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                                                                   EXHIBIT 10.31


                              EMPLOYMENT AGREEMENT

                  THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated effective
as of August 14, 1996 is between UROHEALTH SYSTEMS, INC., a Delaware corporation
(the "Company"), AND RICHARD NEWHAUSER, (the "Employee").

                  A. The Company desires to obtain the continued services of
Employee, on its own behalf and on behalf of all existing and future "Affiliated
Companies" (defined as any corporation or other business entity or entities that
directly or indirectly controls, is controlled by, or is under common control
with the Company), and Employee desires to continue in the employment of the
Company upon the following terms and conditions.

                  B. The Company has spent significant time, effort and money to
develop certain Proprietary Information (as defined below), which the Company
considers vital to its business and goodwill.

                  C. The Proprietary Information will necessarily be
communicated to or acquired by Employee in the course of his employment with the
Company, and the Company desires to obtain the continued services of Employee,
only if, in doing so, it can protect its Proprietary Information and goodwill.

ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS:

         1. Period of Employment
            
            (a) The Company hereby employs Employee to render services to the
Company in the position and with the duties and responsibilities described in
Section 2 for the period (the "Period of Employment") beginning August 14, 1996
and ending on the earlier of (i) August 13, 1997, as the same may be extended
pursuant to Section 1(b) below (the "Term Date") and (ii) the date the Period of
Employment is terminated in accordance with Section 4.

            (b) Unless earlier terminated in accordance with Section 4, this
Agreement shall automatically renew for an additional one-year term on the first
and second anniversaries of the date of this Agreement.

         2. Position, Duties and Responsibilities

            (a) Employee hereby accepts employment with the Company as Executive
Vice-President of the Company, or other positions as the Chief Executive Officer
of the Company shall designate. Employee shall devote his best efforts and his
full time and attention to the performance of the services customarily incident
to such office and to such other services as may be reasonably requested by the
Chief Executive Officer of the Company.


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            (b) Employment. Employee shall expend best efforts on behalf of the
Company. Employee agrees that while employed by the company, Employee will not
engage in any other employment or business which could interfere with the
performance of Employee's duties to the Company, or compete with the Company in
any way. Employee agrees to abide by all policies and decisions of the Company
during the term of this Agreement.

            (c) Competitive Plans. Employee agrees not to take any preliminary
steps to set up or engage in any business enterprises that would compete in any
way with the Company during the term of this Agreement. While employed by the
Company, Employee agrees to divulge to the Company any and all competitive plans
which Employee may have under consideration, whether or not Employee intends to
act upon them. As used in the preceding sentence, the term "competitive plans"
shall include, but not be limited to, plans to set up, establish or engage in a
business enterprise in competition with the Company, and plans to seek or accept
employment from anyone in competition with the Company.

            (d) Business Opportunities. Employee agrees promptly and fully to
disclose to the Company, and not to divert to Employee's own use or benefit, or
the use or benefit of others, any business opportunities involving any past,
existing or prospective lines of business, suppliers, products or other business
activities of the Company, or any other business opportunities that should
otherwise be disclosed to the Company.

         3. Compensation, Benefits and Expenses

            (a) Compensation. In consideration of the services to be rendered
hereunder, including, without limitation, services to any Affiliated Company,
Employee shall be paid an annual salary of Three Hundred Fifty Thousand Dollars
($350,000), payable in 24 equal installments at the times and pursuant to the
procedures regularly established, and as they may be amended, by the Company
during the term of this Agreement.

            (b) Bonus. Employee shall also be eligible to receive, in the
discretion of the Board of Directors (the "Board"), a performance bonus (or
other special bonuses), in such amounts as determined by the Board based upon
the Board's evaluation of the performance of Employee, the Company's operating
results and such other criteria determined by the Board to be relevant.

            (c) Benefits. As he becomes eligible therefor, the Company shall
provide Employee with the right to participate in and to receive benefits from
all present and future life, accident, disability, medical, savings and stock
option plans and all similar benefits made available generally to the Company's
other similarly situated employees. The amount and extent of benefits to which
Employee is entitled shall be governed by the specific benefit plan, as it may
be amended from time to time.


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            (d) Vacation. Employee shall be entitled to three weeks of vacation
per year, exclusive of Company holidays.

            (e) Expenses. The Company shall reimburse Employee for reasonable
travel and other business expenses incurred by Employee in the performance of
his duties hereunder in accordance with the Company's general policies, as they
may be amended from time to time during the term of this Agreement.

         4. Termination of Employment.

            (a) By Death. The Period of Employment shall terminate automatically
upon the death of Employee. The Company shall pay to Employee's beneficiaries or
estate, as appropriate, the compensation to which he is entitled pursuant to
Section 3(a) through the end of the month in which death occurs. Thereafter, the
Company's obligations hereunder shall terminate. Nothing in this section shall
affect any entitlement of Employee's heirs to the benefits under any life
insurance plan.

            (b) By Disability. If, in the sole opinion of the Board, employee
shall be prevented from properly performing his duties hereunder by reason of
any physical or mental incapacity for a period of more than 150 days in the
aggregate or 120 consecutive days in any twelve-month period, then, to the
extent permitted by law, the Period of Employment shall terminate on and the
compensation to which Employee is entitled pursuant to Section 3(a) shall be
paid up through the last day of the month in which the Board determines Employee
to be disabled hereunder, and thereafter the Company's obligations hereunder
shall terminate. Nothing in this section shall affect Employee's rights under
any disability plan in which he is a participant.

            (c) By Company For Cause. The Company may terminate, without
liability, the Period of Employment for Cause (as defined below) at any time
upon 15 days' advance written notice to Employee. The Company shall pay Employee
the compensation to which he is entitled pursuant to Section 3(a) through the
end of the notice period and thereafter the Company's obligations hereunder
shall terminate. Termination shall be for "Cause" if: (i) Employee has engaged
in illegal or other wrongful conduct substantially detrimental to the business
or reputation of the Company or any Affiliated Company, or is charged with or
convicted of a felony; (ii) Employee refuses or fails to act in accordance with
any reasonable direction or order of the Board or his immediate superiors;
provided, that the Board or such superiors has given Employee written notice of
such refusal or failure and Employee fails to comply with such direction or
order within 15 days after the date of such notice; or (iii) Employee has
engaged in any fraud, embezzlement, misappropriation or similar conduct against
the Company.


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            (d) By Company Without Cause. The Company may terminate the Period
of Employment without Cause at any time upon 90 days' advance written notice to
Employee. Upon such termination, and subject to Employee's compliance with
provisions of Section 6 hereof, the Company shall pay Employee aggregate
payments in an amount equal to the amount of compensation to which he is
entitled pursuant to Section 3(a) for the remainder of the Period of Employment
which shall for purposes of this subsection (d) include the renewals
contemplated by Section 1(b) above, and thereafter all obligations of the
Company hereunder shall terminate. In the event that the period of Employment is
terminated without Cause, the payments required under this Section 4(d) shall be
made in accordance with the then normal payroll practices of the Company.

            (e) Termination Obligations.
                
                (i) Employee hereby acknowledges and agrees that all personal
property, including, without limitation, all books, manuals, records, reports,
notes, contracts, lists, blueprints and other documents, or materials, or copies
thereof, Proprietary Information (as defined below), furnished to or prepared by
Employee in the course of or incident to his employment, including, without
limitation, records and any other materials pertaining to Invention Ideas (as
defined below), belong to the Company.

                (ii) Upon termination of the Period of Employment, Employee
shall be deemed to have resigned from all offices then held with the Company or
any Affiliated Company.

                (iii) The representations and warranties contained herein and
Employee's obligations under Sections 4(e) and 6 shall survive termination of
the Period of Employment and the expiration of this Agreement.

         5. Change of Control. Following a "Change of Control". Employee shall
be entitled to terminate his employment hereunder, with or without good reason,
upon 30 days' advance written notice to the Company given at any time during the
one-year period after the Change of Control. In the event that Employee
terminates his employment pursuant to this Section 5 with Good Reason (as
defined below) after a Change of Control or if during such one-year period
Employee's employment is terminated by the Company without Cause, he shall be
entitled to receive payment upon such termination of an amount equal to the
greater of (i) one times the total salary and bonus compensation paid to
Employee by the Company pursuant to Section 3(a) and 3(b) for the twelve months
immediately preceding the Change of Control and (ii) the remaining amounts
payable by the Company pursuant to Section 3(a) through the Term Date; provided,
however, that if the severance payment under this Section 5, either alone or
together with other payments which Employee has the right to receive from the
Company, would not be deductible (in whole or in part) by the Company as a
result of such payment constituting a "parachute payment" (as defined in Section
280G of the Internal Revenue Code of 1986, as amended (the "Code"), the
severance payment provided under this Section 5 shall be reduced to the maximum
deductible amount under the Code. For 


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purposes of this Agreement, a Change of Control of the Company shall be deemed
to have occurred if (i) there shall be consummated (x) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's Common Stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's Common Stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, (y) any reverse merger in
which the Company is the continuing or surviving corporation but in which
securities possessing more than 50% of the total combined voting power of the
Company's outstanding securities are transferred to a person or persons
different from those who hold such securities immediately prior to the merger,
or (z) any sale, lease, exchange or other transfer (in one transaction or series
of related transactions) of all, or substantially all, of the assets of the
Company, or (ii) the stockholders of the Company approve a plan or proposal for
the liquidation or dissolution of the Company, or (iii) any "person" (as defined
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), shall become the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 20% or more of the
Company's outstanding Common Stock (other than as a result of a stock purchase
or purchases made by such person directly from the Company), or (iv) during any
twelve-month period, individuals who at the beginning of such period constitute
the entire Board of Directors of the Company shall cease for any reason to
constitute a majority thereof unless the election, or the nomination for
election by the Company's stockholders, of each new director was approved by a
vote of at lease a majority of the directors then still in office who were
directors at the beginning of the period. For purposes of this Section 5, "Good
Reason" shall exist if (i) the place of business at which Employee is
principally employed is relocated to a location more than 50 miles from such
location on the date of the Change of Control or (ii) there is an assignment to
Employee of any duties materially inconsistent with or which constitute a
material change in Employee's position, duties, responsibilities or status with
the Company or which assignment involves a substantial diminution in Employee's
level of responsibility, provided, that continuation of Employee's primary
responsibilities after a Change of Control without regard to Employee's level of
responsibility in a larger organization after a Change of Control shall not
constitute a diminution of Employee's level of responsibility.

         6. Proprietary Information.

            (a) Defined. "Proprietary Information" is all information and any
idea in whatever form, tangible or intangible, pertaining in any manner to the
business of the Company or any Affiliated Company, or to its clients,
consultants or business associates, unless: (i) the information is or becomes
publicly known through lawful means; (ii) the information was rightfully in
Employee's possession or part of his general knowledge prior to his employment
by the Company; or (iii) the information is disclosed to Employee without
confidential or proprietary restriction by a third party who rightfully
possesses the information (without confidential or proprietary restriction) and
did not 


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learn of it, directly or indirectly, from the Company. For purposes of
this agreement the term "Proprietary Information" shall not be deemed to include
articles, books, journals and other writings concerning floor shop management
which are authored by Employee.

            (b) General Restrictions On Use. Employee agrees to hold all
Proprietary Information in strict confidence and trust for the sole benefit of
the Company and not to, directly or indirectly, disclose, use, copy, publish,
summarize or remove from the Company's premises any Proprietary Information (or
remove from the premises any other property of the Company), except (i) during
the Period of Employment to the extent necessary to carry out Employee's
responsibilities under this Agreement, and (ii) after termination of the Period
of Employment as specifically authorized in writing by the Board.

            (c) Interference with Business; Competitive Activities. Employee
acknowledges that pursuit of the activities prohibited by this Section 6(c)
would necessarily involve the use or disclosure of Proprietary Information in
breach of Section 6(b), but that proof of such breach would be extremely
difficult. To prevent such disclosure, use and breach and in consideration of
employment under this Agreement, Employee agrees for a period of one year after
termination of the Period of Employment, he shall not for himself or herself or
any third party, directly or indirectly, (i) divert or attempt to divert from
the Company (or any Affiliated Company) any business of any kind in which it is
engaged, including, without limitation, the solicitation of or interference with
any of its suppliers or customers, (ii) employ, solicit for employment, or
recommend for employment any person employed by the Company, or any Affiliated
Company, during the period of such person's employment and for a period of one
year thereafter, or (iii) engage in any business activity that is competitive
with the Company, unless Employee can prove that action taken in contravention
of this Section 6(c)(iii) was done without the use of any Proprietary
Information; provided, that in no event shall Employee engage in such
competitive activities during the period which Employee continues to receive
payments pursuant to Section 4(d) above. For purposes of this Section 5(c),
"competitive activities" shall be business activities that are directly
competitive with an existing or presently planned business of the Company on the
date of termination, which activity constitutes or is anticipated to constitute
more than 15% of revenues of the Company.

            (d) Remedies. Nothing in this Section 6 is intended to limit any
remedy of the Company under the California Uniform Trade Secrets Act (California
Civil Code Paragraph 3426), or otherwise available under law.

         7. Assignment; Successors and Assigns.

         Employee agrees that he will not assign, sell, transfer, delegate or
otherwise dispose of, whether voluntarily or involuntarily, or by operation of
law, any rights or obligations under this Agreement, nor shall Employee's rights
be subject to encumbrance or the claims of creditors. Any purported assignment,
transfer or delegation shall be null and void. Nothing in this Agreement shall
prevent the consolidation of the 


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Company with, or its merger into, any other corporation, or the sale by the
Company of all or substantially all of its properties or assets, or the
assignment by the Company of this Agreement and the performance of its
obligations hereunder to any successor in interest or any Affiliated Company.
Subject to the foregoing, this Agreement shall be binding upon and shall inure
to the benefit of the parties and their respective heirs, legal representatives,
successors and permitted assigns, and shall not benefit any person or entity
other than those enumerated above.

         8. Notices. All notices or other communications required or permitted
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand or mailed, postage prepaid, by certified or registered
mail, return receipt requested, and addressed to the Company at:

                          UroHealth Systems, Inc.
                          5 Civic Plaza, Suite 100
                          Newport Beach, CA 92660
                          Attn:  Chief Executive Officer

                    or to Employee at:

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

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

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

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

         Notice of change of address shall be effective only when done in
accordance with this section.

         9. Entire Agreement. Except as provided in that certain Merger
Agreement dated July 5, 1996 and other agreements associated therewith, the
terms of this Agreement are intended by the parties to be the final expression
of their agreement with respect to the employment of Employee by the Company and
may not be contradicted by evidence or any prior or contemporaneous agreement.
The parties further intend that this Agreement shall constitute the complete and
exclusive statement of its terms and that no extrinsic evidence whatsoever may
be introduced in any judicial, administrative or other legal proceeding
involving this Agreement.

         10. Amendments; Waivers. This Agreement may not be modified, amended or
terminated except by an instrument in writing, signed by Employee and by a duly
authorized representative of the Company other than Employee. By an instrument
in writing similarly executed, either party may waive compliance by the other
party with any provision of this Agreement that such other party was or is
obligated to comply with or 


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perform, provided, however, that such waiver shall not operate as a waiver of,
or estoppel with respect to, any other or subsequent failure. No failure to
exercise and no delay in exercising any right, remedy or power hereunder shall
operate as a waiver thereof, nor shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, remedy or power hereunder preclude
any other or further exercise thereof or the exercise of any other right, remedy
or power provided herein or by law or in equity.
         
         11. Severability; Enforcement. If any provision of this Agreement, or
the application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.

         12. Governing Law. The validity, interpretation, enforceability and
performance of this Agreement shall be governed by and construed in accordance
with the law of the State of California.

         13. Injunctive Relief. The parties agree that in the event of any
breach or threatened breach of any of the covenants in Section 6, the damage or
imminent damage to the value and the goodwill of the Company's business will be
irreparable and extremely difficult to estimate, making any remedy at law or in
damages inadequate. Accordingly, the parties agree that the Company shall be
entitled to injunctive relief against Employee in the event of any breach or
threatened breach of any such provisions by Employee, in addition to any other
relief (including damages) available to the Company under this Agreement or
under law.

         The parties have duly executed this Agreement as of the date first
written above.


                                           /s/   RICHARD NEWHAUSER
                                           ----------------------------
                                           Employee:  Richard Newhauser


                                           UROHEALTH SYSTEMS, INC.



                                           By: /s/ CHARLES A. LAVERTY
                                              -------------------------
                                              Charles A. Laverty
                                              Chairman of the Board and
                                              Chief Executive Officer


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