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                                 UNITED STATES
                       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 AUGUST 31, 1997

                                       OR

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

FOR THE TRANSITION PERIOD FROM 
                       _______________ TO _______________

                        COMMISSION FILE NUMBER 000-22625

                            LASER POWER CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            DELAWARE                                       95-3423358
(State or other jurisdiction of                          (IRS Employer
incorporation or organization)                         Identification No.)

       12777 HIGH BLUFF DRIVE                                 92130
       SAN DIEGO, CALIFORNIA                               (Zip Code)
(Address of principal executive offices)



      Registrant's telephone number, including area code:  (619) 755-0700

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

          Securities registered pursuant to Section 12(g) of the Act:

                         COMMON STOCK, $.001 PAR VALUE

                             (Title of each 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 and
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.  Yes  X  No 
                                                              -----  -----

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

         The approximate aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock reported on the Nasdaq National Market System was $28,047,681 as of
October 31, 1997.*

         The number of shares of Common Stock outstanding was 6,099,854 as of
October 31, 1997.

                      DOCUMENTS INCORPORATED BY REFERENCE

                        (TO THE EXTENT INDICATED HEREIN)

         Registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission (the "Commission") pursuant to Regulation
14A in connection with the 1998 Annual Meeting of Stockholders to be held
January 30, 1998 (the "1998 Annual Meeting") is incorporated herein by
reference into Part III of this Report.

         Certain exhibits filed with the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-24421), as amended, are incorporated herein by
reference into Part IV of this Report.

______________

*   Excludes 2,983,445 shares of Common Stock held by directors and officers
    and stockholders whose beneficial ownership exceeds ten percent of the
    shares outstanding on October 31, 1997.  Exclusion of shares held by any
    person should not be construed to indicate that such person possesses the
    power, direct or indirect, to direct or cause the direction of the
    management or policies of the Registrant, or that such person is controlled
    by or under common control with the Registrant.

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         This Annual Report on Form 10-K contains certain forward-looking
statements, and the actual results for Laser Power Corporation ("Laser Power"
or the "Company") may differ materially from those discussed here.  Additional
information concerning factors that could cause such a difference can be found
in this Annual Report on Form 10-K in Part I, Item 1 under the caption "Certain
Risk Factors Related to the Company's Business" and elsewhere throughout this
Annual Report.

                                     PART I

ITEM 1.  BUSINESS


  Laser Power designs, manufactures and markets high performance lasers and
laser optics for industrial, medical and military applications.  The Company's
optics products are sold to laser system OEMs and end users as original and
replacement components in high power CO2 and other lasers.  The Company's
proprietary miniature solid-state lasers ("microlasers") are designed for use
in certain medical, telecommunications, projection display and other
applications.

  The Company's customers use high power CO2 lasers in a variety of industrial
processing applications, such as sheet metal cutting, automobile body welding,
surface hardening for engine components and scribing and drilling delicate
ceramic circuits. The Company also sells high performance laser optics to
medical equipment OEMs for lower power CO2 lasers used in certain therapeutic
and cosmetic procedures, including surgery and skin wrinkle removal. In
addition, the Company has developed very low absorption thin film coatings for
optics for laser anti- missile systems.  The Company's core competencies lie in
its surface finishings and thin film coatings, which are key elements involved
in all high performance laser optics. The Company believes that its expertise
in these areas provides it with a significant competitive advantage.
Substantially all of the Company's product revenues to date are attributable to
the sale of laser optics products for lasers used in the industrial processing
and medical industries.

  The Company also conducts contract research in the development and
applications of advanced solid state lasers.  Sponsors of contract research
include various agencies and departments of the U.S. government, as well as
commercial entities.

  The Company has leveraged its expertise in thin film coatings, surface
finishing and solid state lasers to develop proprietary miniature solid state
lasers that are excited or "pumped" by diode lasers. These microlasers have
significant size advantages and are generally 100 times more energy efficient
than conventional gas and solid state lasers. Further, they have longer
estimated lifetimes than conventional lamp pumped solid state and gas lasers.
Laser Power shipped the first microlaser evaluation units in March 1997 and has
begun deliveries of microlasers to a medical equipment OEM to replace gas
lasers in dermatology systems. The Company believes that microlasers can
replace other lasers in additional medical equipment and in other applications
such as laser light shows and as pump sources for other solid state lasers. The
Company is also developing microlasers for telecommunications and projection
display applications.

  In October 1997, the Company entered into a letter of intent to acquire EMI
Acquisition Corp. ("EMI"), a leading manufacturer and marketer of infrared
night vision optics used in commercial and military systems. Although the
Company has engaged in negotiations with EMI with respect to a definitive
agreement to acquire EMI, there can be no assurance that such negotiations will
result in a definitive agreement satisfactory to the Company or that the
Company will acquire EMI.





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INDUSTRY AND MARKET OVERVIEW

  The use of lasers in industrial and medical applications continues to grow
and to expand into new areas.  High power CO2 lasers are widely used in
industrial applications, such as welding automobile bodies, scribing delicate
ceramic circuits and sheet metal cutting.  CO2 lasers offer greater quality,
speed, flexibility and automation than conventional cutting and welding
technologies.  Lower power CO2 lasers and argon- ion and solid-state lasers are
used in various medical procedures, including surgical, dermatology and
ophthalmology applications.  Surgical laser procedures reduce blood loss and
post-operative pain compared to other procedures.

  The precision optics which collect, form, reflect and transmit the laser beam
are crucial to a laser's function. In gas lasers, the lasing medium is encased
in a tube with precision optics at either end. These internal optics may direct
the beam from one tube to another, may turn the beam back on itself to further
energize the lasing medium or may allow part of the beam to exit the tube while
turning the rest of the beam back on itself. Conventional solid state lasers
are similar except that the tube is replaced by a laser crystal rod. In
addition to the internal optics, a number of external precision optics may be
used to deliver the beam for its intended application. These external optics
may include mirrors, beam splitters, focusing lenses and other special function
optics.  The number of optics used in a laser system can be as many as 15 in a
high power CO2 laser system.  Since optics wear and become contaminated during
operation, they must be replaced routinely.  Sales of optics as replacement
parts represent the majority of the optics market.

  Lasers employing a semiconductor medium (diode lasers) are used in printers,
compact disk players and telecommunications equipment. Diode lasers can also be
used to excite or "pump" solid state lasers. Solid state lasers, which employ
crystals as the lasing medium and are energized by light from lamps, are used
in various industrial, medical and biotechnology applications. Recently, laser
engineers have developed small, highly efficient solid state lasers that are
energized by diode lasers (diode pumped solid state lasers or "DPSSLs").
Because of their small size and high efficiency, DPSSLs may address many of the
applications currently served by other lasers and may create new applications.
Microlasers are miniature DPSSLs.

  The Company believes that because of their small size and high efficiency,
microlasers may replace gas, semiconductor and other solid-state lasers in many
applications as well as enable new applications.  For example, the Company's
microlasers are being used or evaluated as replacements for argon (gas) and
solid state lasers in dermatology and ophthalmology applications and for laser
light shows.  Microlasers may also be used as replacements for semiconductor
lasers and laser/amplifier combinations in broadband communications
applications such as cable television ("CATV") and dense wavelength division
multiplexing ("DWDM").  Finally, the Company believes that microlasers may
enable the development of commercial solid state laser projection systems for
use in flight simulators, large meeting venues, video walls and, ultimately,
electronic cinema.

PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

HIGH PERFORMANCE LASER OPTICS PRODUCTS

  The Company produces optics, including total reflectors, output couplers,
beam splitters and lenses, for use in high power industrial, medical,
scientific and military lasers. The Company's expertise in the





                                       3.
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area of surface finishing and, in particular, thin film coatings, is critical
to producing high performance laser optics. In general, the performance of an
optic is primarily dependent on the quality of the thin film coating. Thin film
coatings include various reflective coatings for mirrors and transmissive and
partially transmissive coatings for lenses, beam splitters and output couplers.
The Company believes that the high quality of its thin film coatings and its
commitment to customer service enhance its reputation as a supplier of high
power and technically advanced laser optics.

  CO2 Optics.  Reliable operation of high power CO2 lasers requires high
quality, low absorption optics. The Company supplies substantially all types of
optics used in CO2 lasers and laser systems. Such optics fall broadly into two
categories: transmissive zinc selenide and reflective metal optics.

  Zinc selenide is the substrate material of choice for high power CO2 laser
transmissive optics such as lenses, output couplers and beam splitters because
of its low absorption of laser energy. Generally, zinc selenide optics with low
absorption thin film coatings are able to handle up to three kilowatts of
power. As laser power increases to the multi-kilowatt range, reflective metal
optics replace transmissive optics in certain applications.

  Reflective metal optics (such as folding mirrors, phase shifting mirrors,
beam bending mirrors and focusing mirrors) utilize a metal substrate, such as
copper. Metal optics are fabricated by conventional polishing or single-point
diamond turning, a process which involves cutting by gem quality diamonds to
create a mirror finish. The Company is a leader in the use of single-point
diamond turning methods to produce both standard metal optics and those with
complicated surfaces such as aspheres, parabolas and hyperbolas, which are used
with higher power CO2 lasers. The Company's fabrication and thin film coating
technologies have earned Laser Power a reputation as a leading manufacturer of
zinc selenide and metal optics.

  The Company supplies optics to high power CO2 laser and laser system
manufacturers and to the aftermarket as replacement parts.  Because CO2 laser
optics wear or become contaminated, every new laser installed increases the
market for replacement optics. In order to meet this growing aftermarket
demand, the Company provides same day shipment of critical replacement optics
for most high power CO2 lasers.

  Other Laser Optics.  In addition to CO2 laser optics, the Company provides
optics for a variety of lasers operating at different wavelengths.  For
example, the Company has used coating technology developed in support of
various military defensive laser weapons programs to become a leading supplier
of optics used in Erbium: YAG lasers.  These solid-state lasers are used in
various medical applications such as surgery and skin-resurfacing.

  Military Products.  Working with Lockheed Martin Corporation ("Lockheed
Martin") and TRW, Inc. ("TRW"), the Company has developed thin film coatings
utilized in ongoing U.S. government programs to develop laser weapons for
missile defense. The Company has developed very low absorption thin film
coatings for uncooled optics, which are critical to a space-based laser for
defense against long range ballistic missiles.  By using uncooled optics, the
weight of the laser system is reduced by approximately one-half, allowing the
laser to be boosted into orbit using one rocket instead of two. The Company
continues to develop these coatings for Lockheed Martin. The Company has also
developed coatings for TRW for use in ground-based lasers to defend against
short-range missiles. In addition, the Company has supplied coatings for
uncooled optics to TRW for an airborne laser defense system for use against
shorter range battlefield theater ballistic missiles.





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  The technology used to produce coatings for optics for these weapons-grade
lasers is derived from technology used by the Company for CO2 laser optics. The
Company believes that participation in these military programs fosters
continued improvement in its optics technology and that these improvements
provide a significant competitive advantage.

PRODUCTS UNDER DEVELOPMENT

Optics Products

  At laser power levels above three kilowatts, zinc selenide loses its ability
to resist distortion and is often replaced by more expensive, beam quality
limiting solutions such as aspheric metal optics or aerodynamic windows.
However, the Company's Turbo-Cooled technology enables zinc selenide optics to
function efficiently even at power levels in excess of 10 kilowatts. In
addition, the Company's MP-5 technology enhances the performance of zinc
selenide optics because it absorbs 25%-50% less laser energy than many
commercial thin film coatings. Because of its Turbo-Cooled and MP-5
technologies, the Company believes it will continue to be a leading supplier in
CO2 laser optics as the industrial CO2 laser industry continues to use higher
laser power.

  Turbo-Cooled refers to the Company's patented cooling design for optical
assemblies. Turbo-Cooled optical assemblies incorporate transmissive zinc
selenide optics that operate with less distortion of the laser beam and at much
higher power levels than conventionally cooled optics. The Company has also
developed laser output couplers, focusing systems and beam integrators using
this technology.

  MP-5 refers to the Company's new class of proprietary low absorption coatings
to replace thorium fluoride based thin film coatings for CO2 laser optics.
Thorium fluoride, a low-level radioactive material, is used by virtually every
manufacturer of high performance CO2 laser optics.  MP-5 coatings absorb
significantly less laser energy than thorium fluoride based coatings and are
non-radioactive. Low absorption reduces optic heating caused by the laser beam.
Optic heating causes the beam quality to deteriorate. In addition, MP-5
technology will not require the expense of handling, storage and disposal of
low level radioactive wastes associated with thorium fluoride. The Company has
filed a patent application to seek protection for the MP-5 technology. The
Company believes that optics manufactured with MP-5 coatings will gain market
share and command premium pricing in certain markets.  The Company released
MP-5 products for commercial sale in the fourth quarter of fiscal 1997.

Microlaser Based Products

  The Company has developed microlasers, which are miniature DPSSLs. The
miniaturization is accomplished by reducing the size of the solid state
material to millimeter or sub-millimeter dimensions and replacing end mirrors
with complex thin film coatings applied to the polished ends of the laser
crystals. Microlasers have significant size advantages over gas and other
lasers in areas such as medicine, biotechnology and projection displays. In
addition, microlasers are generally 100 times more energy efficient than gas
lasers because they consume less electricity in creating their optical output
and require less cooling. Microlasers also have longer estimated lifetimes than
gas lasers. To date, revenues from sales of the Company's microlaser products
have been insignificant.

  Green and Blue Microlasers.  The Company's green microlaser has size and
energy efficiency advantages over gas lasers used in certain medical
applications.  The Company began shipments of green microlasers for dermatology
applications in fiscal 1997 and anticipates selling its green microlaser for
use in ophthalmology applications in fiscal 1998.





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  The Company believes its 0.5 watt blue microlaser is the only high power all
solid state compact blue laser in existence. This laser has a number of
applications in which it can successfully replace argon-ion lasers, such as
certain dentistry, biomedical, dermatology and printing applications.

  The Company has developed prototype projectors using its green and blue
microlasers with commercially available red diode lasers to produce high
quality images with color quality equaling color movie film. The Company
believes that its high resolution projector produces higher resolution and more
colors than commercially available liquid crystal projectors. In addition, the
Company believes that it can produce microlaser based projectors that are
smaller than conventional projectors. Further, microlaser light sources have
longer estimated lifetimes compared to conventional light sources. The Company
expects that microlaser based projectors may provide advantages in a number of
applications, including entertainment displays, flight simulators, process and
system control room displays, portable large-venue projectors, videowalls and
electronic cinema.

  The Company has been awarded several government contracts to develop advanced
multi-beam, direct write microlaser projector technology, for which the Company
retains commercial rights. Such direct write technology will impress video
information directly on the microlaser beams. The beam will write the image
directly onto a screen similar to the way an electron beam writes a television
image, except that multiple lines will be written simultaneously, which may
enable super high resolution up to 5,000 by 4,000 pixels. The Company has been
issued a U.S. patent covering such technology and has filed applications
seeking additional patent protection.  Since the beam from red diode lasers is
not suitable for use in direct write projection systems, the Company is
developing a red microlaser as a replacement. There can be no assurance that
the Company will be able to complete development of a red microlaser, or if it
is unable to develop such a microlaser, that it will be able to acquire the
rights to a suitable red laser technology at a commercially reasonable cost, if
at all. If development of direct write technology can be completed, the Company
believes that such technology may be the best method to produce super high
resolution images required by electronic cinema.

  In addition, the Company has a collaborative arrangement with
Laser-Display-Technologic KG ("LDT"), a joint venture between Daimler-Benz AG
and Schneider Rundfunkwerke AG to develop microlasers for a conventional single
beam direct write laser based projection display system. Such systems have been
commercially available using gas lasers for approximately the past 20 years at
very high prices ($200,000 to $500,000). LDT is developing technology which,
when available, and when combined with the Company's microlasers, will enable
compact high resolution projectors to be built with the ultimate aim of
producing high volume, low cost home entertainment systems.

  1550 nm Microlaser.  Distributed feedback ("DFB") diode lasers emitting at
1550 nm wavelength are used in the telecommunications industry to transmit
signals through fiber optic cables. Such lasers are gaining widespread
acceptance in upgrades and new installations of CATV and other
telecommunications systems worldwide. Microlasers generally create less signal
noise and are capable of generating higher power than DFB lasers. As a result,
CATV fiber optic systems employing 1550 nm microlasers will not require
amplification to the same extent as DFB lasers and will deliver a higher
quality, lower noise signal to the receiver. The Company believes that, if
successfully developed, the high output power of a 1550 nm microlaser could
reduce or eliminate the requirement for erbium-doped fiber amplifiers ("EDFAs")
which are needed to increase the power of existing DFB lasers in CATV head-end
and point-to-point transmitters. The Company expects to sell its 1550 nm high
power microlaser for substantially less than the typical DFB laser EDFA
combination, providing an impetus for industry adoption of its 1550 nm
microlaser.





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  Dense wavelength division multiplexing allows multiple laser beams with
different wavelengths to be launched into a single optical fiber.  DWDM has
been rapidly embraced by long-haul carriers for digital transmission because of
significant cost and time savings over laying additional fiber optic cable. In
addition, the Regional Bell Operating Companies ("RBOCs") and CATV operators
are beginning to use DWDM increasingly as the technology advances, cost of
equipment decreases and digital transmission becomes more popular for local
traffic.

  The wavelengths used for DWDM must be precisely controlled. DFB laser
manufacturers are not able to control their semiconductor processes to the
level required to produce precise wavelength devices on demand and therefore
must go through a selection process to find devices with the desired
wavelengths. Precise temperature control with active feedback is required to
keep the wavelength constant over the lifetime of the device. The Company's
1550 nm microlaser under development is expected to be capable of being
adjusted to any wavelength over the entire DWDM band. The wavelength could be
controlled with a low-cost, passive optical element, and all devices could be
manufactured identically, with the desired wavelength selected with an
adjustment of the passive optic element. The Company believes these
characteristics will provide significant advantages for its 1550 nm microlaser
under development in the DWDM market.

STRATEGY

  The Company's strategy is to expand its current precision optics business and
to leverage its core expertise in high performance laser optics, low absorption
thin film coatings and solid-state lasers to become a world leader in the
manufacture, marketing and sale of microlasers and microlaser based products.
Key aspects of the Company's strategy include:

Continue to Grow High Performance CO2 Laser Optics Business

  The Company's core competencies in the design and manufacture of high
performance laser optics, including its polishing and diamond turning processes
and thin film coatings have made Laser Power one of the leading suppliers of
such components, especially for high power CO2 lasers.  The Company's strategy
is to continually improve quality and customer service while lowering
production costs and introducing new products. See "Products and Products Under
Development." The Company expects the high power CO2 laser market to continue
to grow and laser power levels to continue to rise. To meet the increasing
demand for optics for higher power lasers, the Company will continue to enhance
its Turbo-Cooled and diamond turned metal optics technologies. The Company
believes it is well positioned to meet more stringent requirements for optics
used in higher power CO2 lasers because of its proprietary and state-of-the-art
technologies.


Expand Markets for High Performance Optics Products

  The Company believes that its technologies have applications in markets not
currently served by the Company. The Company plans to use its technology base
developed for CO2 laser optics and microlaser crystal polishing and coating to
produce certain optics for neodymium-YAG lasers and visible lasers.  The
Company also plans to enter other non-CO2 infrared markets using CO2 coatings.





                                       7.
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Increase Margins on Optics Products

  The Company has a multifaceted strategy to reduce costs and increase margins
on its optics products. To reduce costs, the Company plans to increase
automation which will reduce labor costs and improve yields on certain
manufacturing processes. The Company also plans to transfer additional
labor-intensive operations to its facility in Mexico. To increase margins, the
Company plans to intensify its sales efforts on higher margin products and to
serve high-performance, high-margin niches in such markets as the emerging high
power neodymium-YAG laser market.

Market Microlasers for Existing Industrial and Medical Applications

  The Company intends to exploit the superior size and energy efficiency
characteristics of its microlasers to replace existing gas and solid state
lasers currently utilized in certain medical, industrial and other
applications. The Company is shipping green microlasers for use in medical,
industrial and entertainment applications.  The Company expects to ship green
and other microlasers for additional applications in fiscal 1998.

Develop and Market Microlasers for CATV and Telecommunications Applications

  The Company is developing a high power, low noise 1550 nm microlaser that it
believes will provide substantial performance and cost advantages over certain
existing CATV transmission systems that are based on 1550 nm DFB lasers and
EDFAs. In addition, the ability to adjust and maintain the microlaser's
wavelength at any point over the entire EDFA wavelength acceptance band will
provide advantages over existing lasers used in digital CATV and DWDM
telecommunications applications.  The Company expects to ship evaluation units
of its first 1550 nm laser product in the second quarter of fiscal 1998 and to
ship production units in the third quarter of fiscal 1998.

Develop and Market Microlasers for High End Projection Display Applications

  The Company has developed blue and green microlasers and is developing a red
microlaser, all of which can be arrayed together as the light source for a
high-end display projector. The Company believes that microlaser based
projectors will have significant performance and size advantages over existing
high-end lamp based and CRT based projectors.

Supplement Product Development Activities Through Contract Funding

  The Company will opportunistically secure research contracts that will
enhance and advance its products under development. The Company has spent
approximately $11.8 million on microlaser development and related display
technology programs, substantially all of which was paid for through joint
ventures with strategic partners such as the U.S. government, Proxima
Corporation ("Proxima") and LDT. See "Research and Development."

Expand Capabilities Through Strategic Alliances and Acquisitions

  Through alliances with other companies, Laser Power has enhanced its high
performance laser optics technologies, broadened its research activities and
developed its microlaser technology. The Company believes that similar
relationships with leading companies in the medical equipment, high end
projection display and telecommunications industries will facilitate its entry
into those markets. In addition, the Company will continue to acquire
technologies or other companies that complement its current





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technologies. The Company has entered into a letter of intent to acquire EMI.
Although the Company has engaged in negotiations with EMI with respect to a
definitive agreement to acquire EMI, there can be no assurance that such
negotiations will result in a definitive agreement satisfactory to the Company
or that the Company will acquire EMI.

SALES AND MARKETING

  As of October 31, 1997, Laser Power employed 19 persons in sales and
marketing at sales offices in the United States and Belgium. The Company
promotes its optics and intends to promote its microlaser based products to OEM
and end-user customers through a multi-faceted program which includes trade
journal advertising, catalog distribution, direct mail promotion, field sales
presentations, technical seminars, trade show exhibits and direct
telemarketing. The Company sells its optics products through its direct sales
force in the United States and Belgium and through its distributors in the rest
of the world. The Company intends to sell its microlaser based products in
North America, Europe and Asia through a direct sales force and distributors.

RESEARCH AND DEVELOPMENT

  The Company believes that its future success depends in large part on its
ability to complete products under development, to continue to enhance its
existing products and to develop new products. As of October 31, 1997, the
Company had 50 employees performing research and development in the United
States and Belgium. The Company spent $4.9 million, $5.6 million and $5.9
million during fiscal years 1995, 1996 and 1997, respectively, on research and
development. The sources of such funds included contracts with customers and
strategic partners as well as internal Company funds.

  The Company continues to develop its 1550 nm microlaser for broadband
communications and its red microlaser for projection display applications.
Also, the Company continues laser projection display development under several
U.S. government and commercial research contracts.  The Company intends to
strengthen its competitive position for all microlaser applications by
developing higher power microlasers and lower cost component and sub-assembly
designs. In addition, the Company is developing proprietary automated
manufacturing processes for its optics manufacturing to lower costs and provide
a more flexible manufacturing environment.

  The successful completion of development activities and the transition to
manufacture and sale of any resultant products is dependent on a number of
factors, including determination of demand and appropriate product design,
length of development period, development of appropriate manufacturing
processes, product performance and sales and marketing.  There can be no
assurance that the 1550 nm and red microlasers or any of the other products or
improvements under development will be successfully developed, or that new
products developed by the Company will be commercially available or achieve
market acceptance.  See "Products Under Development" and "Certain Risk Factors
Related to the Company's Business - Development and Other Risks Relating to
Microlaser Technologies."

MANUFACTURING

  The Company manufactures high performance laser optics, microlasers and
related components. Some materials and components are available only from
single suppliers.





                                       9.
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  The Company manufactures optics at its San Diego and Mexico facilities.
Thorium fluoride and zinc selenide are important to the manufacture of optics.
The Company purchases all of its thorium fluoride for use in its low absorption
thin film coating processes from Cerac Incorporated ("Cerac"), which the
Company believes is the sole source for high quality thorium fluoride. Any
interruption or cessation of supply by Cerac would have a material adverse
effect on the Company's business, financial condition and results of
operations.

  In the case of zinc selenide, a critical raw material in a significant
percentage of the Company's optics products, the Company currently relies
exclusively on one supplier, the Advanced Materials Division of Morton
International, Inc. ("Morton"). To date, the Company has not experienced any
material difficulties in the quantity or the quality of the zinc selenide
delivered. If any such problem arises in the future, the Company would have to
seek an alternate supplier. However, there can be no assurance that the Company
would be able to secure sufficient inventory of zinc selenide to produce
sufficient product to meet its customers' needs. A transition to alternate
arrangements would involve additional costs and delays in production.

  The manufacture of optics is capital-intensive. Future manufacturing capacity
requirements may require substantial investment in equipment and facilities.
See "Certain Risk Factors Related to the Company's Business -- Fluctuation in
Quarterly Performance."

  The Company's microlasers are assembled from component parts at the Company's
San Diego facility. The Company purchases component parts for its microlasers,
including laser crystals, nonlinear crystals, and semiconductor diode lasers,
from various sources around the world. The Company believes its suppliers can
supply the components in the quantities, with the quality and at the prices
required by the Company for volume production of microlasers for medical,
dental, telecommunications, industrial, display and other general applications
of the Company's microlaser products and products under development. However,
none of the Company's suppliers of microlaser component parts has experience in
supplying these components with the Company's specifications at the increased
volumes that the Company needs to achieve its growth goals. In addition,
certain future applications require substantially lower cost components.  The
Company does not have long term or volume purchase agreements with any of its
suppliers and currently purchases components on a purchase order basis. See
"Certain Risk Factors Related to the Company's Business -- Limited Microlaser
Manufacturing Experience; Scale-up Risk."

  Moreover, the Company has no experience in producing microlasers other than
in low level production quantities. The Company is increasing its manufacturing
capability to polish and coat volume quantities of microlaser and nonlinear
crystals and to perform the required complex assembly steps. Such an increase
in its manufacturing capabilities will require significant scale-up
expenditures and additions to the Company's facilities. See "Certain Risk
Factors Related to the Company's Business -- Limited Microlaser Manufacturing
Experience; Scale-Up Risk."

PATENTS AND PROPRIETARY RIGHTS

  As of October 31, 1997, Laser Power's patent portfolio included four patents
issued by the U.S. Patent and Trademark Office ("USPTO") and one patent granted
by the European Patent Office (the "EPO"), subsequently filed in five European
countries.  The Company has received Notices of Allowability on four of its
patent applications pending with the USPTO and has eight other patent
applications pending.  Two patent applications have been filed in several
foreign jurisdictions and the Company has been granted licenses to two patent
applications owned by Proxima and filed with the USPTO. One of the Company's
U.S. patents, issued in November 1996, covers certain aspects of the Company's
blue





                                      10.
<PAGE>   11

microlaser technology and another, issued in July 1996, covers the Company's
direct write concept and other aspects of display technology associated with
microlasers. One of the Company's U.S. patents, issued in July 1992, covers
basic technology behind the Company's Turbo-Cooled optic products; the
Company's patent granted by the EPO in April 1993 covers this same technology.
Many of the Company's pending patent applications relate to microlaser
technology. The two pending U.S. patent applications licensed from Proxima
cover certain aspects of microlaser display technology.  One pending
application relates to the MP-5 coating technology.

  Because of lesser protection afforded by and the high cost of pursuing
patents in certain foreign jurisdictions, the Company has elected not to seek
patent protection for certain of its inventions covered by its U.S. patents in
foreign jurisdictions. Nevertheless, the Company intends to selectively pursue
foreign patent filings where the cost of and protection afforded by such
patents, if issued, are justified. However, the Company in general believes
that, in certain cases, obtaining foreign patents may be much less useful than
obtaining domestic patents because of differences in patent laws and costs of
patent enforcement, and further believes that the protection provided by
foreign patents, if obtained, and any other foreign intellectual proprietary
protection may be weaker than that provided domestically.

  Laser Power's continued success will depend in part on its ability to obtain
patent protection for its products and processes, and to operate without
infringing the proprietary rights of third parties. There can be no assurance
that patent applications filed by Laser Power will result in patents being
issued, that the claims of such patents will offer significant protection of
the Company's technology, or that any patents issued to or licensed by Laser
Power will not be challenged, narrowed, invalidated or circumvented. The
Company may also be subject to legal proceedings that result in the revocation
of patent rights previously owned by or licensed to Laser Power, as a result of
which the Company may be required to obtain licenses from others to continue to
develop, test or commercialize its products. There can be no assurance that
Laser Power will be able to obtain such licenses on acceptable terms, if at
all.

  In addition, there may be pending or issued patents held by parties not
affiliated with Laser Power that relate to the technology utilized by Laser
Power. As a result, Laser Power may need to acquire licenses to, assert
infringement of, or contest the validity of, such patents or other similar
patents which may be issued. Laser Power could incur substantial costs in
defending itself against patent infringement claims, interference proceedings,
opposition proceedings or other challenges to its patent rights made by third
parties, or in bringing such proceedings or enforcing any patent rights of its
own.

  The patent positions of laser optic, laser component and laser manufacturing
companies, including the Company, are generally uncertain and involve complex
legal and factual questions. As a result, these industries have a history of
patent litigation and will likely to continue to have patent litigation
concerning laser technologies. A number of laser optic, laser component and
laser manufacturing companies maintain and continue to develop patent positions
that could prevent Laser Power from using technology covered by these patents.
The commercial success of the Company depends in part on not infringing
patents. Any action against the Company or its collaborative partners claiming
damages or seeking to enjoin commercial activities relating to the affected
products and processes could, in addition to subjecting the Company to
potential liability for damages, require the Company or its collaborative
partners to obtain a license to continue to develop, manufacture or market the
affected products and processes. There can be no assurances that the Company or
its collaborative partners would prevail in any such action or that any license
(including licenses proposed by third parties) required would be made available
on commercially acceptable terms, if at all.  If the Company becomes involved
in such litigation, it could consume a substantial portion of the Company's
managerial and financial resources,





                                      11.
<PAGE>   12

which could have material adverse effect on the Company's business, financial
condition and results of operations.

  The Company has acquired a license to a Stanford University ("Stanford")
owned patent covering certain technology used in the Company's blue microlaser
from ATx Telecom Systems, Inc. ("ATx Telecom").  The Company has received a
letter from a competitor claiming that the Company's license was transferred
improperly by Stanford and ATx Telecom. While the Company believes that such
license was properly transferred, there can be no assurance that the Company's
license would not be challenged. In such an event, there can be no assurance
that the Company would be able to obtain a replacement license on favorable
terms, if at all. Failure to obtain such a license would result in a material
adverse effect to the Company's business, financial condition and results of
operations.

  The Company is aware of patents held by other laser companies that may relate
to the Company's microlaser technology. The Company does not believe it
infringes any valid claims of such laser companies' patents or believes that it
has adequate design-arounds if it is held to be infringing. Nevertheless, for
certain cost or strategic reasons, the Company believes it may be advantageous
to enter into license agreements with such laser companies. The Company is
currently negotiating to obtain licenses from such parties for certain
technology covered by such patents. However, there can be no assurance that the
Company will obtain the licenses on favorable terms, if at all. If it is
determined that the patents held by these other laser companies do cover the
Company's technology, the Company's inability to obtain licenses for such
technology could have a material adverse effect on the Company's business,
financial condition and results of operations.

  The Company has developed certain of its proprietary technology pursuant to
development contracts, including contracts with federal government agencies.
Under standard provisions in government contracts, the government may retain
certain rights in technology developed under such contracts. In addition, the
Company has granted significant rights to the other parties under such
contracts. The Company's strategy is to continue to develop a significant
portion of its proprietary technology pursuant to funding received from
development contracts. There can be no assurance that the Company will be able
to continue to obtain funding for the development of its proprietary
technology, or that, if received, the Company will obtain rights to such
technology sufficient to permit the Company to develop and market new products
or to prevent third parties from using such technology to compete with the
Company.

  In addition to patent protection, Laser Power also relies on copyright
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities to expand and bolster its competitive position. In an
effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, the Company requires employees, consultants and
certain collaborators to execute confidentiality and invention assignment
agreements upon commencement of a relationship with the Company. These
agreements are intended to enable the Company to protect its proprietary
information by controlling the disclosure and use of technology to which it has
rights and provide for ownership by the Company of proprietary technology
developed at the Company or with the Company's resources. There can be no
assurance, however, that these agreements will provide meaningful protection
for the Company's trade secrets or other confidential information in the event
of unauthorized use or disclosure of such information or that adequate remedies
would exist in the event of such unauthorized use or disclosure. The loss or
exposure of trade secrets possessed by Laser Power could have a material
adverse effect on the Company's business, financial condition and results of
operations.

  The Company's academic collaborators have certain rights to publish data and
information in which the Company has rights. There is considerable pressure on
academic institutions to publish discoveries





                                      12.
<PAGE>   13

in the high technology and physics fields. There can be no assurance that such
publication would not adversely affect the Company's ability to obtain patent
protection for certain technologies in which it may have a commercial interest.

COMPETITION

  The industries in which the Company sells its products are highly
competitive. Laser Power's competitive position depends upon a number of
factors, including the price and performance of its products, the level of
customer service, the quality of its manufacturing processes, the compatibility
of its products with existing laser systems and Laser Power's ability to
participate in the growth of emerging technologies, such as microlasers and
their application to industries already served by gas and solid state lasers.
In the optics market, Laser Power primarily competes with II-VI, Inc.
("II-VI"), Coherent, Inc. ("Coherent") and Sumitomo Electric Industries, Ltd.
II-VI produces its own supply of zinc selenide. The Company uses zinc selenide
as the substrate for 40% to 50% of the CO2 laser optics sold by the Company and
purchases this raw material from Morton.

  With regard to the Company's microlaser based products and products under
development, the Company faces competition from gas, solid-state and DFB laser
manufacturers who already service the various markets the microlasers are
intended to address as well as from lamp manufacturers who are developing lamps
with extended lives for projection display. Competitive factors in the market
for microlaser applications include price, product performance and reliability,
strong customer support and service, customer relationships and the breadth of
product line. In these markets, the Company faces competition from companies
that have substantially greater financial, engineering, research, development,
manufacturing, marketing, service and support resources, greater name
recognition than the Company and long-standing customer relationships.
Specifically, the Company believes that its main competitors for its products
and products under development will be Spectra-Physics Lasers, Inc., Coherent,
Uniphase Corporation, Lightwave Electronics Corporation, LiCONiX, Light
Solutions Corporation, Omnichrome Corporation and Edinburgh Instruments Ltd.
With respect to 1550 nm microlasers and microlaser transmitters for supply to
OEMs, the Company believes its competitors will include Harmonic Lightwaves,
Inc., Ortel Corporation, Synchronous Group, Inc., Uniphase Corporation, SDL,
Inc., ATx Telecom, Scientific-Atlanta, Inc., Fujitsu Compound Semiconductor,
Inc., Lucent Technologies Inc. and NORTEL, Ltd. Other broadband communications
equipment suppliers as well as other laser companies who may develop microlaser
based products which compete directly with the Company's microlaser based
products may also enter this market.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

  The Company uses or generates certain hazardous substances in its research
and manufacturing facilities. The Company believes that its handling and
disposal of such substances is in material compliance with applicable local,
state and federal environmental, safety and health regulations at each
operating location. The Company invests substantially in proper protective
equipment, process controls and specialized training to minimize risks to
employees, surrounding communities and the environment due to the presence and
handling of such hazardous substances. The Company conducts monthly workplace
monitoring regarding such substances. When exposure problems or potential
problems have been indicated, corrective actions have been implemented and
re-occurrence has been minimal or non-existent. The Company does not carry
environmental impairment insurance.

  The Company uses a low-level radioactive material called thorium fluoride to
manufacture low absorption thin film coatings. The use, storage and disposal of
this material is governed by the State of California which last inspected and
licensed the Company's facilities and procedures in February 1996.





                                      13.
<PAGE>   14

All thorium fluoride bearing by-products are collected and stored on site at
the Company until California develops a low-level radioactive waste storage
capability. The Company's non-radioactive coating, MP-5, will provide superior
performance to certain thorium fluoride coated optics and lessen the
environmental hazards associated with the special use, storage and handling of
this low-level radioactive substance.

  The generation, use, collection, storage and disposal of all other hazardous
by-products resulting from the Company's manufacturing of its products and
research and development of new products, such as suspended solids containing
heavy metals or airborne particulates, are believed by the Company to be in
material compliance with local, state and federal regulations. The Company
believes that it possesses all of the permits and licenses required for
operation.  Although the Company is not aware of any material environmental,
safety and health problems in its properties or processes, there can be no
assurance that problems will not develop in the future which would have a
material adverse effect on the Company.

BACKLOG

  With the exception of military contracts, most customer orders for optics are
from stock or for deliveries within one to two months. As a result, backlog of
optics orders is typically two to three times monthly sales and was $3.9
million at August 31, 1997. Backlog of research contracts fluctuates based on
the timing of contract awards and was $2.7 million at August 31, 1997. Backlog
of microlaser orders is expected to reflect the longer-term commitments of OEM
customers. At August 31, 1997, microlaser backlog was $469,000, consisting of
development funding and initial orders for its microlaser products.

EMPLOYEES

  As of October 31, 1997, the Company had 195 full time and 5 part time
employees in the United States and 42 full time employees in its foreign
subsidiaries. Of the Company's United States employees, 14 were engaged in
marketing, sales and related customer-support services, 46 in research and
development and 140 in operations, administration and finance.  None of the
Company's employees is represented by a labor union or covered by a collective
bargaining agreement. The Company has not experienced any work stoppages and
considers its relations with its employees to be good.

EXECUTIVE OFFICERS OF THE REGISTRANT

  The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
           NAME                        AGE                     POSITION
           ----                        ---                     --------
 <S>                                   <C>    <C>
 Glenn H. Sherman, Ph.D  . . . . . . .  54    Chairman of the Board and Chief Executive Officer
 Douglas H. Tanimoto, Ph.D.  . . . . .  57    President, Laser Power Research Division and Director
 Richard P. Scherer  . . . . . . . . .  57    President, Laser Power Optics Division
 Dean T. Hodges, Ph.D  . . . . . . . .  53    President, Laser Power Microlasers Division
 Arthur P. Minich  . . . . . . . . . .  54    President, Laser Power Display Division
 Paul P. Wickman, Jr . . . . . . . . .  48    Senior Vice President and Chief Financial Officer
</TABLE>

  Glenn H. Sherman, Ph.D., the founder of the Company, has served as Chairman
of the Board and Chief Executive Officer of the Company since 1979. From 1972
to 1979, Dr. Sherman served as a director and Vice President of II-VI, Inc., an
electro-optical component manufacturer. Dr.  Sherman received a B.S., M.S. and
Ph.D. in Electrical Engineering from the University of Illinois at Urbana.





                                      14.
<PAGE>   15
  Douglas H. Tanimoto, Ph.D. has served as President of the Laser Power
Research Division since 1988 and has served as a director of the Company since
1984. Dr. Tanimoto served as President of the Laser Power Optics Division from
1986 to 1988. Dr. Tanimoto received a B.A. from the University of California,
Berkeley and an M.S. and Ph.D in Physics from the University of Oregon.

  Richard P. Scherer has served as President of the Laser Power Optics Division
since March 1996. Mr. Scherer served as Senior Vice President, Marketing and
Business Development, of the Company from 1992 to March 1996. Mr. Scherer
received a B.S. in Electrical Engineering from Marquette University.

  Dean T. Hodges, Ph.D. has served as President of the Laser Power Microlasers
Division since March 1996. Dr. Hodges served as President of the Laser Power
Optics Division from March 1994 to March 1996. From 1984 to March 1994, Dr.
Hodges served as Senior Vice President of Newport Corporation, a manufacturer
of instruments for the laser and optics industries. Dr. Hodges received a B.S.
in mathematics and physics from Humboldt State College and a Ph.D. in Applied
Physics from Cornell University.

  Arthur P. Minich has served as President of the Laser Power Display Division
since December 1996. From 1992 to November 1996, Mr. Minich served as Chief
Technical Officer and Vice President, Research and Development, of Proxima
Corporation, a manufacturer of computer display projectors. From 1990 to 1992,
Mr. Minich founded and served as Chairman of the Board of Directors of PIVOTAL
Corp., a developer of object oriented business process engineering software.
From 1988 to 1990, Mr. Minich served as the Business Unit/Group General Manager
of Eastman Kodak Company's digital imaging systems business. Mr. Minich
received a B.S. in Electrical Engineering from Iowa State University and an
M.S.  in Electrical Engineering/Computer Science from the Hewlett-Packard
Honors Cooperative Program.

  Paul P. Wickman, Jr. has served as Senior Vice President and Chief Financial
Officer of the Company since September 1992. From 1982 to 1992, he served as
Group Vice President, Finance, and Controller of The Titan Corporation, a
diversified high technology company. Mr. Wickman received a B.S. in Accounting
from San Diego State University and is a Certified Public Accountant.





















                                      15.
<PAGE>   16

CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS

  In addition to those risks identified elsewhere in this Annual Report on Form
10-K, the Company's business and results of operations are subject to other
risks, including the following risk factors:

HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT

  As a result of substantial investments in research and development, the
Company has incurred operating losses in fiscal years prior to fiscal 1997 and,
at August 31, 1997, had an accumulated deficit of $4.5 million. The
development, sales, marketing and support of new products will require
continued substantial expenditures for the foreseeable future, which could
result in additional operating losses. The Company has funded a substantial
portion of its product development efforts through development contracts. Any
failure by the Company to maintain its external funding sources could result in
increased operating losses. There can be no assurance that the Company will
maintain its external funding sources or be profitable in the future or that
present capital and any funds provided by operations will be sufficient to fund
the Company's future capital requirements.

DEVELOPMENT RISKS RELATING TO MICROLASER TECHNOLOGIES

  The Company has devoted substantial resources to developing its microlasers
and future microlaser based products. To date, sales of the Company's
microlasers have been limited to early, low level, production quantities.
Other microlasers and microlaser based products are still in the early stages
of development. There can be no assurance that the Company's microlasers will
be successfully designed into customers' products or that the Company's
microlasers will achieve widespread market acceptance.  There also can be no
assurance that the Company will successfully develop additional microlasers or
microlaser based products or that any of the Company's products under
development will achieve commercial sales volumes. The Company believes that it
will be necessary to continue to reduce the cost of manufacturing and to
broaden the variety of wavelengths provided by its microlasers to achieve
commercial acceptance. If the Company is unable to successfully gain market
acceptance of its microlasers and microlaser based products, its business,
operating results and financial condition will be materially and adversely
affected.

DEPENDENCE ON NEW PRODUCTS AND PROCESSES

  To meet its strategic objectives, the Company must continue to develop,
manufacture and market new products, develop new processes and improve its
existing processes. As a result, the Company expects to continue to make
significant investments in research and development and to consider from time
to time the strategic acquisition of businesses, products, or technologies
complementary to the Company's business. The success of the Company in
developing, introducing and selling new and enhanced products depends upon a
variety of factors, including product selection, timely and efficient
completion of product design and development, timely and efficient
implementation of manufacturing and assembly processes, effective sales and
marketing and product performance in the field. There can be no assurance that
the Company will be able to develop and introduce new products or enhancements
to its existing products and processes in a manner that satisfies customer
needs or achieves market acceptance. The failure to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations.















                                      16.
<PAGE>   17


LIMITED MICROLASER MANUFACTURING EXPERIENCE; SCALE-UP RISK

  The Company has no experience in producing microlasers other than in early,
low level, production quantities. The Company's microlasers are assembled from
component parts at the Company's San Diego facility. The Company purchases
component parts for its microlasers, including laser crystals, nonlinear
crystals and diode lasers, from various sources around the world. However, none
of the Company's suppliers of microlaser component parts has experience in
supplying components with the Company's specifications at increased volumes.
The Company does not have long term or volume purchase agreements with any of
its suppliers and currently purchases components on a purchase order basis.
There can be no assurance that these suppliers will be able to provide
components to the Company in the quantities, with the quality or at the prices
necessary for production quantities of the Company's products and products
under development. The Company is increasing its manufacturing capacity to
polish and coat crystals and to perform the required complex assembly steps.
Such an increase in its manufacturing capacity will require significant
scale-up expenditures and additions to the Company's facilities.  In the event
the Company is unable to locate sufficient sources of microlaser component
parts, or is unable to expand its manufacturing capacity to produce microlasers
and microlaser based products, the Company will not be able to manufacture its
products on commercially reasonable terms, if at all, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.

LIMITED MICROLASER SALES, MARKETING AND DISTRIBUTION EXPERIENCE

  The Company has only limited experience marketing and selling its
microlasers, and does not have experience marketing and selling such products
in commercial quantities. The Company intends to sell its microlasers and
microlaser based products through a direct sales force in North America and a
direct sales force and distributors in Europe. In Asia, the Company intends to
sell its microlasers and microlaser based products primarily through agreements
with distributors or representatives, although the Company has not entered into
any such agreements or arrangements to date. To the extent that the Company
enters into distribution or representation arrangements for the sale of its
microlasers and microlaser based products, the Company will be dependent upon
the efforts of third parties. There can be no assurance that the Company will
be able to build a direct sales force or marketing organization for microlasers
or microlaser based products, that establishing such a direct sales force or
marketing organization will be cost effective, or that the Company's sales and
marketing efforts will be successful. There can be no assurance that the
Company will be able to enter into agreements with distributors or
representation arrangements on a timely basis, if at all, or that such
distributors or representatives will devote adequate resources to selling the
Company's microlasers and microlaser based products. Failure to build an
effective sales and marketing organization or to establish effective
distribution or representation arrangements for the Company's microlaser
products would have a material adverse effect on the Company's business,
financial condition and results of operations.

FUTURE CAPITAL REQUIREMENTS

  Although the Company believes that its existing cash balances, cash flow from
operations and available lines of credit will be sufficient to meet its capital
requirements for at least the next 12 months, the Company may seek additional
equity or debt financing to compete effectively in the markets it serves. The
timing and amount of the Company's capital requirements cannot be precisely
determined at this time and will depend on a number of factors, including the
demand for the Company's products and products under development. There can be
no assurance that such additional financing will be available


















                                      17.
<PAGE>   18



when needed, or, if available, will be on terms satisfactory to the Company. If
additional funds are raised by issuing equity securities, further dilution to
the then existing stockholders will result.

FLUCTUATION IN QUARTERLY PERFORMANCE

  The Company has experienced and expects to continue to experience significant
fluctuations in its quarterly results. The Company may incur significant losses
in the future due to product design, development, manufacturing and marketing
expenditures, especially in connection with its microlasers and microlaser
based products. If significant variations were to occur between forecasts and
actual orders with respect to its laser optics business or microlasers and
microlaser based products, the Company may not be able to reduce its expenses
proportionately and in a timely manner, and operating results could be
adversely affected. Such variations have occurred in the past and could occur
again in the future as a result of increases in development expenditures for
proposed new products, product introductions by competitors, changes in
customer ordering patterns and other factors. In addition, the Company's
ability to fill orders in a timely and responsive manner is dependent upon
maintaining adequate manufacturing capacity and significant inventories of raw
material and finished optics for replacement orders. The Company has
experienced capacity constraints in the past which have resulted in delays in
order fulfillment and reduced gross margins. Future delays in order fulfillment
could lead to declines in product sales. If product sales or prices were to
decline substantially, inventory writedowns could occur. Price reductions or
increases in material costs could also have an adverse effect on the Company's
business, financial condition and results of operations.

RISKS ASSOCIATED WITH INTERNATIONAL SALES

  International sales accounted for approximately 45%, 44% and 47% of the
Company's total revenues in the fiscal years ended August 31, 1995, 1996 and
1997, respectively, and the Company expects that international sales will
continue to account for a substantial portion of total revenues. The Company
may continue to expand its operations outside of the United States and to enter
additional international markets, both of which will require significant
management attention and financial resources. International sales are subject
to inherent risks, including unexpected changes in regulatory requirements,
tariffs and other trade barriers, political and economic instability in foreign
markets, difficulties in staffing and management and integration of foreign
operations, longer payment cycles, greater difficulty in accounts receivable
collection, currency fluctuations and potentially adverse tax consequences.
Since substantially all of the Company's foreign sales are denominated in U.S.
dollars, the Company's products may also become less price competitive in
countries in which local currencies decline in value relative to the U.S.
dollar. The Company's business and operating results may also be materially and
adversely affected by lower sales levels which typically occur during the
summer months and the calendar year end in Europe and certain other overseas
markets. The sales of many of the Company's OEM customers are dependent on
international sales, which increases the Company's exposure to the risks
associated with international sales.

ENVIRONMENTAL, HEALTH AND SAFETY CONCERNS

  The Company is subject to a variety of federal, state and local governmental
regulations related to the storage, use and disposal of hazardous materials
used by the Company in connection with the manufacture of laser optics. Both
the governmental regulations and the costs associated with complying with such
regulations are subject to change in the future. There can be no assurance that
any such change will not have a material adverse effect on the Company's
business, financial condition and results of operations. The Company makes
investments in protective equipment, and continually reviews and












                                      18.
<PAGE>   19



monitors process controls, manufacturing procedures and training to minimize
the risks to employees, surrounding communities and the environment due to the
presence and handling of such hazardous materials. The failure to properly
handle such materials could lead to harmful exposure to employees or to the
improper discharge of hazardous materials. Since the Company does not carry
environmental impairment insurance, such a failure could result in a material
adverse effect on the Company's business, financial condition and results of
operations.

VOLATILITY OF STOCK PRICE

  Until recently, there has been no public market for the Common Stock, and
there can be no assurance that an active public market for the Common Stock
will develop or be sustained.  The trading price of the Common Stock could be
subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant orders, changes in earning
estimates by analysts, announcements of technological innovations or new
products by the Company or its competitors, general conditions in the laser
optics and laser industries and other events or factors. In addition, the stock
market in general has experienced extreme price and volume fluctuations that
have affected the market price for many companies in industries similar or
related to that of the Company and that have been unrelated to the operating
performance of those companies. These market fluctuations may materially and
adversely affect the market price of the Common Stock. Following the Company's
initial public offering of the Common Stock (the "IPO"), Nasdaq informed the
Company that it had revised its initial listing criteria for inclusion on the
Nasdaq National Market and that such revised criteria were to be applied
retroactively. Nasdaq further informed the Company that it would be subject to
delisting proceedings if it could not meet such revised listing criteria by
November 21, 1997. In accordance with procedures established by Nasdaq, the
Company has requested a hearing on this issue. The Company believes that its
Nasdaq National Market listing should be maintained, but there can be no
assurance that the Company will, in fact, maintain its Nasdaq National Market
listing.



ITEM 2.  PROPERTIES

  The Company's main facility and headquarters, approximately 44,000 square
feet, is located in San Diego, California. This facility is leased through
December 31, 2001 and may be purchased pursuant to an option which may be
exercised at the expiration of the lease with a purchase price equal to the
prevailing market value of the property. The Company also leases facilities in
Plymouth, Michigan, Tijuana, Mexico and Ghent, Belgium, consisting of
approximately 1,000, 4,600 and 3,900 square feet, respectively. The lease on
the Michigan facility is month to month and the leases on the Mexico and
Belgium facilities expire in September 1998 and December 1999, respectively.
The Company believes that its leased properties are adequately covered by
insurance. The Company believes that following expansion of its manufacturing,
research and office space, the Company's facilities will be adequate for its
current and projected needs and that additional space will be available as
needed.

ITEM 3.  LEGAL PROCEEDINGS

  The Company is not a party to any litigation.

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

  No matters were submitted to a vote of security holders during the quarter
ended August 31, 1997.





                                      19.
<PAGE>   20
PART II

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

  (a)    The Company's Common Stock was first traded on June 19, 1997 on the
Nasdaq National Market under the symbol LPWR.  The following table sets forth,
for the periods indicated, the high and low sales prices per share of the
Common Stock as reported on the Nasdaq National Market:

<TABLE>
<CAPTION>
                FISCAL YEAR ENDED AUGUST 31, 1997                             HIGH         LOW      
                ---------------------------------                             ----        ---- 
 <S>                                                                          <C>         <C>
 Fourth Quarter  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7 3/8       5 1/2
</TABLE>


  The Company had approximately 189 stockholders of record of its Common Stock
as of October 31, 1997.  The Company has never paid any cash dividends on its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future.  The Company's credit agreements restrict the payment of cash
dividends.

  (b)    On June 18, 1997, the Company's Form SB-2 registration statement (File
no. 333-24421) was declared effective by the Securities and Exchange
Commission.  The registration statement, as amended, covered the offering of
1,650,000 shares of the Company's Common Stock, $.001 par value.  The offering
commenced on June 19, 1997 and the sale to the public of 1,650,000 shares of
Common Stock at $5.50 per share was completed on June 24, 1997 for an aggregate
price of $9,075,000.  The registration statement covered an additional 247,500
shares of Common Stock that the underwriters had the option to purchase solely
to cover over-allotments.  The managing underwriters for the offering were
Cruttenden Roth Incorporated and L.H. Friend, Weinress, Frankson & Presson,
Inc.  On August 6, 1997, the underwriters exercised their option to purchase
all 247,500 additional shares of Common Stock.  A total of 1,897,500 shares of
Common Stock were sold in the offering at an aggregate price of $10,436,250.
All of the shares sold in the offering were sold by the Company.

  Expenses incurred by the Company through August 31, 1997 in connection with
the issuance and distribution of Common Stock in the offering included
underwriting discounts, commissions and allowances of $965,353 and other
expenses of $1,347,131. Total offering expenses of $2,312,484 resulted in net
offering proceeds to the Company of $8,123,766. No expenses were paid to
directors, officers or affiliates of the Company or 10% owners of any class of
equity securities of the Company.

  Of the net offering proceeds to the Company of $8,123,766, through August 31,
1997, approximately $700,000 had been used for repayment of certain term loans
and amounts outstanding under its line of credit with Wells Fargo Bank N.A.,
approximately $200,000 had been used for the mandatory repayment of certain
term loans owed to Proxima, approximately $100,000 had been used for general
corporate purposes, approximately $100,000 had been used for facilities
expansion and improvements and approximately $100,000 had been used for
enhancement of internal research and development capabilities. No payments were
made to directors, officers or affiliates of the Company or 10% owners of any
class of equity securities of the Company, other than compensation payments to
officers of the Company.  Approximately $6,900,000 of the net offering proceeds
remain as working capital, primarily in the form of cash equivalents with
approximately $6,000,000 held as temporary investments.





                                      20.
<PAGE>   21
ITEM 6.  SELECTED FINANCIAL DATA



  The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's Consolidated Financial Statements and
the Notes thereto included elsewhere in this Annual Report on Form 10-K.




<TABLE>
<CAPTION>
                                                                        YEAR ENDED AUGUST 31,
                                                  --------      ------------------------------------      --------
                                                     1993          1994          1995          1996          1997
                                                  --------      --------      --------      --------      --------
 <S>                                              <C>           <C>            <C>          <C>           <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
  Product sales .............................     $  8,720      $ 10,158      $ 11,859      $ 15,194      $ 17,197
  Contract research and development .........          963         1,727         2,714         3,713         6,156
                                                  --------      --------      --------      --------      --------
         Total revenues .....................        9,683        11,885        14,573        18,907        23,353
Cost of revenues:
  Product sales .............................        5,392         6,550         7,994         9,888        11,882
  Contract research and development .........          766         1,308         2,059         2,942         4,849
                                                  --------      --------      --------      --------      --------
         Total cost of revenues .............        6,158         7,858        10,053        12,830        16,731
Gross profit:
  Product sales .............................        3,328         3,608         3,865         5,306         5,315
  Contract research and development .........          197           419           655           771         1,307
                                                  --------      --------      --------      --------      --------
         Total gross profit .................        3,525         4,027         4,520         6,077         6,622
Income (loss) from operations ...............         (630)         (745)       (1,920)         (918)        1,069
Net income (loss) ...........................     $   (816)     $ (1,013)     $ (2,269)     $ (1,231)     $    754


Net income (loss) per share(1) ..............     $  (0.25)     $  (0.29)     $  (0.59)     $  (0.29)     $   0.15
Shares used in per share computations(1) ....        3,318         3,509         3,856         4,311         5,143
</TABLE>





<TABLE>
<CAPTION>
                                                                  AUGUST 31, 
                                           -------     -------------------------------     -------
                                             1993        1994        1995        1996        1997
                                           -------     -------     -------     -------     -------
<S>                                        <C>         <C>         <C>         <C>         <C>
CONSOLIDATED BALANCE SHEETS DATA:
 Cash and cash equivalents ............    $   109     $   394     $   257     $   298     $ 6,304
 Working capital ......................      1,745       1,723       2,311       2,838      10,476
 Total assets .........................      7,899       9,444      10,207      11,194      21,186
 Long-term debt, net of current portion        943       1,049         802         559       1,171
 Subordinated convertible debentures ..      1,660       1,660       1,660       1,660       1,660
 Total stockholders' equity ...........      3,234       3,787       4,670       5,320      14,065
----------
</TABLE>

(1)      See Note 1 of Notes to Consolidated Financial Statements for a
         description of the computation of net income (loss) per share and the
         number of shares used in the per share calculation.





                                       21.

<PAGE>   22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         The following discussion contains forward-looking statements that
involve risks and uncertainties.  Laser Power's actual results could differ
materially from those discussed here.  Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in the
sections entitled "Certain Risk Factors Related to the Company's Business" as
well as those discussed elsewhere in this Form 10-K.

RESULTS OF OPERATIONS

Fiscal Year Ended August 31, 1997 Compared to Fiscal Year Ended August 31, 1996

REVENUES

  For the fiscal year ended August 31, 1997, product sales were $17.2 million
compared to $15.2 million for fiscal 1996, an increase of $2.0 million or 13%.
Contract research and development revenues were $6.2 million for fiscal 1997
compared to $3.7 million for fiscal 1996, an increase of $2.5 million or 66%.
The increase in product sales was due primarily to increased demand for laser
optics for new lasers and as replacement parts in installed lasers.  Initial
shipments of microlasers were not significant.  The increase in contract
research and development revenues was primarily due to work performed on a
commercial microlaser display development contract that began in July 1996.

  The Company's ability to increase product sales for fiscal 1998 will depend
on maintaining increased orders for products, integrating into operations
additional manufacturing equipment purchased and facilities leased during
fiscal 1997, hiring and training new employees for its expanded facility in
Mexico and increasing shipments of microlasers for medical and other
applications.  Contract research and development revenues are expected to
decrease in fiscal 1998 due to lower levels of funding for commercial
microlaser display development.

GROSS PROFIT

  Gross profit on product sales was $5.3 million in fiscal 1997 and fiscal
1996.  Gross profit on research and development revenues was $1.3 million in
fiscal 1997 compared to $771,000 in fiscal 1996, an increase of $536,000 or
69%.  Gross margin on product sales was 31% in fiscal 1997 compared to 35% in
fiscal 1996.  The decrease in gross margin was due to manufacturing start-up
costs of the Company's new microlaser products, and for optics products, to
manufacturing inefficiencies related to capacity constraints and facility
expansion to accommodate increased volume of orders and, to a lessor extent,
reduced average selling prices for optics in certain markets.  Gross margin on
contract research and development revenues was 21% for both fiscal 1997 and
fiscal 1996.

INTERNAL RESEARCH AND DEVELOPMENT EXPENSE

 Internal research and development expenses were $1.0 million in fiscal 1997
compared to $2.7 million in fiscal 1996, a decrease of $1.7 million or 62%.
The decrease was due to the transition of funding for certain microlaser
development efforts from internal sources to contract sources.  The Company
expects to increase funding for internal research and development of both
microlaser and laser optics products in future periods.  The extent of
increased internal funding will depend in part on the Company's ability to
maintain adequate levels of contract research and development funding.





                                      22.
<PAGE>   23

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

  Selling, general and administrative expenses were $4.5 million in fiscal 1997
compared to $4.3 million in fiscal 1996, an increase of $220,000 or 5%.  These
expenses have decreased as a percentage of revenues as absolute spending has
increased at a slower rate than the growth in revenues.  Selling, general and
administrative expenses are not expected to decrease further as a percentage of
revenues in the near-term due to planned increases in selling expenses for
microlaser products and to the additional expenses attributed to the Company
becoming publicly-held in June 1997.

INTEREST EXPENSE

  Net interest expense was $275,000 in fiscal 1997 compared to $300,000 in
fiscal 1996, a decrease of $25,000 or 8%.  The decrease was due primarily to
income from investment of the net proceeds of the Company's IPO, partially
offset by increased borrowings for capital investments.  In the near-term,
interest expense is expected to be lower due to repayment of certain debt and
income from investment of cash balances.

INCOME TAXES

  Income taxes were $40,000 in fiscal 1997 compared to $13,000 in fiscal 1996,
an increase of $27,000 or 201%.  The increase was due to increased taxable
income.  The Company's effective tax rate in fiscal 1997 was reduced
substantially by the utilization of federal and state tax net operating loss
carryforwards. The future availability of carryforwards may be limited by the
application of rules relating to a change in control as a result of the
completion of the IPO in August 1997.

Fiscal Year Ended August 31, 1996 Compared to Fiscal Year Ended August 31, 1995



REVENUES

  Product sales were $15.2 million in fiscal 1996 compared to $11.9 million in
fiscal 1995, an increase of $3.3 million or 28%. Contract research and
development revenues were $3.7 million in fiscal 1996 compared to $2.7 million
in fiscal 1995, an increase of $1.0 million or 37%.  The increase in product
sales was due to increased acceptance of the Company's OEM customers' lower
power lasers for certain industrial and medical applications and increased
worldwide demand for laser optics for new high power lasers and as replacement
parts in installed lasers.  The increase in contract research and development
revenues was due to the increased number and average size of contracts awarded
to the Company.



GROSS PROFIT

  Gross profit on product sales was $5.3 million in fiscal 1996 compared to
$3.9 million in fiscal 1995, an increase of $1.4 million or 37%.  Gross profit
on contract research and development revenues was $771,000 in fiscal 1996
compared to $655,000 in fiscal 1995, an increase of $116,000 or 18%. Gross
margin on product sales increased to 35% in fiscal 1996 from 33% in fiscal
1995. The increase in gross margin was primarily due to improved manufacturing
efficiencies resulting from higher manufacturing volume and from increased
production in Mexico. Gross margin on contract research and development
revenues decreased to 21% in fiscal 1996 from 24% in fiscal 1995. The decrease
was primarily due to a cost-sharing contract that supplemented internal funding
of technology development for microlasers and microlaser based projection
displays.





                                      23.
<PAGE>   24



INTERNAL RESEARCH AND DEVELOPMENT EXPENSE

         Internal research and development expenses were $2.7 million in fiscal
1996 compared to $2.9 million in fiscal 1995, a decrease of $168,000 or 6%.
The decrease is due to the transition during the fourth quarter of fiscal 1996
from internal funding to contract funding for certain microlaser development
activities.



SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

  Selling, general and administrative expenses were $4.3 million in fiscal 1996
compared to $3.6 million in fiscal 1995, an increase of $724,000 or 20%, due
primarily to the addition of personnel necessary to support the growth in
product sales and the anticipated production of microlasers and to a lesser
extent Company-wide bonus accruals; no bonuses were accrued in 1995. These
expenses decreased as a percentage of revenues as absolute spending increased
at a slower rate than the growth in revenues.



INCOME TAXES

  Income taxes were $13,000 in fiscal 1996 compared to $23,000 in fiscal 1995,
a decrease of $10,000 or 43% which was due to lower taxable income for state
income and alternative minimum tax calculations.



LIQUIDITY AND CAPITAL RESOURCES

  The Company completed its IPO in August 1997, raising approximately $8.1
million, net of offering costs.  Prior to the IPO, the Company satisfied its
liquidity requirements primarily from cash generated from operating activities
and the net proceeds of private sales of preferred and common stock and, to a
lesser extent, from issuance of subordinated debentures and capital equipment
leasing and bank debt.

  Cash provided by operating activities was $441,000 in fiscal 1997 compared to
cash used in operating activities of $714,000 and $1.8 million in fiscal 1996
and 1995, respectively. The primary reason for the increase was the transition
of certain microlaser research and development activities from internal funding
to contract funding which resulted in increased operating income, and to a
lesser extent, increased operating income from sales of optics.

  Cash used in investing activities was $3.1 million in fiscal 1997

compared to $923,000 and $905,000 in fiscal 1996 and 1995, respectively.  The
increase is primarily due to additions to plant and equipment to increase
capacity and automation for manufacture of optics products and to enable
manufacturing of microlaser products.

  Cash provided by financing activities was $8.6 million in fiscal 1997
compared to $1.7 million and $2.6 million for fiscal 1996 and 1995,
respectively.  For fiscal 1997, the primary source of financing was the IPO.
For fiscal 1996 and 1995, the primary source of financing was the private sale
of preferred stock.  On August 1, 1997, a $1.3 million capital equipment line
of credit converted to a five-year term loan.  The Company had no amount
outstanding under its bank line of credit at October 31, 1997.





                                      24.
<PAGE>   25

  The Company believes that the net proceeds from the IPO completed in August
1997 together with other sources of liquidity and anticipated cash provided by
operations will satisfy its cash requirements for at least the next twelve
months.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The financial statements and supplementary data of the Company required by
this item are filed as exhibits hereto, are listed under Item 14(a)(1) and (2),
and are incorporated herein by reference.

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

         None.



                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  The information required by this item with respect to directors of the
Company is incorporated by reference to Registrant's Definitive Proxy Statement
to be filed with the Commission pursuant to Regulation 14A in connection with
the 1998 Annual Meeting (the "Proxy Statement") under the headings "Nominees"
and "Directors." The information required by this section with respect to
Executive Officers is set forth under Part I, Item 1, "Business--Executive
Officers of the Registrant."

ITEM 11. EXECUTIVE COMPENSATION

  The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions."





                                      25.
<PAGE>   26
                                    PART IV

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

(a)  (1)  Index to Consolidated Financial Statements:



  The consolidated financial statements required by this item are submitted in
a separate section beginning on page 27 of this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                                 Page
                                                                                Number
                                                                                ------
          <S>                                                                    <C>
          Report of Independent Auditors                                          29
          Consolidated Balance Sheets at
              August 31, 1997 and 1996                                            30
          Consolidated Statements of Operations for the years ended
              August 31, 1997, 1996 and 1995                                      31
          Consolidated Statements of Stockholders' Equity
              for the years August 31, 1997, 1996 and 1995                        32
          Consolidated Statements of Cash Flows for the years ended
              August 31, 1997, 1996 and 1995                                      33
          Notes to Consolidated Financial Statements                              34
</TABLE>



     (2)  All schedules have been omitted because
          they are not applicable or required, or
          the information required to be set forth
          therein is included in the Financial
          Statements or notes thereto.

(b)      The Registrant filed no reports on Form 8-K during the fourth quarter
of the fiscal year ended August 31, 1997.

(c)      Exhibits


<TABLE>
<CAPTION>
Exhibit            Exhibit
Footnote            Number                                 Description
---------------------------------------------------------------------------------------------------------------------
 <S>                 <C>            <C>
 (1)                  3.1           Registrant's Amended and Restated Certificate of Incorporation

 (1)                  3.2           Registrant's Amended and Restated Bylaws

 (1)                  4.4           Form of Common Stock Certificate of Registrant

 (1)                 10.1           Form of Indemnity Agreement entered into between Registrant and its directors and
                                    executive officers

 (1)(3)              10.2           Registrant's Second Amended and Restated 1981 Stock Option Plan (the "1981 Plan")

 (1)                 10.3           Incentive Stock Option Agreement Under Registrant's 1981 Plan

 (1)(3)              10.4           Registrant's 1993 Stock Option Plan (the "1993 Plan")
</TABLE>





                                  26.
<PAGE>   27
<TABLE>
 <S>                 <C>            <C>

 (1)                 10.5           Form of Incentive Stock Option Agreement under the 1993 Plan

 (1)                 10.6           Form of Nonstatutory Stock Option Agreement under the 1993 Plan

 (1)(3)              10.7           Registrant's 1997 Equity Incentive Plan (the "1997 Plan")

 (1)                 10.8           Form of Incentive Stock Option Agreement under the 1997 Plan

 (1)                 10.9           Form of Nonstatutory Stock Option Agreement under the 1997 Plan

 (1)(3)              10.10          Registrant's Employee Stock Purchase Plan

 (1)                 10.11          Form of Warrant issued by Registrant in favor of certain directors of Registrant
                                    and attached schedule

 (1)(2)              10.12          Cooperative Development and License Agreement between Proxima Corporation and
                                    Registrant dated January 11, 1994

 (1)                 10.13          Registration Rights Agreement between Registrant, Union Miniere Inc. and Proxima
                                    Corporation dated June 9, 1997

 (1)(2)              10.14          Assignment Agreement between Registrant and ATx Telecom Systems, Inc. dated
                                    September 30, 1996

 (1)                 10.15          Credit Agreement between Registrant and Wells Fargo dated January 29, 1997

 (1)                 10.16          Form of Employment Agreement and attached schedule

 (1)                 10.17          Consulting Agreement dated December 1, 1996 between Registrant and Arthur P.
                                    Minich

 (1)                 10.18          Lease dated August 30, 1984 between the Registrant and Highlands Park Partnership
                                    and amendments thereto

 (1)(2)              10.19          Development and Manufacturing Agreement for RGB Lasers between Registrant and LDT
                                    GmbH & Co. dated July 1, 1996

                     11.1           Statement re: computation of per share earnings

 (1)                 21.1           Subsidiaries of the Registrant

                     23.1           Consent of Ernst & Young LLP, Independent Auditors

                     24.1           Power of Attorney. Reference is made to page 44

                     27.1           Financial Data Schedule
----------                                                     
</TABLE>

(1)      Filed as an exhibit to the Registrant's Registration Statement on Form
         SB-2 (No. 333-24421) or amendments thereto and incorporated herein by
         reference.

(2)      Certain confidential portions deleted pursuant to Order Granting
         Application Under the Securities Act of 1933, as amended, and Rule 406
         thereunder respecting Confidential Treatment dated June 12, 1997.

(3)      Indicates management or compensatory plan or arrangement required to be
         identified pursuant to item 14(a)(3)





                                      27.
<PAGE>   28
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
                <S>                                                                       <C>
                Report of Independent Auditors..........................................  29
                Consolidated Balance Sheets at August 31, 1997 and 1996.................  30
                Consolidated Statements of Operations for the years ended
                   August 31, 1997, 1996 and 1995.......................................  31
                Consolidated Statements of Stockholders' Equity for the years ended
                August 31, 1997, 1996 and 1995..........................................  32
                Consolidated Statements of Cash Flows for the years ended
                   August 31, 1997, 1996 and 1995.......................................  33
                Notes to Consolidated Financial Statements..............................  34
</TABLE>

































                                        28.
<PAGE>   29
                         REPORT OF INDEPENDENT AUDITORS



The Board of Directors and Stockholders

Laser Power Corporation

  We have audited the accompanying consolidated balance sheets of Laser Power
Corporation at August 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended August 31, 1997.  These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Laser Power
Corporation at August 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1997, in conformity with generally accepted accounting principles.


                               ERNST & YOUNG LLP



San Diego, California

October 7, 1997





                                      29.
<PAGE>   30

                             LASER POWER CORPORATION


                           CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
                                                                                                  AUGUST 31,        
                                                                                        ------------------------------
                                                                                           1997                1996
                                                                                        ------------      ------------
<S>                                                                                     <C>               <C>
ASSETS
Current assets:
  Cash and cash equivalents .......................................................     $  6,303,776      $    298,160
  Accounts receivable, net ........................................................        4,280,814         2,992,556
  Inventories, net ................................................................        3,612,220         2,729,865
  Other current assets ............................................................          334,254           166,445
                                                                                        ------------      ------------
          Total current assets ....................................................       14,531,064         6,187,026
Property and equipment, net .......................................................        5,719,665         4,187,387
Intangibles and other assets, net .................................................          935,305           819,286
                                                                                        ------------      ------------
          Total assets ............................................................     $ 21,186,034      $ 11,193,699
                                                                                        ============      ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable ................................................................     $  1,933,196      $  1,339,596
  Accrued compensation and related expenses .......................................          919,856           739,385
  Other current liabilities .......................................................          827,239           781,936
  Current portion of long-term debt ...............................................          374,580           488,083
                                                                                        ------------      ------------
          Total current liabilities ...............................................        4,054,871         3,349,000
Deferred rent .....................................................................          234,795           305,247
Long-term debt ....................................................................        1,171,300           558,975
Subordinated convertible debentures ...............................................        1,660,000         1,660,000
Stockholders' equity:
  Convertible preferred stock, $.125
     par value in 1996, $.001 par value in 1997:
     Authorized -- 3,000,000 shares

       Issued and outstanding 1,610,891 shares in 1996 ............................               --           201,361
  Common stock, par value $.001:
     Authorized -- 15,000,000 shares

       Issued and outstanding 3,000,106 shares in 1996 and 6,099,854 shares in 1997            6,100             3,000
  Additional paid-in capital ......................................................       18,585,905        10,223,305
  Foreign currency translation adjustment .........................................          (50,576)          123,222
  Accumulated deficit .............................................................       (4,476,361)       (5,230,411)
                                                                                        ------------      ------------
          Total stockholders' equity ..............................................       14,065,068         5,320,477
                                                                                        ------------      ------------
          Total liabilities and stockholders' equity ..............................     $ 21,186,034      $ 11,193,699
                                                                                        ============      ============
</TABLE>



                            See accompanying notes.








                                      30.
<PAGE>   31

                             LASER POWER CORPORATION



                      CONSOLIDATED STATEMENTS OF OPERATIONS




<TABLE>
<CAPTION>
                                                                             YEARS ENDED AUGUST 31,       
                                                                 -----------------------------------------------
                                                                     1997             1996              1995
                                                                 ------------     ------------      ------------
<S>                                                              <C>              <C>               <C>   
 Revenues:
   Product sales ...........................................     $ 17,197,346     $ 15,194,472      $ 11,858,713
   Contract research and development .......................        6,155,794        3,712,967         2,714,208
                                                                 ------------     ------------      ------------
           Total revenues ..................................       23,353,140       18,907,439        14,572,921
 Costs and expenses:
   Cost of product sales ...................................       11,882,343        9,887,809         7,994,255
   Contract research and development .......................        4,849,183        2,941,947         2,058,873
   Internal research and  development ......................        1,027,160        2,689,182         2,857,452
   Selling, general and administrative .....................        4,525,914        4,306,329         3,582,773
                                                                 ------------     ------------      ------------
           Total costs and expenses ........................       22,284,600       19,825,267        16,493,353
                                                                 ------------     ------------      ------------
 Income (loss) from operations .............................        1,068,540         (917,828)       (1,920,432)
 Interest expense, net .....................................          274,532          299,832           325,928
                                                                 ------------     ------------      ------------
 Income (loss) before income taxes .........................          794,008       (1,217,660)       (2,246,360)
 Income taxes ..............................................           39,958           13,281            22,523
                                                                 ------------     ------------      ------------
 Net income (loss) .........................................     $    754,050     $ (1,230,941)     $ (2,268,883)
                                                                 ============     ============      ============
 Net income (loss) per share ...............................     $       0.15     $      (0.29)     $      (0.59)
                                                                 ============     ============      ============
 Shares used in per share computations .....................        5,143,000        4,311,000         3,856,000
                                                                 ============     ============      ============
</TABLE>


                            See accompanying notes.








                                      31.
<PAGE>   32
                            LASER POWER CORPORATION

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                   YEARS ENDED AUGUST 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                                                                                
                                    CONVERTIBLE                                                                      FOREIGN     
                                  PREFERRED STOCK                      COMMON STOCK                ADDITIONAL        CURRENCY    
                          ------------------------------      ------------------------------         PAID-IN        TRANSLATION  
                             SHARES            AMOUNT            SHARES            AMOUNT            CAPITAL         ADJUSTMENT  
                          ------------      ------------      ------------      ------------      ------------      ------------ 
<S>                        <C>              <C>                <C>              <C>               <C>               <C>          
Balance at August
 31, 1994 ............         382,172      $     47,771         2,987,153      $      2,988      $  5,422,314      $     44,257
 Issuance of preferred
  stock ..............         761,024            95,128                --                --         2,948,968                -- 
 Issuance of common
  stock ..............              --                --            13,322                13            39,955                -- 
 Foreign currency
  translation                  
  adjustment .........              --                --                --                --                --            68,433
 Net loss ............              --                --                --                --                --                -- 
                          ------------      ------------      ------------      ------------      ------------      ------------
Balance at August 31,
 1995 ...............        1,143,196           142,899         3,000,475             3,001         8,411,237           112,690
 Issuance of
  preferred stock....          467,695            58,462                --                --         1,812,318                -- 
 Repurchase of
  common stock.......               --                --              (369)               (1)             (250)               -- 
 Foreign currency
  translation
  adjustment ........               --                --                --                --                --            10,532
  Net loss ..........               --                --                --                --                --                -- 
                          ------------      ------------      ------------      ------------      ------------      ------------
Balance at August 31,
 1996 ...............        1,610,891           201,361         3,000,106             3,000        10,223,305           123,222
 Issuance of common
  stock for         
  services performed                --                --             8,996                 9            40,564                -- 
 Issuance of common
  stock in
  conjunction with
  the initial public
  offering at $5.50         
  per share .........               --                --         1,897,500             1,898         8,121,868                --
 Conversion of
  preferred stock in
  conjunction with
  the initial public        
  offering ..........       (1,610,891)         (201,361)        1,193,252             1,193           200,168                --
 Foreign currency
  translation
  adjustment .......               --                --                --                --                --          (173,798)
 Net income ........               --                --                --                --                --                -- 
                          ------------      ------------      ------------      ------------      ------------      ------------
Balance at August 31,
   1997 .............               --      $         --         6,099,854      $      6,100      $ 18,585,905      $    (50,576)
                          ============      ============      ============      ============      ============      ============


                          ACCUMULATED                    
                            DEFICIT            TOTAL     
                          ------------      ------------ 
                          <C>               <C>          
Balance at August                                                    
 31, 1994 ............    $ (1,730,587)     $  3,786,743
 Issuance of preferred
  stock ..............              --         3,044,096
 Issuance of common
  stock ..............              --            39,968
 Foreign currency
  translation             
  adjustment .........              --            68,433
 Net loss ............      (2,268,883)       (2,268,883)
                          ------------      ------------
 Balance at August 31,
  1995 ...............      (3,999,470)        4,670,357
  Issuance of
   preferred stock....             --         1,870,780
  Repurchase of
   common stock.......             --              (251)
  Foreign currency
   translation
   adjustment ........             --            10,532
  Net loss ...........      (1,230,941)       (1,230,941)
                          ------------      ------------
Balance at August 31,
 1996 ...............       (5,230,411)        5,320,477
 Issuance of common
  stock for
  services performed               --             40,573
 Issuance of common
  stock in
  conjunction with
  the initial public
  offering at $5.50        
  per share..........              --          8,123,766
 Conversion of
  preferred stock in
  conjunction with
  the initial public      
  offering...........              --                --
 Foreign currency
  translation
  adjustment ........               --          (173,798)
  Net income ........          754,050           754,050
                          ------------      ------------
Balance at August 31,
 1997 ...............     $ (4,476,361)     $ 14,065,068
                          ============      ============
</TABLE>




                             See accompanying notes.










                                      32.


<PAGE>   33
                            LASER POWER CORPORATION



                     CONSOLIDATED STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
                                                                              YEARS ENDED AUGUST 31,       
                                                                 ---------------------------------------------
                                                                     1997             1996              1995   
                                                                 -----------      -----------      -----------
<S>                                                              <C>               <C>              <C>
OPERATING ACTIVITIES

Net income (loss) from operations ..........................     $   754,050       (1,230,941)      (2,268,883)

Adjustments to reconcile net income (loss) to net cash
provided by (used in)

  operating activities:
  Depreciation and amortization ............................       1,166,723        1,037,941          997,168
  Loss on disposal of property and equipment ...............              --           84,936               --
  Deferred rent ............................................         (70,452)         (70,452)         (70,452)
  Provision for losses on accounts receivable ..............          12,096            9,847            6,000
  Changes in operating assets and liabilities:
    Accounts receivable ....................................      (1,300,354)        (548,800)        (358,550)
    Inventories ............................................        (882,355)        (581,244)        (518,900)
    Other current assets ...................................         (57,809)         (14,578)         (52,414)
    Accounts payable .......................................         592,854           69,720          294,144
    Accrued compensation and related expenses ..............         180,471          315,026           17,526
    Other current liabilities ..............................          45,303          214,994          135,445
                                                                 -----------      -----------      -----------
    Net cash provided by (used in) operating activities ....         440,527         (713,551)      (1,818,916)
INVESTING ACTIVITIES

Additions to property and equipment ........................      (2,785,561)        (813,089)        (917,125)
(Increase) decrease in intangibles and other assets ........        (313,257)        (109,889)          11,648
                                                                 -----------      -----------      -----------
    Net cash used in investing activities ..................      (3,098,818)        (922,978)        (905,477)
FINANCING ACTIVITIES
Proceeds from borrowings ...................................       1,158,632          251,046               --
Payments on borrowings .....................................        (659,064)        (444,195)        (496,622)
Net proceeds from issuance of stock in conjunction with
initial
                                                                   8,123,766               --               --
 public offering
Net proceeds from issuance and repurchase of stock .........          40,573        1,870,529        3,084,064
                                                                 -----------      -----------      -----------
    Net cash provided by financing activities ..............       8,663,907        1,677,380        2,587,442
                                                                 -----------      -----------      -----------
Net increase (decrease) in cash and cash equivalents .......       6,005,616           40,851         (136,951)
Cash and cash equivalents at beginning of the period .......         298,160          257,309          394,260
                                                                 -----------      -----------      -----------
Cash and cash equivalents at end of the period .............     $ 6,303,776      $   298,160      $   257,309
                                                                 ===========      ===========      ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for interest ...................     $   267,000      $   313,000      $   305,000
                                                                 ===========      ===========      ===========
</TABLE>


                            See accompanying notes.








                                      33.
<PAGE>   34
                            LASER POWER CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                AUGUST 31, 1997

1.  BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Presentation

  Laser Power Corporation ("Laser Power" or the "Company") operates in one
business segment and designs, manufactures and markets high performance lasers
and laser optics for industrial, medical and military applications. The
Company's optics products are sold to laser system OEMs and end users as
original and replacement components in high power CO2 and other lasers. Such
lasers are used in a variety of industrial processing applications, such as
sheet metal cutting, automobile body welding, surface-hardening for engine
cylinder walls, scribing and drilling delicate ceramic circuits, and in certain
therapeutic and cosmetic procedures, including heart surgery and skin wrinkle
removal. The Company's proprietary miniature solid state lasers are designed
for use in certain medical, telecommunication, projection display and other
applications. The Company also conducts contract research in the development
and applications of advanced solid state lasers. Substantially all of the
Company's product revenues to date are attributable to the sale of laser optics
products for the industrial processing and medical industries.

  The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of Laser Power Corporation (the
"Company") and its subsidiaries, Laser Power Optics de Mexico S.A. de C.V.
("Laser Power Mexico") and Radius Engineering N.V.  ("Radius"). The Company
operates through three divisions: Laser Power Optics, which manufactures and
sells laser optics; Laser Power Research, which performs funded contract
research for commercial applications and for various agencies and laboratories
of the U.S. federal government; and Laser Power Microlasers, which manufactures
and markets the Company's microlasers. Laser Power Mexico performs a portion of
the manufacturing of Laser Power Optics division and does not sell products to
unaffiliated customers. All significant intercompany accounts and transactions
have been eliminated in consolidation.

Revenues

  Product sales are recorded upon shipment. Revenues from contract research and
development involve both commercial and governmental contracts and are
recognized using the percentage-of-completion method based on the ratio of
costs incurred to date to total estimated costs. Total revenues from government
contracts were $3,337,000, $3,397,000, and $2,254,000 in 1997, 1996 and 1995,
respectively. Provisions are made to recognize any anticipated losses on
contracts when losses become evident.

Cash and Cash Equivalents

  Cash and cash equivalents consist of cash and highly liquid investments with
maturities of three months or less when purchased.

Inventories

  Inventories are stated at lower of cost (first-in, first-out) or market.
Market is based upon estimated net realizable value.





                                      34.
<PAGE>   35
Depreciation and Amortization

  Machinery, equipment and office furniture are depreciated over their
estimated useful lives (3 to 15 years) on the straight-line method and
leasehold improvements are amortized over the useful life of the asset or the
lease term, whichever is less.

  Intangible assets consist primarily of goodwill, patents and licenses.
Goodwill is amortized over 20 years and patents and licenses (which are
primarily related to microlaser technology) are amortized over the shorter of
the estimated useful life or the legal life. Amortization of patents is
initiated when the related technology is ready for commercial release.

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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Concentration of Credit Risk

  The Company primarily sells its products to commercial, military and medical
companies. Financial instruments that potentially subject the Company to credit
risk consist principally of cash equivalents and trade receivables.  The
Company invests in a variety of financial instruments and limits exposure with
any one issuer.  The Company performs periodic credit evaluations of its
customers and has not experienced significant losses with respect to its
accounts receivable.  As of August 31, 1997, the cost of cash equivalents and
trade receivables approximated estimated fair value.

Impairment of Long-Lived Assets

  Effective September 1, 1996, the Company adopted Financial Accounting
Standards Board issued SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121").
SFAS 121 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of.  The adoption of SFAS 121 did not have a
material effect on the Company's financial position or results of operations.

Stock Options

  In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), effective for fiscal
years beginning after December 15, 1995. SFAS 123 established the fair
value-based method of accounting for stock-based compensation arrangements
under which compensation cost is determined using the fair value of the stock
option at the grant date and the number of options vested, and is recognized
over the periods in which the related services are rendered as allowed by SFAS
123. The Company has elected to continue with the current intrinsic value-based
method, under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations.

Net Income (Loss) Per Share

  Net income (loss) per share is computed using the weighted average number of
common shares and common equivalents shares outstanding during the periods
presented. Common equivalent shares result from stock options and warrants. For
loss periods, common equivalent shares are excluded from the computation as
their effect would be antidilutive, except that the Securities and Exchange
Commission requires common and common share equivalents issued during the
twelve-month period prior to the initial filing of a proposed public offering,
to be





                                      35.
<PAGE>   36

included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method and the initial public offering
price).

  In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128"), which supersedes APB Opinion 15.  SFAS 128 replaces the presentation of
primary earnings per share (EPS) with "Basic EPS" which includes no dilution
and is based on weighted-average common shares outstanding for the period.
Companies with complex capital structures, including the Company, will also be
required to present "Diluted EPS" that reflects the potential dilution of
securities like employee stock options and warrants to purchase common stock.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997.  Basic EPS for each of the three years in the period ended
August 31, 1997, 1996 and 1995 would be $0.21, $(0.41) and $(0.76),
respectively.  Diluted EPS is not expected to differ materially from
fully-diluted EPS.

New Accounting Standards

  In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income  ("SFAS
130"), and Statement of Financial Accounting Standards No. 131, Segment
Information ("SFAS 131").  Both of these standards are effective for fiscal
years beginning after December 15, 1997.  SFAS 130 requires that all components
of comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized.  Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources.  Net income and other
comprehensive income, including foreign currency translation adjustment,
minimum pension accrual, and unrealized gains and losses on investments shall
be reported, net of their related tax effect, to arrive at comprehensive
income.  The Company intends to adopt SFAS 130 in fiscal 1999 and operating
results of prior periods will be reclassified.

  Historically, the Company has operated in one business segment; however, SFAS
131 redefines segments and in the future, the Company may also be required to
disclose certain financial information about operating segments, products and
services.  The Company has not determined how operating segments will be
defined for disclosure purposes or which segments will meet the quantitative
requirements for disclosure.  The adoption of the standard will have no impact
on the Company's future results of operations or financial position.

2.  SELECTED BALANCE SHEET DETAILS

<TABLE>
<CAPTION>
                                                        AUGUST 31,       
                                             ------------------------------
                                                 1997               1996   
                                             ------------      ------------
<S>                                          <C>               <C>
   Accounts receivable:
    Trade ..............................     $  3,881,801      $  2,895,292
    Revenue in excess of billings ......          640,499           326,654
                                             ------------      ------------
                                                4,522,300         3,221,946
    Reserves ...........................          241,486           229,390
                                             ------------      ------------
                                             $  4,280,814      $  2,992,556
                                             ============      ============
   Inventories:
     Raw materials .....................     $  1,338,353      $    909,563
     Work in progress ..................        1,594,513         1,148,439
     Finished goods ....................          679,354           671,863
                                             ------------      ------------
                                             $  3,612,220      $  2,729,865
                                             ============      ============
   Property and equipment, at cost:
     Machinery and equipment ...........     $ 10,493,445      $  8,375,250
     Leasehold improvements ............        1,284,093         1,012,629
     Office furniture and equipment ....          923,926           861,952
                                             ------------      ------------
                                               12,701,464        10,249,831
   Less accumulated depreciation and 
     amortization .....................    .   (6,981,799)       (6,062,444)
                                             ------------      ------------
                                             $  5,719,665      $  4,187,387
                                             ============      ============
</TABLE>





                                      36.
<PAGE>   37
<TABLE>
<CAPTION>
                                                       AUGUST 31,
                                              ----------------------------
                                                 1997              1996    
                                              -----------      -----------
<S>                                           <C>              <C>
    Intangible and other assets:
      Goodwill in foreign subsidiary ....     $   549,100      $   549,100
      Patents and licenses ..............         507,462          302,513
      Other .............................         272,356          274,048
                                              -----------      -----------
                                                1,328,918        1,125,661
    Less accumulated amortization .......        (393,613)        (306,375)
                                              -----------      -----------
                                              $   935,305      $   819,286
                                              ===========      ===========
    Accrued compensation and related
    expenses:
      Accrued bonuses ...................     $   262,004      $   240,000
      Other .............................         657,852          499,385
                                              -----------      -----------
                                              $   919,856      $   739,385
                                              ===========      ===========
    Other current liabilities:
      Customer advances .................     $    46,344      $   326,562
      Other .............................         780,895          455,374
                                              -----------      -----------
                                              $   827,239      $   781,936
                                              ===========      ===========
</TABLE>

3.  LONG-TERM DEBT AND OTHER FINANCING AGREEMENTS

  In January 1997, the Company renewed a line of credit with a bank, subject to
maximum advances of $2,000,000 and at an annual interest rate of 1% above the
bank's prime rate (9.5% at August 31, 1997). The line of credit expires on
March 1, 1998, and there were no significant amounts outstanding under the line
of credit at August 31, 1997.

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                       AUGUST 31,
                                               -------------------------
                                                  1997           1996
                                               ----------     ----------
<S>                                            <C>            <C>
       Promissory note ...................     $   75,000     $   90,203
       Term note payable to bank .........      1,319,626        277,779
       Equipment line of credit from bank              --        172,166
       Equipment financing from Proxima ..             --        273,936
       Other equipment financing .........        135,488        225,534
       Other .............................         15,766          7,440
                                               ----------     ----------
                                                1,545,880      1,047,058
       Less current portion ..............        374,580        488,083
                                               ----------     ----------
                                               $1,171,300     $  558,975
                                               ==========     ==========
</TABLE>

  The promissory note is payable in monthly installments of principal and
interest of $1,840 through September 2001. Borrowings under the promissory note
are secured by equipment and bear interest at 8.25% per annum.

  In July 1997, the Company fully paid off the prior term note payable to the
bank using proceeds from the initial public offering.  In August 1997, the
Company converted its equipment line draws to a five-year term note payable to
the bank.

  The current term note payable to the bank is due in monthly principal
payments of $22,000 plus interest, with the final installment consisting of all
remaining unpaid principal due and payable in full no later than August 1,
2002. The term note bears interest at 1.25% above the bank's prime rate (9.75%
at August 31, 1997.)

  All bank borrowings are secured by accounts receivable, inventory,
intangibles, and property and equipment, and contain restrictive covenants.
Restrictive covenants include the maintenance of minimum tangible net worth,
debt to equity and cash flow ratios, as well as restrictions on capital and
lease expenditures, investment levels in the Company's Belgium subsidiary,
additional borrowings and payment of dividends.

  Other equipment financing agreements are payable in monthly installments of
principal and interest through March 2001. Borrowings under these financing
agreements are secured by specific equipment, with interest at rates ranging
from 9.0% to 10.7% at August 31, 1997.

  The Company entered into an equipment line of credit agreement with Proxima
Corporation on June 30, 1994, which provided for maximum borrowings of
$500,000. In May 1995, the outstanding borrowings were converted to





                                      37.
<PAGE>   38

a four-year term loan bearing interest at 1.5% above the bank's prime rate. The
loan was paid off in full in July 1997 with proceeds from the initial public
offering.

  In November 1987, the Company obtained debt and equity financing from Union
Miniere ("Union"). The Company issued 483,333 shares of common stock for
$1,053,000 cash (net of stock issuance costs of $107,000) and subordinated
convertible debentures amounting to $1,340,000. In December 1988, the Company
issued an additional $320,000 of subordinated convertible debentures to Union
Miniere. In March 1997, the maturity date of the debentures was extended to
November 2, 2000 and the conversion rate for which the debentures are
convertible into common stock was set at $4.625 per share (358,918 shares). The
debentures are subordinated to all bank borrowings and interest is payable
semi-annually at an annual rate equal to 1% above a bank's prime rate (9.50% at
August 31, 1997) subject to a minimum rate of 5 -1/2% and a maximum rate of the
lesser of 11.5% or the maximum rate permitted by law. The debentures provide
for restrictive covenants similar to those of the bank borrowings.

  Principal maturities on the subordinated convertible debentures and long-term
debt for each of the years ending subsequent to August 31, 1997 are as follows:

<TABLE>
<S>                                                         <C>
         1998     ....................................      $  375,000
         1999     ....................................         311,000
         2000     ....................................         301,000
         2001     ....................................       1,955,000
         2002     ....................................         264,000
                  Thereafter..........................              --
                                                            ----------
                                                            $3,206,000
                                                            ==========
</TABLE>

4.  INCOME TAXES

  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 amounts used for income tax purposes. The components of the
Company's deferred tax liabilities and assets are as follows:

<TABLE>
<CAPTION>
                                                         AUGUST 31,
                                                ----------------------------
                                                    1997             1996
                                                -----------      -----------
<S>                                             <C>              <C>
  Deferred tax assets:
    Tax basis operating loss and credit ...     $ 2,303,000      $ 2,504,000
  carryforwards ...........................
    Other .................................         301,000          273,000
                                                -----------      -----------
  Total deferred tax assets ...............       2,604,000        2,777,000
                                                -----------      -----------

  Deferred tax liability: .................
    Depreciation ..........................        (549,000)        (535,000)
    Intangibles ...........................        (191,000)        (110,000)
                                                -----------      -----------
  Total deferred tax liabilities ..........        (740,000)        (645,000)
                                                -----------      -----------

  Net deferred tax assets .................       1,864,000        2,132,000
  Valuation allowance .....................      (1,864,000)      (2,132,000)
                                                -----------      -----------
  Net deferred tax accounts ...............     $        --      $        -- 
                                                ===========      ===========
</TABLE>

         For financial reporting purposes, income (loss) before income taxes
includes the following components:

<TABLE>
<CAPTION>
                                                          YEARS ENDED AUGUST 31,     
                                              ---------------------------------------------
                                                 1997              1996             1995 
                                              -----------      -----------      -----------
<S>                                           <C>              <C>             <C>
Pretax income:
  United States .........................     $   623,357      $(1,323,591)     $(2,050,894)
  Foreign ...............................         170,651          105,931         (195,466)
                                              -----------      -----------      -----------
                                              $   794,008      $(1,217,660)     $(2,246,360)
                                              ===========      ===========      ===========
</TABLE>





                                      38.
<PAGE>   39
Significant components of the provision for income taxes are as follows:



<TABLE>
<CAPTION>
                                                       YEARS ENDED AUGUST 31,
                                                 -------------------------------
                                                   1997        1996       1995
                                                 -------     -------     -------
<S>                                             <C>          <C>         <C>  
Current
Federal ....................................     $18,000          $-          $-
Foreign ....................................      12,836          --          --
State ......................................       9,122      13,281      22,523
                                                 -------     -------     -------
Total income tax provision .................     $39,958     $13,281     $22,523
                                                 =======     =======     =======
</TABLE>

         A reconciliation of the effective tax rates and the statutory federal
income tax rate is as follows:

<TABLE>
<CAPTION>
                                                       YEARS ENDED AUGUST 31,      
                                                    ---------------------------  
                                                     1997      1996       1995    
                                                    -----      -----      -----  
<S>                                                 <C>        <C>        <C>
Tax at U.S. statutory rate ....................       35%       (35)%      (35)%
State income taxes, net of federal benefit ....      1.0        1.0        1.1
Higher effective income taxes of other ........      1.0         --         --
countries .....................................
Change in valuation allowance .................    (35.3)      32.3       33.7
Other, net ....................................      4.3        2.8        1.2
                                                    ---------------------------  
                                                     6.0%       1.1%       1.0%
                                                    ===========================  
</TABLE>


  At August 31, 1997, the Company has net operating loss carryforwards for
federal and California income tax purposes of approximately $5,156,000 and
$1,348,000, respectively, which may be applied against future taxable income.
These carryforwards will begin to expire in 2001 and 1998, respectively, unless
previously utilized.

  The Company also has investment tax credit, research and development credit,
targeted jobs tax credit, alternative minimum tax credit and California
manufacturers investment credit carryforwards at August 31, 1997 aggregating
approximately $483,000. These tax credit carryforwards will expire in 1998
through 2007 unless previously utilized.

  Due to the Tax Reform Act of 1986, the Company's ability to use the net
operating loss and tax credit carryforwards could be limited in the event of a
cumulative change in ownership of more than 50% occurring within a three-year
period.

5.  STOCKHOLDERS' EQUITY

Common Stock

On March 25, 1997, the Company's Board of Directors authorized a 1-for-1.5
reverse split of all outstanding common stock.  In addition, the Board also
approved a change in the par value of the common stock from $0.125 to $0.001.
All share and per share amounts and stock option and warrants data have been
restated to retroactively reflect these changes in capitalization.

During 1997 the Company issued 1,897,500 shares of common stock at $5.50 per
share in connection with its initial public offering.

Preferred Stock and Proxima Corporation

  In January 1994, the Company executed a Stock Purchase Agreement with
Proxima. Under the terms of the agreement, Proxima could invest in the Company
through purchases of Series A Preferred Stock. The Company and Proxima also
entered into an agreement providing for technology licenses and cooperative
development of new technologies (see Note 9). During 1996, 1995 and 1994,
Proxima purchased 467,695, 761,024 and 382,172 shares of Series A Preferred
Stock, respectively.  In June 1997, all shares were converted into 1,193,252
shares of common stock.





                                      39.
<PAGE>   40
Common Stock Warrants

  Periodically, the Company will issue warrants to purchase common stock to
outside directors and affiliates in lieu of stock options. During the three
years ended August 31, 1997, 69,996 warrants at exercise prices ranging from
$3.00 to $4.50 per share were issued to outside directors and affiliates which
are fully exercisable. Warrants to purchase 551,660 shares of common stock at
$3.00 to $7.15 per share are outstanding at August  31, 1997 including 165,000
warrants at $7.15 per share issued to representatives of the underwriters in
conjunction with the initial public offering. The outstanding warrants expire 
from June 2002 to December 2006.

Stock Option Plans

  The Company's 1981 Stock Option Plan was approved by the Board of Directors
and stockholders in 1981, as amended (the "1981 Plan"). The Company's 1993
Stock Option Plan (the "1993 Plan") was approved by the Board of Directors and
stockholders in September 1993. The exercise price of options granted will be
at not less than fair market value of the stock on the date of grant and the
options granted vest over a five- year period commencing on the date of grant
in annual increments of twenty percent and are exercisable for a period of ten
years after the date of grant.

  On March 25, 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan").  The 1997 Plan provides for incentive stock options and stock
appreciation rights appurtenant thereto for employees (including officers and
employee directors), and nonstatutory stock options, stock appreciation rights
appurtenant thereto, stock bonuses and rights to purchase restricted stock for
employees (including officers and employee directors) and non-employee
directors and consultants.   The 1997 Plan is administered by the Board of
Directors, or a Committee appointed by the Board, which determines the option
awards to be granted, including exercise prices, number of shares subject to
the awards and the exercisability thereof, provided that such terms comply with
the provisions of the plan under which the option award is granted.  Non-
employee directors are eligible only for nonstatutory grants.  The term of
stock options granted under the 1997 Plan may not exceed 10 years.  The options
granted vest over a four-year period commencing on the date of grant in
increments of 25% after one year and one-forty eighth per month thereafter.
The exercise price of options granted under the 1997 Plan is determined by the
Board of Directors, but in the case of an incentive stock option, cannot be
less than 100% of the fair market value of the common stock on the date of
grant and in the case of a non- statutory stock option, cannot be less than 85%
of the fair market value of the common stock on the date of grant. Options
granted under the plans vest at the rate specified in the option agreement.
The Board has authorized and secured an aggregate of 1,000,000 shares of common
stock for issuance under the Plan.   The Board also terminated the 1981 and
1993 Plans and no additional shares will be granted thereunder, but outstanding
options remain exercisable and continue to vest in accordance with their terms
until they terminate.

  The Company has 541,329 non-qualified options issued to certain employees and
officers and outstanding as of August 31, 1997, of which 341,329 were issued
outside the Company's option plans. These options were issued at exercise
prices ranging from $3.00 to $4.50 per share and expire from December 2001 to
March 2007.





                                      40.
<PAGE>   41
The following table summarizes stock option and warrant activity:

<TABLE>
<CAPTION>
                                                                          WEIGHTED
                                                                           AVERAGE
                                                                           EXERCISE
                                          NUMBER OF        PRICE PER      PRICE PER
                                           SHARES            SHARE          SHARE
                                         ----------      -------------    --------
<S>                                      <C>             <C>              <C>
Outstanding at August 31, 1994 .....      1,199,334      $3.00 -- 6.00    $   3.48
  Granted ..........................        127,333               4.50        4.50
  Exercised ........................             --                 --          --
  Canceled .........................       (148,358)      3.00 -- 6.00        4.85
                                         ----------      -------------    --------
Outstanding at August 31, 1995 .....      1,178,309       3.00 -- 4.50        3.40
  Granted ..........................        131,325               4.50        4.50
  Exercised ........................             (6)              4.50        4.50
  Canceled .........................        (81,656)      3.00 -- 4.50        3.46
                                         ----------      -------------    --------
Outstanding at August 31, 1996 .....      1,227,972       3.00 -- 4.50        3.51
  Granted ..........................        634,305       3.00 -- 7.15        5.21
  Exercised ........................             --                 --          --
  Canceled .........................        (11,997)      3.00 -- 4.50        3.25
                                         ----------      -------------    --------
Outstanding at August 31, 1997 .....      1,850,280      $3.00 -- 7.15    $   4.09
                                         ==========      =============    ========
</TABLE>

  At August 31, 1997, the weighted-average exercise price of outstanding stock
options and warrants is $3.97 and $4.39, respectively, and 945,845 combined
options and warrants are exercisable.

  Adjusted pro forma information regarding net income (loss) is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options 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 method for option pricing with the following weighted-average
assumptions: volatility of 0.559; risk-free interest rate range from 5.4% to
6.2%; dividend yield of 0%; and a weighted average expected life of the options
of 6 years. The Company's pro forma information is as follows:

<TABLE>
<CAPTION>
                                                       YEARS ENDED AUGUST 31,
                                                 ------------------------------ 
                                                     1997              1996   
                                                 -----------      ------------- 
<S>                                              <C>              <C>
Adjusted pro forma net income (loss) ......      $   255,686      $  (1,357,543)
Adjusted pro forma net income (loss) ......      $      0.05      $       (0.31)
per share .................................
</TABLE>

  The weighted average fair value of stock options granted during 1997 and 1996
was $4.51 and $4.50, respectively. The weighted average remaining life of the
options at August 31, 1997 is approximately 6.6 years.

Employee Stock Purchase Plan

  On March 25, 1997 the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 250,000 shares of common stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board has
authorized participation by eligible employees, including officers, in periodic
offerings following the commencement of the Purchase Plan. The initial offering
under the Purchase Plan commenced on the closing of the Company's initial
public offering and will terminate on February 28, 1998. Sequential six-month
offerings will occur thereafter.  The Purchase Plan permits the purchase of
shares of common stock at the end of each offering period at 85% of the lesser
of the price of the common stock on the first day of the offering period and
the last day of the offering period.





                                      41.
<PAGE>   42
Shares Reserved for Future Issuance

  The following shares of common stock are reserved for future issuance:

<TABLE>
<CAPTION>
                                                       AUGUST 31,
                                                         1997
                                                       ---------
<S>                                                   <C>
               Subordinated convertible debentures       358,918
               Stock options:
                 Granted and outstanding .........     1,298,620
                 Reserved for future grants ......       987,668
               Warrants ..........................       551,660
               Stock Purchase Plan ...............       250,000
                                                       ---------
                                                       3,446,866
                                                       =========
</TABLE>

6.  COMMITMENTS AND CONTINGENCIES

Lease Commitments

  The Company leases its operating, office and other facilities as well as
certain vehicles and equipment under noncancellable operating leases. The
operating and office facilities lease contains escalation clauses and an option
for renewal and extends through December 2001. The operating and office
facilities lease also provides for deferred payment terms; however, for
financial reporting purposes, rent expense is recorded evenly over the term of
the lease.

  Deferred rent, as reflected in the accompanying consolidated balance sheet,
represents the difference between rent expense accrued and amounts paid under
the terms of the lease agreement. Future minimum rental payments (excluding
common area maintenance charges) required under the operating leases for each
of the remaining fiscal years ending subsequent to August 31, 1997 are as
follows:

<TABLE>
<S>                                                        <C>
                 1998.................................     $  796,000
                 1999.................................        723,000
                 2000.................................        691,000
                 2001.................................        684,000
                 2002.................................        228,000
                 Thereafter...........................             --
                                                           ----------
                                                           $3,122,000
                                                           ==========
</TABLE>

  Rent expense was $1,062,523, $914,000, and $844,000 for the years ended
August 31, 1997, 1996 and 1995, respectively.

Contingency

  The Company has a license to certain technology used in its blue microlaser.
During 1996, the Company received a letter from a third party claiming that the
Company's license was granted improperly by the licensor. While the Company
believes that such license was properly granted, there can be no assurance that
the Company's license would not be voided if subjected to a legal challenge. In
such an event, there can be no assurance that the Company would be able to
obtain a replacement license on favorable terms, if at all. Failure to obtain
such a license could result in a material adverse effect to the Company's
business, financial condition and results of operations.

7.  GEOGRAPHIC INFORMATION

  The Company operates in one business segment and designs, manufactures and
markets high performance lasers and laser optics for industrial, medical and
military applications. No one customer accounted for more than 10% of revenues
in 1997, 1996 or 1995. Export sales from U.S.  operations to unaffiliated
customers located principally in Europe and the Asia Pacific region amounted to
37%, 32%, and 32% of total revenue in 1997, 1996 and 1995, respectively.





                                      42.
<PAGE>   43

  Information with respect to the Company's operations by significant
geographic area is set forth below. Transfers between geographic areas have
been shown at the agreed upon transfer price. All transactions denominated in
foreign currency have been translated at the average exchange rates during the
period.

  The identifiable assets located in the United States include assets located
in Mexico, which are not considered significant.
<TABLE>
<CAPTION>
                                                    YEAR ENDED AUGUST 31, 1997             
                                    ------------------------------------------------------------
                                      UNITED                                        CONSOLIDATED
                                      STATES           EUROPE      ELIMINATIONS         TOTAL   
                                    -----------     -----------     -----------      -----------
 <S>                                 <C>               <C>           <C>              <C>
Sales to unaffiliated customers     $19,633,617     $ 3,719,523     $        --      $23,353,140
Transfers between geographic     
  areas .......................       1,391,125              --      (1,391,125)              -- 
                                    -----------     -----------     -----------      -----------
Total revenue .................     $21,024,742     $ 3,719,523     $(1,391,125)     $23,353,140
                                    ===========     ===========     ===========      ===========
Income before income taxes ....     $   609,738     $   170,651     $    13,619      $   794,008
                                    ===========     ===========     ===========      ===========
Identifiable assets ...........     $20,831,368     $ 2,009,946     $(1,655,280)     $21,186,034
                                    ===========     ===========     ===========      ===========
</TABLE>

<TABLE>
<CAPTION>
                                                          YEAR ENDED AUGUST 31, 1996         
                                       -----------------------------------------------------------------
                                          UNITED                                            CONSOLIDATED
                                          STATES            EUROPE        ELIMINATIONS          TOTAL 
                                       ------------      ------------     ------------      ------------
<S>                                    <C>              <C>               <C>               <C>
Sales to unaffiliated customers ..     $ 15,462,416      $  3,445,023     $         --      $ 18,907,439
Transfers between geographic areas        1,195,380                --       (1,195,380)               -- 
                                       ------------      ------------     ------------      ------------
Total revenue ....................     $ 16,657,796      $  3,445,023     $ (1,195,380)     $(18,907,439)
                                       ============      ============     ============      ============
Income (loss) before income taxes      $ (1,282,844)     $    105,931     $    (40,747)     $ (1,217,660)
                                       ============      ============     ============      ============
Identifiable assets ..............     $ 11,286,833      $  1,994,440     $ (2,087,574)     $ 11,193,699
                                       ============      ============     ============      ============
</TABLE>

<TABLE>
<CAPTION>
                                                     YEAR ENDED AUGUST 31, 1995
                                 ------------------------------------------------------------------
                                    UNITED                                             CONSOLIDATED
                                    STATES            EUROPE         ELIMINATIONS         TOTAL    
                                 ------------      ------------      ------------      ------------
<S>                              <C>               <C>               <C>               <C>
Sales to unaffiliated 
  customers ................     $ 11,831,280      $  2,741,641      $         --      $ 14,572,921
Transfers between geographic     
  areas ....................          813,461                --          (813,461)               -- 
                                 ------------      ------------      ------------      ------------
Total revenue ..............     $ 12,644,741      $  2,741,641      $   (813,461)     $ 14,572,921
                                 ============      ============      ============      ============
Income (loss) before income     
  taxes ....................     $ (2,062,437)     $   (195,466)     $     11,543      $ (2,246,360)
                                 ============      ============      ============      ============
Identifiable assets ........     $ 10,346,281      $  1,822,831      $ (1,961,672)     $ 10,207,440
                                 ============      ============      ============      ============
</TABLE>



8.  EMPLOYEE BENEFIT PLAN

  The Company has a defined contribution plan (the "Plan") covering
substantially all employees that have been employed for at least 90 days and
meet certain age requirements. Employees may contribute up to 16% of their
compensation per year (subject to a maximum limit by federal tax law). The
Company is obligated to make matching contributions equal to 50% of the
employee's contribution up to a maximum of 6% of the employee's compensation.
At the discretion of the Board of Directors, the Company may make additional
contributions. The Company's contributions charged to operations were $140,000,
$79,000, and $57,000 for the years ended August 31, 1997, 1996 and  1995,
respectively.

9.  AGREEMENT WITH PROXIMA CORPORATION

  The Company and Proxima have entered into a Cooperative Development and
License Agreement (the "Agreement") which provides for licensing of existing
technology and technologies being developed under the terms of the agreement.

  Included in internal research and development expenses in the accompanying
statements of operations are $1,630,000 and $2,107,000 spent in accordance with
the Agreement in 1996 and 1995, respectively. No amounts were spent during
1997.





                                      43.
<PAGE>   44
                                   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, in the City of San Diego,
County of San Diego, State of California, on the 25th day of November, 1997.

                                      LASER POWER CORPORATION


                                      By  /s/  Paul P. Wickman
                                        ---------------------------------------
                                               Paul P. Wickman, Jr.
                                               Senior Vice President and Chief
                                               Financial Officer


                                POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Glenn H. Sherman and Paul P. Wickman,
Jr., or any of them, his attorney-in-fact, each with the power of substitution,
for him in any and all capacities, to sign any amendments to this Report, and to
file the same, with exhibits thereto and other documents in connections
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>
                        SIGNATURE                                      TITLE                        DATE
                        ---------                                      -----                        ----
<S>                                                      <C>                                <C>
       /s/          GLENN H. SHERMAN                     Chairman of the Board and Chief    November 25, 1997
 ------------------------------------------------------  Executive Officer (Principal
                 Glenn H. Sherman, Ph.D.                 Executive Officer)

       /s/           PAUL P. WICKMAN                     Senior Vice President and Chief    November 25, 1997
 ------------------------------------------------------  Financial Officer
                  Paul P. Wickman, Jr.                   (Principal Financial and
                                                         Accounting Officer)

       /s/         DOUGLAS H. TANIMOTO                   Director                           November 25, 1997
 ------------------------------------------------------                                                                         
               Douglas H. Tanimoto, Ph.D.

       /s/         WILLIAM G. FREDRICK                   Director                           November 25, 1997
 ------------------------------------------------------                                                                         
                   William G. Fredrick

       /s/        ROBERT G. KLIMASEWSKI                  Director                           November 25, 1997
 ------------------------------------------------------                                                                         
                  Robert G. Klimasewski
</TABLE>





                                      44.
<PAGE>   45
<TABLE>
<S>                                                     <C>                                 <C>     
       /s/          RICHARD C. LAIRD                     Director                           November 25, 1997
 ------------------------------------------------------                                                                         
                    Richard C. Laird

       /s/          KENNETH E. OLSON                     Director                           November 25, 1997
 ------------------------------------------------------                                                                         
                    Kenneth E. Olson

       /s/           JOHN C. STISKA                      Director                           November 25, 1997
 ------------------------------------------------------                                                                         
                     John C. Stiska
</TABLE>