development  expenses  decreased  by $343,000  in 1995,  due  primarily  to
completion of development of the MicroPrep(R) product.

     Engineering and development  increased by $108,000 in 1996 compared to 1995
due primarily to development costs associated with the CureStar curing system, a
dental product introduced in the first quarter of 1997.

Sales, Marketing and Regulatory

     Sales,  Marketing and Regulatory  expenses were $3,763,000,  $2,277,000 and
$3,632,000 for the years ended 1994, 1995 and 1996 respectively.

     The Company  currently  markets its ophthalmic  lasers and dental  products
through a small direct sales organization working with dealers, distributors and
manufacturer's  representatives  in the  United  States.  Distribution  for  all
products  internationally  is handled  through  distributors.  The  Company  had
thirteen  direct  sales  employees  at the end of 1995,  and three at the end of
1996.

     Sales,  Marketing and Regulatory  expenses decreased to $2,277,000 in 1995,
approximately a 40% reduction from the 1994 level. This reduction is principally
due to the lower international sales and marketing costs, including commissions,
as a result of decreased revenues in Germany.

     Sales, Marketing and Regulatory expenses increased in 1996 over 1995 by 60%
due primarily to incremental  costs  associated with the development of a direct
sales force late in 1995, the launch of the MicroPrep  Associate(R) in the first
quarter of 1996 and costs  associated  with the  expansion  of the Phase IIa FDA
ophthalmic clinical studies (see "Business") and FDA review of the Company's PMA
submitted for use of its dental lasers for hard tissue applications.

General and Administrative

     General  and  administrative  expenses  were  $2,933,000,   $2,329,000  and
$2,700,000 for the years ended 1994, 1995 and 1996, respectively.

     The Company's  general and  administrative  expenses  consist  primarily of
product  liability  and  officer  and  director  liability  insurance  premiums;
accounting,  legal and other fees related to financial transactions,  patent

                                       19
<PAGE>

and general  corporate  matters,  and  litigation as well as provisions  for the
Company's allowance for bad debts. General and Administrative expenses decreased
to $2,329,000 in 1995,  approximately  a 20% reduction from the 1994 level,  due
primarily to reduction in legal and accounting fees associated with litigation.

     General  and  administrative  expenses in 1996  increased  compared to 1995
primarily  as a result of costs  associated  with the  proposed  acquisition  of
EyeSys  Technologies  and  the  development  of a new  management  team  for the
ophthalmic business.


Income taxes

     At  December  31,  1996 and 1995,  all  deferred  tax  assets  computed  in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", have been fully offset by a valuation allowance.

     As of December  31,  1996,  the Company  had  federal  net  operating  loss
carry-forwards  of approximately  $25,000,000.  The ownership  provisions of the
Internal Revenue Code of 1986 would limit the utilization of the  carry-forwards
should there be a substantial change in the Company's ownership.


Net loss

     The Company  reported  losses of  $6,910,000,  $4,130,000 and $6,020,000 in
1994, 1995 and 1996, respectively.

     The net loss in 1994 was due principally to a severe drop in laser sales in
both the domestic and international market place and a decrease in foreign sales
of dental lasers. Somewhat offsetting these reductions were the initial sales of
the MicroPrep(R) and across-the-board reductions in operating expenses.

     The net loss in 1995 was due  principally  to the  continued  low  level of
sales,  excess  manufacturing  capacity and the  Company's  need to maintain the
basic  sales,  marketing,  regulatory  and  corporate  infrastructure.  Although
across-the-board  operating expense  reductions  totaled $2,433,000 in 1995 when
compared to 1994, the reductions do not offset the low level of sales volume.

     The net loss in 1996 was due primarily to increased selling,  marketing and
product development costs required to grow the business. A new sales, marketing,
and  regulatory  team was hired to focus on sales of the Corneal  Shaping System
outside the United  States and FDA  clinical  trials were  expanded,  along with
expansion of clinical research, to further advance the technology.

Liquidity and Capital Resources

     As of  December  31,  1996  the  Company  had  $647,000  in cash  and  cash
equivalents.  The Company's operating  activities used $5,297,000 in cash during
1996.  This was funded from the  reduction of cash and $2.2 million net proceeds
received from a common stock private placement in August, 1996.

     Working  capital  amounted to $4,541,000 at December 31, 1995 and decreased
to $1,073,000 at December 31, 1996. The overall  reduction in working capital is
consistent with the current year loss and fund raising activity.

     The Company's current operations continue to be cash flow negative, further
straining the Company's working capital resources.  The level of current product
sales is not sufficient to provide enough cash to pursue the Dental Business and
support  ongoing   development  and  regulatory  approval  of  the  LTK  system.
Management's  plans  include  selling the Dental  Assets and field of use rights
related to its Dental Business. If successful

                                       20
<PAGE>

in selling the Dental Assets,  the Company will focus on further  developing and
seeking regulatory  approval of its ophthalmic  related products.  Such approval
may take several  years.  Although  dental  related sales have  represented  the
majority  of  historical  sales  (98% in  1996,  76% in 1995  and 79% in  1994),
management's  strategic  plan is to use the proceeds from the sale of the Dental
Assets and the 1997 Notes Placement to further develop the ophthalmic  products,
specifically the Sunrise Corneal Shaping System.  There can be no assurance that
the Company will successfully consummate the sale of the dental assets, which is
subject to stockholder approval. There can also be no assurance that the Corneal
Shaping  System  will  receive  regulatory  approval  and  the  Company  will be
successful in  developing,  manufacturing,  and  marketing  the Corneal  Shaping
System or other ophthalmic related products.

     In February and March 1997 the Company completed  private  placements of 5%
convertible  notes due 1999  (convertible  into  common  stock) and  warrants to
purchase common stock, for aggregate net proceeds of approximately $3.7 million.
Management believes the net proceeds from the 1997 Notes Placement and cash from
the expected  sale of the Dental  Assets will provide  sufficient  funds for the
Company's planned  operations for 1997. Should the sale of the Dental Assets not
be  successfully  completed,  the  Company may need to seek  additional  debt or
equity financing.  There can be no assurance that such financing,  if necessary,
will be  available,  in which  case  management  may need to  curtail or suspend
certain or all operations.



ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Consolidated  balance sheets at December 31, 1996 and 1995, and the related
consolidated  statements of operations,  stockholders'  equity and cash flow for
each of the three  years in the period  ended  December  31,  1996 and the notes
thereto appear as noted in the index listed under Item 14(a).


ITEM 9: CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE
                                 Not Applicable

                                       21
<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The section entitled "Directors And Executive Officers" in the Registrant's
Proxy Statement to be filed not later than April 30, 1997 ("Proxy Statement") is
incorporated herein by reference.



ITEM 11. EXECUTIVE COMPENSATION

     The section  entitled  "Executive  Compensation"  in the Proxy Statement is
incorporated herein by reference.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The section entitled "Security  Ownership of Certain Beneficial Owner's and
Management" in the Proxy Statement is incorporated herein by reference.



ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The section entitled "Certain  Relationships  and Related  Transactions" in
the Proxy Statement is incorporated herein by reference.


                                       22
<PAGE>
                                     PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
     1.   Financial Statements

         The following documents are filed as part of this report:
                                                                  Page in this
                                                                Annual Report on
                                                                   Form 10-K
                                                                    ---------
       Report of Ernst & Young LLP, Independent Auditors               25
       Consolidated Balance Sheets - December 31, 1995 and 1996        26
       Consolidated Statements of Operations*                          27
       Consolidated Statement of Stockholders' Equity*                 28
       Consolidated Statements of Cash Flows*                          29
       Notes to Consolidated Financial Statements                      30

       *For the years ended December 31, 1996, 1995, 1994

     2.  Financial Statement Schedules

         The following  financial  statement  schedule is filed as
part of this report:

         Schedule II - Valuation and qualifying accounts               38

         All other  schedules  have been omitted as they are not  required,  not
         applicable,  or the required  information  is included in the financial
         statements or notes thereto.

 3.   Exhibits

Exhibit           Description
-------           -----------

    2          Plan of Acquisition, Reorganization,  Arrangement, Liquidation or
               Succession

  2.1             Asset  Purchase  Agreement  dated as of March 26, 1997, by and
                  among Sunrise and Lares Research, a California corporation

  3            Charter Documents

  3.1             Certificate of Incorporation, as amended (1)

  3.2             Bylaws (1)

    4          Instruments Defining the Rights of Security Holders

  4.1             Form of 5% Convertible Notes due 1999 (6)

  4.2             Form of Security  Agreement  relating to 5% Convertible  Notes
                  due 1999 (6)

  4.3             Form of Registration Rights Agreement (6)

  4.4             Form of Warrant issued to Pennsylvania Merchant Group (4)

    10         Material Contracts

  10.1            Lease  Agreement  with  Bayside  Spinnaker  Partners  III,  as
                  lessor,   for  the  lease  of   facilities  at  47257  Fremont
                  Boulevard, Fremont, California, dated July 16, 1991 (2)

  10.2            Patent   License   Agreement   between   Sunrise   and  Patlex
                  Corporation dated January 1, 1990 (3)

  10.3            Agreement   between  Sunrise  and  the  University  of  Miami,
                  Department of Ophthalmology, dated October 28, 1991 (2)

  10.4            Joint Development and Exclusive  Manufacturing Agreement dated
                  April 17, 1993 between Sunrise and Danville Engineering,  Inc.
                  (1)

  10.5            Settlement  Agreement  between  Sunrise  and  American  Dental
                  Laser,  Inc., dated February 4, 1993  (confidential  treatment
                  has previously been granted for portions of this exhibit) (4)

  10.6            License  Agreement  between Sunrise and American Dental Laser,
                  Inc.,  dated  February  4, 1993  (confidential  treatment  has
                  previously been granted for portions of this exhibit) (4)

  10.7            Settlement  Agreement with between Sunrise and American Dental
                  Technologies, dated July 30, 1996

 *10.8            Form of Indemnification  Agreement between Sunrise and each of
                  its officers and directors (3)

                                       23

<PAGE>

 *10.9            1988 Stock Option Plan, as amended (5)

 *10.10           Employment  Agreement  entered into between Sunrise and Joseph
                  W. Shaffer, dated April 5, 1989 (5)

  10.11           Form of U.S. Note and Warrant Purchase  Agreement  relating to
                  the Regulation D private placement of 5% convertible notes due
                  1999 and warrants in February and March 1997

  10.12           Form of Offshore Note and Warrant Purchase  Agreement relating
                  to the Regulation S private  placement of 5% convertible notes
                  due 1999 and warrants in March 1997

    11         Statement regarding Computation of Per Share Loss

  11.1            Statement  regarding  computation  of per  share  loss for the
                  years ended December 31, 1996, 1995 and 1994

    21         Subsidiaries of Registrant

  21.1            Subsidiaries of Sunrise

    22         Power of Attorney  (included on the signature  pages to this Form
               10-K)

    23         Consents of Experts

  23.1            Consent of Ernst & Young LLP, Independent Auditors

    27         Financial Data Schedule


----------

  *      Compensatory plan or management contract

  (1)    Incorporated by reference from the  registrant's  Annual Report on Form
         10-K for the year ended December 31, 1994 (File No. 0-17816)

  (2)    Incorporated by reference from the  registrant's  Annual Report on Form
         10-K for the year ended December 31, 1991 (File No. 0-17816)

  (3)    Incorporated by reference from the registrant's  Registration Statement
         on Form S-1, as amended (File No. 33-36768)

  (4)    Incorporated by reference from the  registrant's  Annual Report on Form
         10-K for the year ended December 31, 1992 (File No. 0-17816)

  (5)    Incorporated by reference from the registrant's  Registration Statement
         on Form S-18, as amended (File No. 33-27029-LA)

  (6)    Incorporated by reference from the registrant's  Current Report on Form
         8-K dated March 12, 1997 (File No. 0-17816)

Reports on Form 8-K

No reports  on Form 8-K were  filed by the  Company  during  the  quarter  ended
December 31, 1996.

                                       24

<PAGE>



                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS





The Board of Directors and Stockholders
Sunrise Technologies International, Inc.


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

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

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

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that Sunrise Technologies International,  Inc. will continue as a going
concern.  As more fully described in Note 1, the Company has incurred  recurring
operating  losses.  This condition raises  substantial doubt about the Company's
ability to continue as a going  concern.  Management's  plans in regard to these
matters are also described in Note 1. The consolidated  financial  statements do
not  include  any  adjustments  to reflect the  possible  future  effects on the
recoverability and  classification of assets or the amounts and  classifications
of liabilities that may result from the outcome of this uncertainty.



                                                /s/ Ernst & Young LLP
                                                -----------------------
                                                Ernst & Young LLP


Palo Alto, California
March 10, 1997


                                       25

<PAGE>

                    SUNRISE TECHNOLOGIES INTERNATIONAL, INC.

                           Consolidated Balance Sheets

                                                               December 31,
                                                            1996        1995
                                                         -----------------------
                                                              (In thousands)
                                                         -----------------------
Assets
Current assets:
    Cash and cash equivalents                            $     647    $   3,514
    Accounts receivable, net of allowance of
     $ 140,000 and $25,000 in 1996 and 1995                    472        1,048
    Inventories                                              2,135        1,666
    Prepaid expenses                                           288          257
                                                         -----------------------
Total current assets                                         3,542        6,485

Property and equipment, net                                    199          204
                                                         -----------------------
Total assets                                             $   3,741    $   6,689
                                                         =======================

Liabilities and stockholders' equity
Current liabilities:
    Accounts payable                                     $   1,586    $   1,097
    Accrued payroll and related expenses                       209          181
    Accrued warranty                                           199          324
    Other accrued expenses                                     475          342
                                                         -----------------------
Total current liabilities                                    2,469        1,944

Commitments and contingencies

Stockholders' equity:
    Preferred Stock, $0.001 par value; 2,000,000 
    shares authorized, none issued or outstanding               --           --
    Common stock, $0.001 par value; 40,000,000 shares
        authorized, 27,868,613 and 25,279,716 shares 
        issued and outstanding at December 31, 1996 
        and 1995, respectively                                  28           25
    Additional paid-in-capital                              31,688       29,196
    Accumulated deficit                                    (30,444)     (24,476)
                                                         -----------------------
Total stockholders' equity                                   1,272        4,745
                                                         -----------------------
Total liabilities and stockholders' equity               $   3,741    $   6,689
                                                         =======================


                             See accompanying notes.

                                       26
<PAGE>


                    SUNRISE TECHNOLOGIES INTERNATIONAL, INC.

                      Consolidated Statements of Operations





                                                    Years ended December 31,
                                                 1996        1995        1994
                                              ---------------------------------
                                        (In thousands, except per share amounts)

Net revenues                                   $  5,654    $  5,294    $  7,578

Cost of revenues                                  4,016       3,657       6,238
                                              ---------------------------------
Gross profit                                      1,638       1,637       1,340
                                              ---------------------------------
Other costs and expenses:

  Engineering and development                     1,326       1,218       1,561

  Sales, marketing and regulatory                 3,632       2,277       3,763

  General and administrative                      2,700       2,329       2,933
                                              ---------------------------------

Total other costs and expenses                    7,658       5,824       8,257
                                              ---------------------------------

Loss from operations                             (6,020)     (4,187)     (6,917)

Interest income, net of expense                      52          57           7
                                              ---------------------------------

Net loss                                       $ (5,968)   $ (4,130)   $ (6,910)
                                              =================================

Net loss per share                             $  (0.23)   $  (0.28)   $  (0.68)
                                              =================================

Shares used in calculation of net loss per
  share                                          26,414      14,935      10,129
                                              =================================



                             See accompanying notes.

                                       27
<PAGE>

<TABLE>

                                              SUNRISE TECHNOLOGIES INTERNATIONAL, INC.

                                           Consolidated Statement of Stockholders' Equity
                                                 Three Years ended December 31, 1996
<CAPTION>

                                                        Common Stock                    Additional                  Total
                                                  -----------------------   Paid-In     Treasury   Accumulated  Stockholders'
                                                      Shares      Amount    Capital       Stock      Deficit        Equity
                                                  ---------------------------------------------------------------------------
                                                                                      (In thousands, except share amounts)


<S>                                                  <C>          <C>     <C>              <C>       <C>         <C>        
Balance at December 31, 1993                         9,008,293    $   9   $16,135          $ --      $(13,436)   $  2,708

     Sale of common stock, net of offering costs     1,250,000        1     5,507            --           --        5,508

     Exercise of warrants and options                  200,993     --         670            --           --          670

     Treasury stock acquired through sale of
       surgical laser business                            --       --        --             (619)         --         (619)

     Net loss                                             --       --        --              --        (6,910)     (6,910)
                                                  ---------------------------------------------------------------------------

 Balance at December 31, 1994                       10,459,286       10    22,312           (619)     (20,346)      1,357

     Sale of common stock, net of offering costs    15,100,000       15     7,528            --           --        7,543

     Cancellation of treasury stock                   (275,000)    --        (619)           619          --         --

     Other                                              (4,570)    --         (25)           --           --          (25)

     Net Loss                                             --       --        --              --        (4,130)     (4,130)
                                                  ---------------------------------------------------------------------------

Balance at December 31, 1995                        25,279,716       25    29,196            --       (24,476)      4,745

     Sale of common stock, net of offering costs     2,333,412        3     2,242            --           --        2,245

     Exercise of warrants and options                  243,252     --         243            --           --          243

     Other                                              12,233     --           7            --           --            7

     Net Loss                                             --       --        --              --        (5,968)     (5,968)
                                                  ---------------------------------------------------------------------------
Balance at December 31, 1996                        27,868,613    $  28   $31,688          $ --      $(30,444)   $  1,272
                                                  ===========================================================================

<FN>

                                                       See accompanying notes.
</FN>
</TABLE>
                                                                 28

<PAGE>

                    SUNRISE TECHNOLOGIES INTERNATIONAL, INC.

                      Consolidated Statements of Cash Flows
                Increase (decrease) in cash and cash equivalents


                                                     Years ended December 31,
                                                    1996      1995       1994
                                                 -------------------------------
                                                          (In thousands)

Cash flows from operating activities
Net                                               $(5,968)   $(4,130)   $(6,910)
Adjustments to reconcile net loss
 to net cash used in operating activities:
Depreciation and amortization                         438        102        469
Provision for doubtful accounts                       115         25       --
Changes in assets and liabilities:
    Accounts receivable                               461       (303)       777
    Inventories                                      (837)       289        (68)
    Prepaid expenses                                  (31)        25        (69)
    Accounts payable                                  489       (278)    (1,091)
    Accrued payroll and related expenses               28         31         68
    Accrued warranty                                 (125)      --          181
    Other accrued expenses                            133       (256)       571
                                                 -------------------------------
Total adjustments                                     671       (365)       838
                                                 -------------------------------
Net cash used in operating activities              (5,297)    (4,495)    (6,072)

Cash flows from investing activities
Purchase of property and equipment                    (65)       (50)       (22)
                                                 -------------------------------
    Net cash used in investing activities             (65)       (50)       (22)
                                                 -------------------------------
Cash flows from financing activities
Payment on capital lease obligations                 --          (18)       (61)
Issuance of common stock, net of offering costs     2,495      7,518      6,178
                                                 -------------------------------
Net cash provided by financing activities           2,495      7,500      6,117
                                                 -------------------------------
Net increase (decrease) in cash and equivalents    (2,867)     2,955         23
Cash and cash equivalents at beginning of period    3,514        559        536
                                                 -------------------------------
Cash and cash equivalents at end of period        $   647    $ 3,514    $   559
                                                 ===============================


                             See accompanying notes.


                                       29

<PAGE>


                    SUNRISE TECHNOLOGIES INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1996

1.   Organization and Summary of Significant Accounting Policies

     Organization and Nature of Business

     Sunrise   Technologies   International,   Inc.  (the  "Company")  develops,
manufactures  and markets laser systems and other products for  applications  in
ophthalmology  and  dentistry.   The  Company  was  organized  as  a  California
corporation  in March 1987 and was  reincorporated  in  Delaware in June 1993 as
Sunrise  Technologies  International,  Inc. The Company continues to do business
under the name Sunrise Technologies, Inc.


     Basis of Presentation

     The consolidated  financial  statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of all material intercompany
balances and  transactions.  Certain  reclassifications  have been made to prior
year amounts in order to conform to the current presentation.

     The Company has incurred  significant losses for the last several years and
at December 31, 1996 has an accumulated deficit of $30,444,000. The accompanying
financial  statements have been prepared assuming the Company will continue as a
going concern. The Company's ability to continue as a going concern is dependent
upon performing  profitably or obtaining further  financing.  Management's plans
include selling assets and field of use rights related to its dental operations.
If  successful  in selling the dental  assets the company  will focus on further
developing and seeking  regulatory  approval of its ophthalmic related products.
Such  approval  may take  several  years.  Although  dental  related  sales have
represented  the majority of historical  sales (98% in 1996, 76% in 1995 and 79%
in 1994),  management's  strategic  plan is to use the proceeds from the sale of
the dental assets and debenture offering in March of 1997 to further develop the
ophthalmic products,  specifically the Sunrise Corneal Shaping System. There can
be no assurance  that the Company will  successfully  consummate the sale of the
dental assets,  which is subject to stockholder  approval.  There can also be no
assurance that the Corneal Shaping System will receive  regulatory  approval and
the Company will be successful in developing,  manufacturing,  and marketing the
Corneal Shaping System or other ophthalmic related products.

     In March 1997 the  Company  completed  a private  placement  consisting  of
two-year   convertible   notes  and  warrants   resulting  in  net  proceeds  of
approximately  $3.7  million.  Management  believes  the net  proceeds  from the
convertible  debenture  offering and cash from the  expected  sale of the dental
assets will provide  sufficient funds for the Company's  planned  operations for
1997.  Should the sale of the dental  assets not be  successfully  completed the
Company may need to seek  additional debt or equity  financing.  There can be no
assurance that such financing,  if necessary,  will be available,  in which case
management may need to curtail or suspend certain or all operations.


     Industry Segment and Concentration of Risk

     The  Company,  which  operates  in  a  single  industry  segment,  designs,
manufactures,  markets and services medical laser and air abrasive systems.  The
Company sells its products to customers in the medical industries globally.  The
Company performs ongoing credit  evaluations of its customers and generally does
not require  collateral.  The Company  maintains  reserves for potential  credit
losses and such losses have been within management's expectations.  One customer
accounted for 16%, 21% and 57% of revenues in 1996, 1995 and 1994 respectively.

     Financial   instruments   which   potentially   subject   the   Company  to
concentration  of credit risk consist  principally of cash investments and trade
receivables.  The Company  invests its excess cash in deposits with major banks,
in U.S. Treasury and U.S. Agency obligations.

                                       30

<PAGE>

     Concentration of Other Risks

     The  Company's  operating  results  each  quarter  are  subject  to various
uncertainties as discussed in the Company's Annual Report on Form 10-K for 1996,
including  uncertainties  related to the composition,  timing and size of orders
from the shipments to major customers,  variations in product mix and variations
in product cost and competitive pressures.

     Inventories:  Most  components used in the Company's air abrasive and laser
systems are  purchased  from  outside  sources.  Certain  components  in the air
abrasive systems are currently purchased from a single supplier.  The failure of
such supplier to meet its commitment on schedule  could have a material  adverse
effect on the Company. If the sole source supplier were to go out of business or
otherwise become unable to meet its supply commitments,  the process of locating
and qualifying alternate sources could require up to several months during which
time the  Company's  production  could be delayed.  Such delays could  adversely
affect the Company's business and financial results.

     International Operations:  Sunrise's international business is an important
contributor to the Company's net revenues and gross profits.  Substantially  all
of  Sunrise's  international  sales are  denominated  in the U.S.  dollar and an
increase in the value of the U.S.  dollar relative to foreign  currencies  could
make products sold internationally  less competitive.  The Company does not have
any overseas offices.


     Use of Estimates

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


     Cash and Cash Equivalents

     Cash consists of cash on deposit with banks and highly  liquid  investments
with a maturity from the date of purchase of 90 days or less. As of December 31,
1996 and  1995,  the  Company  did not hold any  investments  in debt or  equity
securities.


     Inventories

     Inventories  are  stated  at the  lower of cost  (first-in,  first-out)  or
market. Inventory at December 31, consists of:



                                           1996              1995
                                    --------------------------------
                                               (In thousands)
             Raw materials                $1,180              $909

             Work-in-process                 299               237

             Finished goods                  656               520
                                    --------------------------------

                                          $2,135            $1,666
                                    ================================


     Property and Equipment

     Property  and  equipment  is  stated  at cost  and  depreciated  using  the
straight-line  method for financial 

                                       31

<PAGE>

reporting  over  estimated  useful  lives  of two to five  years.  Assets  under
capitalized  leases are  amortized  over the shorter of the term of the lease or
their useful lives, and such amortization is included with depreciation expense.
Property and equipment at December 31, consists of:


                                                       1996              1995
                                                 ------------------------------
                                                              (In thousands)

             Machinery and equipment                 $1,644            $1,412

             Computer Equipment                         611               599

             Furniture and fixtures                     207               207

             Leasehold improvements                     392               167
                                                 ------------------------------
                                                      2,854             2,385

             Less accumulated depreciation and       (2,655)           (2,181)
             amortization
                                                 ------------------------------
                                                       $199              $204
                                                 ==============================


     Net Loss Per Share

     Net loss per share for the years ended December 31, 1996,  1995 and 1994 is
based solely on weighted average shares of common stock  outstanding  during the
period.  Common  equivalent  shares have not been  considered in the computation
since their inclusion would have an anti-dilutive effect.


     Revenue Recognition

     Revenues are recognized at time of shipment.  A provision for the estimated
future cost of warranty is made at the time a sale is recorded.

     Export Sales

     The Company had export sales by region as follows:


                                       1996              1995            1994
                               -----------------------------------------------
                                                    (In thousands)

             Europe                  $1,036            $1,948          $4,291

             Pacific Rim              1,602             1,192             139

             Canada                    ----               248             393

             Other                     ----               282             363
                               -----------------------------------------------

                 Total               $2,638            $3,670          $5,186
                               ================================================

                                       32
<PAGE>

2.   Taxes on Income

     As of December  31, 1996,  the Company had federal and state net  operating
loss carryforwards of approximately  $24,600,000 and $11,000,000,  respectively.
The federal  net  operating  loss  carryforwards  will  expire at various  dates
beginning on 2007 through 2011. The state net operating loss  carryforwards will
expire at various dates through 2001.

     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amount used for income tax purposes.

     Significant  components of the Company's deferred tax assets as of December
31 are as follows:


                                                     1996                1995
                                             ---------------------------------
                                                      (In thousands)

Deferred tax assets:

     Net operating loss carry-forwards             $9,000              $7,175

     Research credits (expire 2007-2011)              600                 642

     Other                                            600                 949
                                             ---------------------------------

Total deferred tax assets                          10,200               8,766

Valuation allowance for deferred tax assets       (10,200)             (8,766)
                                             ---------------------------------

Net deferred tax assets                        $     ----          $     ----
                                             =================================


     Because of the Company's lack of earnings history,  the deferred tax assets
have been  fully  offset  by a  valuation  allowance.  The  valuation  allowance
increased by $1,928,000 during the year ended December 31, 1995.

     Utilization  of the net  operating  losses and  credits may be subject to a
substantial  annual  limitation  due to the ownership  change  provisions of the
Internal  Revenue  Code  of  1986.  The  annual  limitation  may  result  in the
expiration of net operating losses and credits before utilization.



3.  Commitments and Contingencies

     Leases

     The  Company  leases  certain  of its  facilities  and  equipment  under  a
non-cancelable operating lease. Rent expense was $299,000, $281,000 and $279,000
in 1996, 1995 and 1994, respectively.

     Future  minimum  lease  payments  under the lease are  $255,000 in 1997 and
$21,000 in 1998.

     Litigation Settlements

     In July 1996, the Company  settled all of its  outstanding  litigation with
ADT. The material terms of the settlement are as follows:

     (a)  The  Company  waived its rights to  collect a  judgment  for  $940,000
          obtained  against  ADT in a prior case,  which had been  subject to an
          appeal by ADT.

     (b)  The Company  obtained a  non-exclusive  license to certain ADT patents
          covering air abrasion systems used in dental applications.

     (c)  The Company will pay ADT a royalty of 7% on all air abrasion  products
          shipped after December 31, 1996.


                                       33

<PAGE>

     (d)  If the Company sells its dental air abrasion  assets before July 1998,
          it must pay to ADT a transfer  fee on the amount  received for the air
          abrasion assets.


4.   Stockholders' Equity

     Common Stock

     As of December 31,  1996,  there  remains  38,340  outstanding  warrants to
purchase  common stock which were issued in connection  with the  acquisition of
Laser Biotech,  Inc. in April 1992. The exercise  prices of these warrants range
from $3.70 to $9.26 per share.

     In conjunction with a 1992 private placement,  the placement agent received
a warrant to purchase  25,000  shares of common  stock for $8.05 per share.  The
warrant is exercisable at any time prior to August 28, 1997.

     In February  1994, the Company  completed a private  placement of 1,250,000
shares of common stock. In connection with the private placement,  the placement
agent received a warrant to purchase 62,500 shares of common stock. The exercise
price for these warrants is $6.00 per share and they are exercisable at any time
before February 8, 1999.

     In June 1995, the Company completed a private placement of 2,100,000 shares
of common stock.

     In September 1995, the Company  completed a private placement of 13,000,000
shares of common stock. In connection with the private placement,  the placement
agent  received  a warrant  to  purchase  675,000  shares of common  stock.  The
exercise price for these warrants is $0.55 per share and they are exercisable at
any time before September 6, 2000.

     In August  1996,  the Company  completed a private  placement  of 2,334,000
shares of common stock. In connection with the private placement,  the placement
agent  received  a warrant  to  purchase  116,721  shares of common  stock.  The
exercise price for these warrants is $1.06 per share and they are exercisable at
any time between August 7, 1997 and August 7, 2001.

     As of  December  31,  1996,  there were  warrants  outstanding  to purchase
917,561 shares of common stock.


     Stock Option Plan

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

     In 1988, the Company  adopted the 1988 Stock Option Plan (the "Plan") under
which  employees,   directors  and  consultants  may  be  granted  incentive  or
non-statutory  stock options.  Under the Plan,  incentive  stock options must be
granted  at an  exercise  price of not less  than the fair  market  value of the
common stock at the date of grant,  except that options  granted to shareholders
owning greater than 10 percent of the total voting power of all classes of stock
of the Company  must have an exercise  price of not less than 110 percent of the
fair market value at the date of grant.  Non-statutory  options must be at least
85 percent of fair market value at the date of grant.  Options granted generally
provide that 25 percent of the shares  subject  thereto become  exercisable  one
year  after the date of grant and 1/36 of the  remaining  shares  subject to the
option become exercisable each month thereafter. The Plan expires in 1998.

                                       34
<PAGE>

<TABLE>
     The following  table  summarizes  the Company's  stock option  activity and
related information for the three years ended December 31, 1996:
<CAPTION>

                                                       Outstanding Options
                                  ------------------------------------------------------------
                                           Shares
                                   Available  For                                       Share
                                            Grant                Shares                 Price
<S>                                    <C>                   <C>                <C>  
Balance, December 31, 1993                415,350               771,900         $0.75 - $8.50

Shares reserved                           440,000                  ----                  ----

Granted                                (1,168,214)            1,168,214                 $2.00

Exercised                                    ----              (189,561)        $0.75 - $5.63

Canceled                                  582,339              (582,339)        $1.25 - $8.50
                                  ------------------------------------------------------------

Balance, December 31, 1994                269,475             1,168,214         $0.75 - $2.00

Shares reserved                         1,550,000                  ----                  ----

Granted                                (1,633,331)            1,633,331         $0.97 - $2.50

Exercised                                    ----                  ----                  ----

Canceled                                1,497,381            (1,497,381)                $1.00
                                  ------------------------------------------------------------

Balance, December 31, 1995              1,683,525             1,304,164         $0.75 - $2.50

Shares reserved                              ----                  ----                  ----

Granted                                (1,816,000)            1,816,000                 $1.11*

Exercised                                    ----              (243,252)                $1.00*

Canceled                                  389,474              (389,474)                $1.44*
                                  ------------------------------------------------------------

Balance, December 31, 1996                256,999             2,487,438                 $1.03*
                                  ============================================================

<FN>
*  Represents the weighted average exercise price for the applicable options.
</FN>
</TABLE>


The following table summarizes  information  about stock options  outstanding at
December 31, 1996:


                                    Options Outstanding and Exercisable
                         -------------------------------------------------------
                                              Weighted
                                              Average               Weighted
                           Number            Remaining              Average
                         Outstanding        Contractual             Exercise
                                                Life                 Price
                                              (Years)


$0.75 - $1.00                  748,604          4.0                  $1.00

$1.01 - $1.25                1,695,834          3.8                  $1.05

$1.26 - $1.50                   38,000          1.0                  $1.49

$1.51 - $1.75                    5,000          1.0                  $1.63
                         -------------------------------------------------------

                             2,487,438          3.8                  $1.03
                         =======================================================


     As of December 31, 1996 and 1995,  options to purchase  680,248 and 472,840
shares  respectively  were 

                                       35

<PAGE>

exercisable.  In 1995,  1,058,331  options to purchase  shares were  reissued at
$1.00  per  share  under  an  option  exchange  program.   During  1994  options
outstanding were canceled and reissued under an option exchange program.

     Pro forma information regarding net loss and net loss per share is required
by FAS 123,  which also  requires that the  information  be determined as if the
Company has  accounted  for its employee  stock  options  granted  subsequent to
December 31, 1994 under the fair value method of that Statement.  The fair value
for these  options was  estimated  at the date of grant using the  Black-Scholes
pricing model with the following weighted-average assumptions for 1996 and 1995,
respectively:  risk-free  interest  rates of 5.7% and 5.6%;  no dividend  yield;
volatility factors of the expected market price of the Company's common stock of
0.955; and expected life of the options of 4.8 years.

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

     For  purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the options' vesting period.  The Company's
pro forma information follows:


                                                        For the Years Ending
                                                            December 31,

                                                        1996               1995
                                         --------------------------------------
                                        (In thousands, except per share amounts)


          Pro forma net loss                          $6,390             $4,220

          Pro forma net loss per share                 $0.24              $0.28


     The weighted  average grant date fair value of options  granted during 1996
and 1995 were $0.74 and $0.89 respectively.

     Because  FAS  123 is  applicable  only to  options  granted  subsequent  to
December 31, 1994, its pro forma effect will not be fully reflected until fiscal
1997. The effects on pro forma disclosures of applying FAS 123 are not likely to
be representative of the effects on pro forma disclosures in future years.


     Employee Stock Purchase Plan

     In June 1992,  the Company  adopted the 1992 Employee  Stock  Purchase Plan
under which 200,000 shares have been reserved for issuance.  Eligible  employees
may purchase common stock at 85 percent of the lower of the closing price of the
stock on the  offering  date or the  exercise  date  determined  by the Board of
Directors.  Purchases are limited to 10 percent of each employee's compensation.
There were 40,656 and 34,689  shares  issued  under the plan as of December  31,
1996 and 1995, respectively.

                                       36
<PAGE>

5.  Supplemental Statement of Cash Flows Information



                                            1996           1995        1994
                                      --------------------------------------
                                                  (In thousands)

Cash received during the year for:

Interest                                      52           ----        ----




6.  Events Subsequent to Date of Auditor's Report (Unaudited)

     On March 25,  1997,  the  Company  signed an  agreement  to sell its dental
assets to Lares  Research.  Consideration  for the sale will be $4.0  million in
cash on completion, $1.0 million in an 8% interest bearing note receivable three
years  from the date of  closing  and $0.5  million  in an 8%  interest  bearing
promissory note four years from the date of closing. This transaction is subject
to stockholder approval and other conditions.


                                       37
<PAGE>

<TABLE>

                                              SUNRISE TECHNOLOGIES INTERNATIONAL, INC.

                                           SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>


                                                                              Additions                                             
                                                               Balance at    Charged to                                   Balance at
                                                               Beginning     Costs and                                       End    
                                                               of Period      Expenses      Deductions      Other(A)       of Period
                                                               ---------------------------------------------------------------------
                                                                                            (In thousands)
<S>                                                             <C>         <C>             <C>            <C>               <C> 
Year ended December 31, 1994
Reserves and allowances deducted from assets accounts:

  Allowance for uncollectible accounts                          $981        $  ----         $ ----         $(531)            $450

  Allowance for inventory                                       $886        $  ----         $ ----         $(373)            $513



Year ended December 31, 1995
Reserves and allowances deducted from assets accounts:

  Allowance for uncollectible accounts                           $450            $25         $(450)          $----            $25

  Allowance for inventory                                        $513           $250         $(295)          $----           $468



Year ended December 31, 1996
Reserves and allowances deducted from assets accounts:

  Allowance for uncollectible accounts                           $25           $115           ----          $----            $140

  Allowance for inventory                                       $468          $----         $(118)          $----            $350




<FN>
(A) Amounts relate to valuation allowance assigned to disposed assets.
</FN>
</TABLE>

                                                                 38


<PAGE>


                    SUNRISE TECHNOLOGIES INTERNATIONAL, INC.

                                   SIGNATURES

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

Date: April 10, 1997

                                  SUNRISE TECHNOLOGIES INTERNATIONAL, INC.

                                  By:      /s/ David W. Light
                                           ----------------------------
                                           Chairman and Chief Executive Officer

                                POWER OF ATTORNEY

     Each of the officers and directors of Sunrise  Technologies  International,
Inc.  whose  signature  appears below hereby  constitutes  and appoints David W.
Light  and  Joseph  W.  Shaffer,  and  each  of  them,  their  true  and  lawful
attorneys-in-fact and agents, with full power and substitution,  each with power
to act alone,  to sign and execute on behalf of the undersigned any amendment or
amendments to this Report on Form 10-K,  and to perform any acts necessary to be
done in order to file such amendment,  and each of the  undersigned  does hereby
ratify and confirm all that such  attorneys-in-fact  and agents, or their or his
substitutes, shall do or cause to be done by virtue hereof.

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

<CAPTION>

                     Signature                                   Title                         Date

<S>                                            <C>                                        <C>
 /s/ David W. Light                            David W. Light                             April 9, 1997
-----------------------------------------      Chairman and Chief Executive Officer
                                               (Principal Executive Officer)       

 /s/ Clara R. Munley                           Clara R. Munley                            April 9, 1997
-----------------------------------------      Vice President, Finance and              
                                               Chief Financial Officer (Principal 
                                               Financial and Accounting Officer)  
                                               
 /s/ C. Russell Trenary, III                   C. Russell Trenary, III                    April 9, 1997
-----------------------------------------      President, Chief Operating Officer and 
                                               Director                               
                                               


 /s/ Joseph W. Shaffer                         Joseph W. Shaffer                          April 9, 1997
-----------------------------------------      Vice President and Director


 /s/ Joseph D.Koenig                           Joseph D. Koenig                           April 9, 1997
-----------------------------------------      Director

</TABLE>

                                       39