##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---



FORM 10-Q

(Mark One)

x
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the quarterly period ended September 30, 2003


or

o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities


Exchange Act of 1934 For the transition period from  to


Commission file number 0-18053

LASERSCOPE

(Exact name of Registrant as Specified in Its Charter)


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


3070 ORCHARD DRIVE, SAN JOSE, CALIFORNIA 95134-2011
(Address of Principal Executive Offices)

Registrants Telephone Number, Including Area Code: (408) 943-0636

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes x   No o

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

The number of shares of Registrants common stock issued and outstanding as of
October 31, 2003 was 17,840,813.

1



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TABLE OF CONTENTS



|                               |                                                                                                |                                                                           |  |  |  |  |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION.
|                               | Item 1. Financial Statements.                                                                 
|                               |                                                                                                | Condensed Consolidated Balance Sheets (Unaudited)                        
|                               |                                                                                                | Condensed Consolidated Statements of Income (Unaudited)                  
|                               |                                                                                                | Condensed Consolidated Statements of Cash Flows (Unaudited)              
|                               |                                                                                                | Laserscope Notes to Unaudited Condensed Consolidated Financial Statements
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                               |                                                                                                | Results of Operations.                                                   
|                               |                                                                                                | Liquidity and Capital Resources.                                         
|                               |                                                                                                | Risk Factors.                                                            
|                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk.                           
|                               | Item 4. Controls and Procedures.                                                              
|PART II. OTHER INFORMATION    
|                               | Item 6. Exhibits and Reports on Form 8-K.                                                     
|SIGNATURES                    
|Exhibit Index                 
|EXHIBIT 10.1                  
|EXHIBIT 10.2                  
|EXHIBIT 31.1                  
|EXHIBIT 31.2                  
|EXHIBIT 32.1                  
|EXHIBIT 32.2                  



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##### Table of Contents



TABLE OF CONTENTS

PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed
Consolidated Statements of Income
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis ofFinancial Condition and Results of Operations
    
    
    11Results of Operations
    
    
    12Liquidity and Capital Resources
    
    
    14Risk Factors
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    26PART II. OTHER INFORMATION
    
    
    27Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    27SIGNATURES
    
    
    28


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|        |                       
|------- | ----------------------
|PART I. | FINANCIAL INFORMATION.






|        |                      
|------- | ---------------------
|Item 1. | Financial Statements.

Laserscope




Condensed Consolidated Balance Sheets


(Unaudited)


September 30,
    
    December 31,(thousands)
    
    2003
    
    2002AssetsCurrent assets:Cash and cash equivalents
    
    $
    6,086
    
    
    $
    4,661Accounts receivable, net
    
    
    12,042
    
    
    
    10,287Inventories, net
    
    
    12,301
    
    
    
    10,445Other current assets
    
    
    1,306
    
    
    
    1,027Total current assets
    
    
    31,735
    
    
    
    26,420Property and equipment, net
    
    
    1,580
    
    
    
    1,808Goodwill
    
    
    655
    
    
    
    655Other assets
    
    
    178
    
    
    
    280Total assets
    
    $
    34,148
    
    
    $
    29,163Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    4,681
    
    
    $
    3,989Accrued compensation
    
    
    2,310
    
    
    
    2,033Deferred revenue
    
    
    1,871
    
    
    
    1,408Convertible subordinated debentures, current portion
    
    
    341
    
    
    
    147Other current liabilities
    
    
    4,445
    
    
    
    3,191Total current liabilities
    
    
    13,648
    
    
    
    10,768Convertible subordinated debentures, net of current portion
    
    
    2,259
    
    
    
    2,853Obligations under capital leases
    
    
    18
    
    
    
    60Total long-term liabilities
    
    
    2,277
    
    
    
    2,913Contingencies (Note 7)Shareholders equity:Common stock
    
    
    57,415
    
    
    
    55,915Accumulated deficit
    
    
    (38,503
    )
    
    
    (39,519
    )Accumulated other comprehensive loss
    
    
    (564
    )
    
    
    (789
    )Notes receivable from shareholders
    
    
    (125
    )
    
    
    (125
    )Total shareholders equity
    
    
    18,223
    
    
    
    15,482Total liabilities and shareholders equity
    
    $
    34,148
    
    
    $
    29,163


See Accompanying Notes to Condensed Consolidated Financial Statements

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Laserscope




Condensed Consolidated Statements of Income


(Unaudited)


Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(thousands, except per share amounts)
    
    2003
    
    2002
    
    2003
    
    2002Net revenue
    
    $
    14,293
    
    
    $
    10,479
    
    
    $
    39,611
    
    
    $
    30,428Cost of sales
    
    
    6,790
    
    
    
    4,822
    
    
    
    19,388
    
    
    
    14,578Gross margin
    
    
    7,503
    
    
    
    5,657
    
    
    
    20,223
    
    
    
    15,850Operating expenses:Research and development
    
    
    1,195
    
    
    
    841
    
    
    
    3,300
    
    
    
    2,890Selling, general and administrative
    
    
    5,778
    
    
    
    4,487
    
    
    
    15,836
    
    
    
    12,323Total operating expenses
    
    
    6,973
    
    
    
    5,328
    
    
    
    19,136
    
    
    
    15,213Operating income
    
    
    530
    
    
    
    329
    
    
    
    1,087
    
    
    
    637Interest income (expense) and other, net
    
    
    7
    
    
    
    (107
    )
    
    
    (23
    )
    
    
    (301
    )Income before income taxes
    
    
    537
    
    
    
    222
    
    
    
    1,064
    
    
    
    336Provision for income taxes
    
    
    4
    
    
    
    30
    
    
    
    48
    
    
    
    63Net income
    
    $
    533
    
    
    $
    192
    
    
    $
    1,016
    
    
    $
    273Basic net income per share
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.06
    
    
    $
    0.02Diluted net income per share
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.01Shares used in basic per share calculations
    
    
    17,705
    
    
    
    16,541
    
    
    
    17,440
    
    
    
    16,355Shares used in diluted per share calculations
    
    
    22,138
    
    
    
    18,582
    
    
    
    19,671
    
    
    
    18,534


See Accompanying Notes to Condensed Consolidated Financial Statements

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Laserscope




Condensed Consolidated Statements of Cash Flows


(Unaudited)


Nine Months EndedSeptember 30,(thousands)
    
    2003
    
    2002Cash flows from operating activities:Net income
    
    $
    1,016
    
    
    $
    273Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation and amortization
    
    
    905
    
    
    
    887Changes in assets and liabilities:Accounts receivable, net
    
    
    (1,710
    )
    
    
    (1,277
    )Inventories
    
    
    (1,736
    )
    
    
    (708
    )Other current assets
    
    
    (231
    )
    
    
    23Accounts payable
    
    
    651
    
    
    
    278Accrued compensation
    
    
    277
    
    
    
    128Deferred revenue
    
    
    463
    
    
    
    208Other current liabilities
    
    
    1,212
    
    
    
    646Net cash provided by operating activities
    
    
    847
    
    
    
    458Cash flows from investing activities:Acquisition of property and equipment
    
    
    (566
    )
    
    
    (538
    )Net cash used in investing activities
    
    
    (566
    )
    
    
    (538
    )Cash flows from financing activities:Payments on obligations under capital leases
    
    
    (101
    )
    
    
    (202
    )Proceeds from the sale of common stock under stock plans
    
    
    1,100
    
    
    
    778Proceeds from bank loans
    
    
    200
    
    
    
    6,220Repayment of bank loans
    
    
    (200
    )
    
    
    (6,155
    )Net cash provided by financing activities
    
    
    999
    
    
    
    641Effect of exchange rate changes on cash
    
    
    145
    
    
    
    124Net increase in cash and cash equivalents
    
    
    1,425
    
    
    
    685Cash and cash equivalents, beginning of period
    
    
    4,661
    
    
    
    3,408Cash and cash equivalents, end of period
    
    $
    6,086
    
    
    $
    4,093Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    194
    
    
    $
    75Income taxes
    
    $
    54
    
    
    $
    79Non-cash increase in obligations under capital leases
    
    $
    
    
    
    $
    172Issuance of common stock in exchange for conversion of
subordinated debentures
    
    $
    400
    
    
    $
    


See Accompanying Notes to Condensed Consolidated Financial Statements

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Laserscope Notes to Unaudited Condensed Consolidated Financial Statements:



|1. |  | Basis of presentation
|-- |  | ---------------------

The accompanying unaudited condensed consolidated financial statements include
Laserscope (the Company, management, we, us, our) and its wholly
owned subsidiaries. All intercompany transactions and balances have been
eliminated. While the financial information in this report is unaudited, in
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations as of and for the periods indicated have been recorded. We suggest
that these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes for the year ended December 31,
2002 included in the Companys annual report on Form 10-K for the year ended
December 31, 2002. The results of operations for the three and nine month
periods ended September 30, 2003 are not necessarily indicative of the results
expected for the full year.



|2. |  | Accounting for Stock-Based Compensation
|-- |  | ---------------------------------------

The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure.
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25) and its related
interpretations and has elected to follow the disclosure-only provisions of
SFAS No. 123, Accounting for Stock-Based Compensation. Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
stock option grant between the fair value of the Companys stock and the
exercise price of the stock option.

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

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Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net income as reported
    
    $
    533
    
    
    $
    192
    
    
    $
    1,016
    
    
    $
    273Add:
    Stock-based compensation expense
included in reported net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Deduct:
    Total stock-based compensation
expense determined under fair value
based method for all awards
    
    
    (293
    )
    
    
    (219
    )
    
    
    (900
    )
    
    
    (686
    )Pro forma net income (loss)
    
    $
    240
    
    
    $
    (27
    )
    
    $
    116
    
    
    $
    (410
    )Net income (loss) per share:Basic-as reported
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.06
    
    
    
    0.02Basic-pro forma
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.01
    
    
    $
    (0.03
    )Diluted-as reported
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.01Diluted-pro forma
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.01
    
    
    $
    (0.03
    )


Laserscope accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.



|3. |  | Inventories, net
|-- |  | ----------------

Inventories were comprised of the following (in thousands):

September 30,
    
    December 31,2003
    
    2002Sub-assemblies and purchased parts
    
    $
    5,673
    
    
    $
    4,304Work-in-process
    
    
    3,666
    
    
    
    3,340Finished goods
    
    
    2,962
    
    
    
    2,801$
    12,301
    
    
    $
    10,445




|4. |  | Warranty and Service Contracts
|-- |  | ------------------------------

Warranty

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

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

Warranty Reserve (in thousands)Balance, December 31, 2002
    
    $
    1,127Add:
    Accruals for warranties issued in 2003
    
    
    1,871Accruals related to pre-existing warranties
    
    
    77Less:
    Settlements made during the period
    
    
    (1,393
    )Balance, September 30, 2003
    
    $
    1,682


Service Contracts

Deferred service contract revenue is recognized on a pro rata basis
over the period of the applicable service contract. Costs are
recognized as incurred.

Deferred Service Contract Revenue (in thousands)Balance, December 31, 2002
    
    $
    1,086Add:
    Payments received
    
    
    2,450Costs incurred under service contracts
    
    
    1,398Less:
    Revenue recognized
    
    
    (2,128
    )Settlements made during the period
    
    
    (1,398
    )Balance, September 30, 2003
    
    $
    1,408




|5. |  | Net income per share
|-- |  | --------------------

Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted net income per share is computed by giving effect to all dilutive
potential common shares, including options, warrants, and convertible
debentures. A reconciliation of the numerator and denominator used in the
calculation of historical basic and diluted net income per share follows:

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Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(thousands)
    
    2003
    
    2002
    
    2003
    
    2002Numerator:Net income used in computing
basic net income per share
    
    $
    533
    
    
    $
    192
    
    
    $
    1,016
    
    
    $
    273Add: Interest expense on 8.00%
convertible debentures
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    Net income used in computing diluted
net income per share
    
    $
    585
    
    
    $
    192
    
    
    $
    1,016
    
    
    $
    273Denominator:Weighted average number of common
shares outstanding used in computing
basic net income per share
    
    
    17,705
    
    
    
    16,541
    
    
    
    17,440
    
    
    
    16,355Add: dilutive potential common shares used
in computing dilutive net income
per share
    
    
    4,433
    
    
    
    2,041
    
    
    
    2,231
    
    
    
    2,179Total weighted-average number of shares
used in computing diluted net
income per share
    
    
    22,138
    
    
    
    18,582
    
    
    
    19,671
    
    
    
    18,534


The following outstanding options (prior to the application of the treasury
stock method) and convertible debentures (on an as-converted basis) were
excluded from the computation of diluted net income per common share for the
periods ended September 30, 2003 and 2002 because including them would have had
an antidilutive effect:

Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(thousands)
    
    2003
    
    2002
    
    2003
    
    2002Options to purchase common stock
    
    
    237
    
    
    
    255
    
    
    
    327
    
    
    
    207Convertible debentures
    
    
    
    
    
    
    2,400
    
    
    
    2,080
    
    
    
    2,400237
    
    
    
    2,655
    
    
    
    2,407
    
    
    
    2,607




|6. |  | Comprehensive income
|-- |  | --------------------

Total comprehensive income during the periods ended September 30, 2003 and 2002
consisted of (in thousands):

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Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net income
    
    $
    533
    
    
    $
    192
    
    
    $
    1,016
    
    
    $
    273Translation adjustments
    
    
    37
    
    
    
    97
    
    
    
    225
    
    
    
    383Comprehensive income
    
    $
    570
    
    
    $
    289
    
    
    $
    1,241
    
    
    $
    656




|7. |  | Contingencies
|-- |  | -------------

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



|8. |  | Recent accounting pronouncements
|-- |  | --------------------------------

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51. FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. During October, 2003, the FASB issued FASB Staff Position 46-6
(FSP 46-6), Effective Date of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities. FSP 46-6 is effective for financial statements
issued after October 9, 2003, and provides a broad deferral of the latest date
by which all public entities must apply FIN 46 to certain variable interest
entities, to the first reporting period ending after December 15, 2003. The
Company does not expect the adoption of FIN 46 to have a material impact upon
its financial position, cash flows or results of operations.

In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 requires that
contracts with comparable characteristics be accounted for similarly. In
particular, SFAS No. 149 clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, clarifies when
a derivative contains a financing component, amends the definition of an
underlying to conform it to language used in FIN No. 45, and amends certain
other existing pronouncements. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. In addition, provisions of SFAS
No. 149 should be applied
prospectively. The adoption of SFAS No. 149 did not have a material impact on
the Companys financial statements.

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In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of SFAS No. 150 and still existing
at the beginning of the interim period of adoption. The adoption of
SFAS No. 150 did not have a material impact on the
Companys financial statements.



|9. |  | Debentures
|-- |  | ----------

In February of 2000, the Company sold
$3 million of 8.00% convertible debentures in a private
placement. Under the original terms, the debentures mature in
February 2007 and interest and principal is paid in monthly
installments. In the first six months of 2003, $400,000 of the
debentures were converted to Laserscope common stock. On October of
2003, the debenture agreement was modified. Under the terms of the
amended agreement, the Company will not be required to make any
principal payments until expiration of the debentures on
February 11, 2007, and principal payments will only be made at
that time if there is a balance of principal which has not been
converted to common stock. However, not withstanding the foregoing,
the debenture holders may, at their sole discretion, direct the
Company to resume making monthly principal payments at any time prior
to expiration and in an amount sufficient to bring payments made plus
conversions to the level specified in the original debenture.






|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial Condition and
Results of Operations.

INTRODUCTORY STATEMENT

Some of the statements in this Quarterly Report on Form 10-Q, including but not
limited to Managements Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this document are forward-looking
statements within the meaning of the Private Securities Litigation Act of 1995.
These statements relate to future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors that may
cause our actual results, performance or achievements to be materially
different from those expressed or implied by any forward-looking statements.
In
some cases, you can identify forward-looking statements by terminology such as
may, will, could, would, should, expect, plan, anticipate,
intend, believe, estimate, predict, potential or continue or the
negative of these terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially. We refer you
to the factors described under the heading Risk Factors in this Quarterly
Report on Form 10-Q as well as to our Annual Report on Form 10-K for the year
ended December 31, 2002 under the heading Risk Factors. Readers are
cautioned not to place undue reliance on forward-looking statements. Moreover,
neither we nor any other person assumes responsibility for the accuracy and
completeness of those statements.

11



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We are under no duty to publicly release any
revision to the forward-looking statements after the date of this document.

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

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




Results of Operations.

The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes included in Part I 
Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes contained in the Companys Annual Report on Form 10-K for
the year ended December 31, 2002 and the accompanying Managements Discussion
and Analysis of Financial Condition and Results of Operations.

The following table contains selected income statement information, which
serves as the basis of the discussion of the Companys results of operations
for the quarter and nine months ended September 30, 2003 (in thousands, except
for percentages):

Three months ended
    
    
    
    
    
    Nine months endedSept 30, 2003
    
    Sept 30, 2002
    
    %
    
    Sept 30, 2003
    
    Sept 30, 2002
    
    %Amount
    
    %(a)
    
    Amount
    
    %(a)
    
    Change
    
    Amount
    
    %(a)
    
    Amount
    
    %(a)
    
    ChangeRevenues from sales of:Lasers & Instrumentation
    
    $
    9,230
    
    
    
    65
    %
    
    $
    7,099
    
    
    
    68
    %
    
    
    30
    %
    
    $
    26,233
    
    
    
    66
    %
    
    $
    21,096
    
    
    
    69
    %
    
    
    24
    %Disposable supplies
    
    
    3,408
    
    
    
    24
    %
    
    
    1,958
    
    
    
    19
    %
    
    
    74
    %
    
    
    8,749
    
    
    
    22
    %
    
    
    5,049
    
    
    
    17
    %
    
    
    73
    %Service
    
    
    1,655
    
    
    
    11
    %
    
    
    1,422
    
    
    
    14
    %
    
    
    16
    %
    
    
    4,629
    
    
    
    12
    %
    
    
    4,284
    
    
    
    14
    %
    
    
    8
    %Total net revenues
    
    $
    14,293
    
    
    
    100
    %
    
    $
    10,479
    
    
    
    100
    %
    
    
    36
    %
    
    $
    39,611
    
    
    
    100
    %
    
    $
    30,428
    
    
    
    100
    %
    
    
    30
    %Gross margin
    
    $
    7,503
    
    
    
    52
    %
    
    $
    5,657
    
    
    
    54
    %
    
    
    33
    %
    
    $
    20,223
    
    
    
    51
    %
    
    $
    15,850
    
    
    
    52
    %
    
    
    28
    %Research & development
    
    $
    1,195
    
    
    
    8
    %
    
    $
    841
    
    
    
    8
    %
    
    
    42
    %
    
    $
    3,300
    
    
    
    8
    %
    
    $
    2,890
    
    
    
    9
    %
    
    
    14
    %Selling, general & admin
    
    $
    5,778
    
    
    
    40
    %
    
    $
    4,487
    
    
    
    43
    %
    
    
    29
    %
    
    $
    15,836
    
    
    
    40
    %
    
    $
    12,323
    
    
    
    40
    %
    
    
    29
    %Net income
    
    $
    533
    
    
    
    4
    %
    
    $
    192
    
    
    
    2
    %
    
    
    178
    %
    
    $
    1,016
    
    
    
    3
    %
    
    $
    273
    
    
    
    1
    %
    
    
    272
    %




---

|(a) |  | expressed as a percentage of total net revenues.
|--- |  | ------------------------------------------------

Revenues from the sales of lasers and instrumentation increased during the
three month and nine month periods ended September 30, 2003 compared to the
same periods in 2002. The three month period increase primarily was driven by
a higher volume of GreenLight PVTM lasers sold.

12



---



##### Table of Contents



The GreenLight PV is a
surgical laser used in the treatment of benign prostatic hyperplasia (BPH), a
procedure called Photo Vaporization of the Prostate (PVPTM). In the three
month period ended September 30, 2003 we sold 34 GreenLight PV units compared
to nine units in the corresponding period in 2002. Due to Manufacturing
improvements we were able to decrease some of the backlog in the quarter ended
September 30, 2003 that existed in prior quarters. The nine month period
increase primarily was driven by a higher sales volume of aesthetic lasers and
accompanying instruments. This was in large part due to the increasing success
of the distribution arrangement with McKesson Corporation which began in 2001.
Also, through the nine month period of 2003 we shipped 60 GreenLight PV laser
units for revenue while at the same time building a backlog of 12 units. In
the first nine months of 2002, we had sold 24 GreenLight PV lasers. The Company
expects that sales of lasers and instrumentation will continue to be a major
source of revenue.

We have made significant strides in procuring critical GreenLight PV laser
components and we continue to work with our suppliers to resolve these issues.
In the quarter ended September 30, 2003, we were able to significantly reduce
our backlog due to progress made. Backlog declined to 12 systems at the end of
the third quarter, versus 21 systems at the close of the second quarter. We
will closely monitor our suppliers progress toward the eventual goal of being
able to ship within 30 to 60 days after receipt of a customer order.

Revenues from the sales of disposable supplies increased 74% and 73% during the
three month and nine month periods ended September 30, 2003 compared to the
corresponding periods in 2002. The increase in revenues in both the three and
nine month periods is primarily due to higher unit sales of GreenLight PV
fibers. In the first nine months of 2003 we sold approximately 7,895
GreenLight PV fibers whereas in the first nine months of 2002 we sold
approximately 1,790 GreenLight PV fibers. This was a direct result of an
increase in our GreenLight PV installed base as well as a higher number of
fibers purchased per laser in the installed base. The Company expects
revenues from the sales of disposable supplies to incrementally increase as we
ship more GreenLight PV lasers, which require a single-use fiber optic energy
delivery device.

Laserscopes service revenues increased 16% and 8% during the three and nine
month periods ended September 30, 2003 compared to the same periods in 2002.
Increased service revenues are a result of a larger contract installed base in
the domestic region, as well as increased service activity internationally.
The Company believes that increases in future revenues depend on increases to
the installed base of lasers as well as the purchase of its service contracts
by its customers.

Gross margin as a percentage of revenues decreased two percentage points and
one percentage point, respectively, during the three and nine month periods
ended September 30, 2003 relative to the corresponding periods of 2002. The
decrease in gross margin percentage is due primarily to both lower aesthetic
laser average selling prices and to GreenLight PV component related
manufacturing issues. The Company expects gross margin as a percentage of 2003
revenues to be in the range of 51% to 52%.

Research and development expenses are the result of activities related to the
development of new laser, instrumentation and disposable products and the
modification and enhancement of Laserscopes existing products. These expenses
increased marginally as a percentage of revenue during the three month period
ended September 30, 2003 compared to the same periods in 2002, but decreased 1%
for the nine month period ended September 30, 2003 compared to the same period
in 2002. The Company expects research and development expenses during 2003 to
be approximately 8% of net revenues.

13



---



##### Table of Contents



Selling, general and administrative expenses, as a percentage of revenues,
decreased three percentage points in the quarter ended September 30, 2003 and
decreased marginally in the nine month period ended September 30, 2003.
However, selling, general and administrative expenses increased 29% in absolute
terms in both periods. The increase is due primarily to higher variable
selling expenses resulting from higher revenues in the three and nine month
periods ended September 30, 2003 relative to the same periods last year and to
higher marketing expenses for aesthetic and GreenLight PV products. We expect
amounts spent in selling, general and administrative expenses to be marginally
lower, as a percentage of revenues, in the fourth quarter, but remain
relatively high in absolute terms in conjunction with continuing investment in
educational and training support and marketing programs for the PVP products.




Liquidity and Capital Resources.

The following table contains selected balance sheet information that serves as
the basis of the discussion of the Companys liquidity and capital resources at
September 30, 2003 and for the nine months then ended (in thousands):

September 30,
    
    December 31,2003
    
    2002Cash and cash equivalents
    
    $
    6,086
    
    
    $
    4,661Total assets
    
    $
    34,148
    
    
    $
    29,163Total liabilities
    
    $
    15,925
    
    
    $
    13,681Net working capital
    
    $
    18,087
    
    
    $
    15,652


The increase in cash and cash equivalents was due primarily to cash provided by
financing and operating activities, partially offset by cash used by investing
activities.

During the nine months ended September 30, 2003, cash provided by financing
activities consisted of the sale of common stock under stock plans  $1.1
million; and was partially offset by payments on obligations under capital
leases of $0.1 million.

During the nine months ended September 30, 2003, cash provided by operating
activities totaled $0.8 million. This was the combined result of the following
sources: depreciation and amortization  $0.9 million; an increase in other
current liabilities- $1.2 million, partly due to higher warranty provision,
legal accruals, sales tax liability and travel expenses; an increase in
accounts payable- $0.7 million; an increase in deferred revenue- $0.5 million;
and an increase in accrued compensation-$0.3 million; and a net income of $1
million. These sources were offset by: an increase in inventory- $1.7 million,
due to higher material purchases, an increase in accounts receivable- $1.7
million, a result of higher revenue and an increase in other current
assets-$0.2 million.

During the nine months ended September 30, 2003, cash used in investing
activities consisted of capital expenditures of $0.6 million. The increase in
capital expenditures is due to higher purchases of manufacturing machinery and
equipment, office equipment and capitalization of laser systems.

14



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##### Table of Contents



In February of 2000, the Company sold
$3 million of 8.00% convertible debentures in a private
placement. Under the original terms, the debentures mature in
February 2007 and interest and principal is paid in monthly
installments. In the first six months of 2003, $400,000 of the
debentures were converted to Laserscope common stock. On October of
2003, the debenture agreement was modified. Under the terms of the
amended agreement, the Company will not be required to make any
principal payments until expiration of the debentures on
February 11, 2007, and principal payments will only be made at
that time if there is a balance of principal which has not been
converted to common stock. However, not withstanding the foregoing,
the debenture holders may, at their sole discretion, direct the
Company to resume making monthly principal payments at any time prior
to expiration and in an amount sufficient to bring payments made plus
conversions to the level specified in the original debenture.

We have in place an asset-based line of credit, which was renewed on September
25, 2003, that provides for borrowing up to $5.0 million and expires in
September 2004. The line of credit bears annual interest at a rate equal to
the prime rate plus 2.0%. Credit is extended and collateralized based on
eligible accounts receivable and inventory. At September 30, 2003, we had
approximately $3.6 million in borrowing capacity available and $1.2 million in
letter of
credit reserve requirements. As of September 30, 2003, we had no outstanding
borrowings under the line and were in compliance with all covenants associated
with the line of credit and our convertible debentures. We anticipate that
future changes in cash and working capital will be dependent on a number of
factors including:



| |  | our ability to effectively manage inventory and accounts receivable;
|- |  | --------------------------------------------------------------------



| |  | our ability to anticipate and adapt to the changes in our industry
such as new and alternative medical procedures;
|- |  | ------------------------------------------------------------------------------------------------------------------



| |  | our level of profitability;
|- |  | ---------------------------



| |  | our determination to acquire or invest in products and businesses
complementary to ours; and
|- |  | --------------------------------------------------------------------------------------------



| |  | the market price for our common stock as it affects the exercise of
stock options and sale of common stock under stock plans.
|- |  | -----------------------------------------------------------------------------------------------------------------------------

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

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

Recent accounting pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51.

15



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##### Table of Contents



FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. During October 2003, the FASB issued FASB Staff Position 46-6
(FSP 46-6), Effective Date of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities. FSP 46-6 is effective for financial statements
issued after October 9, 2003, and provides a broad deferral of the latest date
by which all public entities must apply FIN 46 to certain variable interest
entities, to the first reporting period ending after December 15, 2003. The
Company does not expect the adoption of FIN 46 to have a material impact upon
its financial position, cash flows or results of operations.

In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 requires that
contracts with comparable characteristics be accounted for similarly. In
particular, SFAS No. 149 clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, clarifies when
a derivative contains a financing component, amends the definition of an
underlying to conform it to language used in FIN No. 45, and amends certain
other existing
pronouncements. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. In addition, provisions of SFAS No. 149 should be applied
prospectively. The adoption of SFAS No. 149 did not have a material impact on
the Companys financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. It is to be implemented by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of SFAS No. 150 and still existing at the beginning of the
interim period of adoption. The adoption of SFAS No. 150 did not
have a material impact on the Companys financial statements.




Risk Factors.

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

Limited Working Capital; Potential Need to Raise Additional Capital.

Current and anticipated demand for our products as well as procurement and
production affect our need for capital. Changes in these or other factors could
have a material impact on capital requirements and may require us to raise
additional capital.

History of Losses; Uncertain Future Profitability.

There can be no assurance that we can achieve or maintain profitability on a
quarterly basis or at all.

16



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##### Table of Contents



Government Regulation; Uncertainty of Obtaining Regulatory Approval.

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

Laserscope and its products are regulated in the United States by the Food and
Drug Administration (FDA) under the Federal Food, Drug and Cosmetic Act (the
FDC Act) and the Radiation Control for Health and Safety Act. There can be
no assurance that the FDA will grant marketing clearance for our future
products on a timely basis, or at all. Delays in receiving such clearances
could have a significant adverse impact on our ability to compete in our
industry. The FDA may also require post-market testing and surveillance
programs to monitor certain products.

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

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

In addition, our laser products are covered by a performance standard for laser
products set forth in FDA regulations. The laser performance standard imposes
certain specific record-keeping, reporting, product testing, and product
labeling requirements on laser manufacturers. These requirements also include
affixing warning labels to laser systems, as well as incorporating certain
safety features in the design of laser products.

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

We are also subject to regulation under federal and state laws regarding, among
other things, occupational safety, the use and handling of hazardous materials
and protection of the environment.

Insurance Reimbursement.

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

17



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##### Table of Contents



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

In November 2002, the Centers for Medicare and Medicaid Services (CMS)
announced its final rule with respect to Ambulatory Payment Classification
(APC) reimbursement codes to be implemented in January 2003. One of the APC
codes that was affected is currently being used by hospitals to bill Medicare
for the Photo Vaporization of the Prostate (PVP) procedures. In February
2003, CMS issued a technical correction to this APC code which represents the
reimbursement under this code for 2003. The reimbursement level to the
hospital for this code was reduced approximately 19% for the hospital site of
service for Medicare patients compared to the reimbursement during 2002. In
August 2003, the Centers for Medicare and Medicaid Services (CMS) announced
adjusted reimbursement rates for various BPH treatment alternatives. These
rates are due to become effective in January 2004. The national average
reimbursement rates for the PVP procedure in 2004 are now projected to be
slightly higher in outpatient hospital facilities. In November 2003, CMS
notified Laserscope that its application for assignment of PVP to treat BPH to
a new technology Ambulatory Payment Classification (APC) has been accepted.
CMS has determined that PVP
meets the new technology APC qualification criteria and will be assigned a new
APC code effective April 1, 2004. Until that time, PVP will continue to be
reimbursed under current designated codes. Details regarding the specific
coding information and the new associated reimbursement rates will be
forthcoming prior to the reassignment. Over the next few months, we will
continue to work closely with CMS and the American Urological Association to
ensure that the hospital outpatient and physician reimbursement rates for
furnishing PVP reflect the appropriate costs of performing the procedure.

If reimbursement rates are not increased soon, it will likely have a short-term
adverse effect on the adoption and sales growth of the PVP procedure in the
United States as some hospital-based customers who would normally consider
adopting the PVP procedure delay their purchases or adoption until the
reimbursement climate becomes more attractive.

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

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

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

18



---



##### Table of Contents



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

Dependence on Single-Source Suppliers and Certain Third Parties.

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

Manufacturing.

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

A challenge we have been recently experiencing relates to some of our component
suppliers. Our commitment to delivering a quality product for the GreenLight
PV procedure has stretched some of our vendors to the point where we were
unable to fulfill our GreenLight PV laser backlog during the first three
quarters of 2003 due to a shortage of some critical components. We have made
progress and we are continuing to work with these suppliers to resolve these
issues. In the quarter ended September 30, 2003, we were able to significantly
reduce our backlog due to progress made. We will closely monitor our
suppliers progress toward the eventual goal of being able to ship within 30 to
60 days after receipt of a customer order.

Competition.

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



| |  |  | market acceptance of our products;
| | - |  | ----------------------------------



| |  |  | product performance;
| | - |  | --------------------



| |  |  | price;
| | - |  | ------



| |  |  | customer support;
| | - |  | -----------------



| |  |  | the success and timing of new product development; and
| | - |  | ------------------------------------------------------



| |  |  | continued development of successful distribution channels.
| | - |  | ----------------------------------------------------------

Some of our current and prospective competitors have or may have significantly
greater financial, technical, research and development, manufacturing and
marketing resources than we have. To compete effectively, we will need to
continue to expand our product offerings, periodically enhance our existing
products and continue to enhance our distribution.

19



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##### Table of Contents



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

Reliance on Patents and Licenses.

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

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

Intellectual Property Infringement Claims.

From time to time we receive notices from others claiming we are infringing
their patent or other intellectual property rights. Responding to any
infringement claim, regardless of its validity, could:



| |  | be time-consuming to defend;
|- |  | ----------------------------



| |  | result in costly litigation;
|- |  | ----------------------------



| |  | divert managements time and attention from developing our business;
|- |  | --------------------------------------------------------------------



| |  | require us to enter into royalty and licensing agreements that we
would not normally find acceptable;
|- |  | -----------------------------------------------------------------------------------------------------



| |  | require us to stop selling or to redesign our products; and
|- |  | -----------------------------------------------------------



| |  | require us to pay money as damages or to satisfy indemnification
obligations that we have with our customers.
|- |  | -------------------------------------------------------------------------------------------------------------

If a successful claim is made against us and we fail to develop or license a
substitute technology, our business, results of operations, financial condition
or cash flows could be materially adversely affected.

20



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##### Table of Contents



Failure to Attract or Retain Key Personnel Can Adversely Affect Results.

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

Reliance on Key Customers.

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

Fluctuations in Quarterly Operating Results.

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

Potential of Product Defects.

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

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

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| |  |  | loss of customers;
| | - |  | ------------------



| |  |  | increased costs of product, returns and warranty expenses;
| | - |  | ----------------------------------------------------------



| |  |  | damage to our brand reputation;
| | - |  | -------------------------------



| |  |  | failure to attract new customers or achieve market acceptance;
| | - |  | --------------------------------------------------------------



| |  |  | diversion of development and engineering resources; and
| | - |  | -------------------------------------------------------



| |  |  | legal actions by our customers.
| | - |  | -------------------------------

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

Product Liability Risk; Limited Insurance Coverage.

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

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

Natural Catastrophic Events; Terrorism and Other Manmade Problems.

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

Factors Affecting Financial Results and Stock Price.

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



| |  |  | product mix;
| | - |  | ------------



| |  |  | competitive pricing pressures;
| | - |  | ------------------------------

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| |  |  | material costs;
| | - |  | ---------------



| |  |  | revenue and expenses related to new products and enhancements to
existing
products;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | delays in customer purchases in anticipation of new products or
product
enhancements by Laserscope or its competitors; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the risk of loss or interruption to our operations or increased costs
due to
earthquakes, the availability of power and energy supplies and other
events
beyond our control.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| |  |  | quarterly fluctuations in our financial results;
| | - |  | ------------------------------------------------



| |  |  | changes in analysts estimates of future results;
| | - |  | -------------------------------------------------



| |  |  | changes in investors perceptions of our products;
| | - |  | --------------------------------------------------



| |  |  | announcement of new or enhanced products by us or our competitors;
| | - |  | ------------------------------------------------------------------



| |  |  | announcements relating to acquisitions and strategic transactions by
us
| | - |  | -----------------------------------------------------------------------



| |  |  | or our competitors;
| | - |  | -------------------



| |  |  | general conditions in the medical equipment industry; and
| | - |  | ---------------------------------------------------------



| |  |  | general conditions in the financial markets.
| | - |  | --------------------------------------------

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

As of October 31, 2003, we had 17,840,813 shares of outstanding common stock.
The sale of a substantial number of shares of common stock or the perception
that such sales could occur could adversely affect prevailing market prices for
our common stock.

International Business.

Our international sales are made through international distributors and
wholly-owned subsidiaries with payments to us typically denominated in the
local currencies of the United Kingdom and France, and in U.S. Dollars in the
rest of the world. We intend to continue our operations outside of the United
States and potentially to enter additional international markets. These
activities, require significant management attention and financial resources
and further subject us to the risks of operating internationally. These risks
include, but are not limited to:



| |  |  | changes in regulatory requirements;
| | - |  | -----------------------------------



| |  |  | delays resulting from difficulty in obtaining export licenses for
certain technology;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | customs, tariffs and other barriers and restrictions; and
| | - |  | ---------------------------------------------------------



| |  |  | the burdens of complying with a variety of foreign laws.
| | - |  | --------------------------------------------------------

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



| |  |  | differing economic conditions;
| | - |  | ------------------------------

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| |  |  | changes in political climate;
| | - |  | -----------------------------



| |  |  | differing tax structures; and
| | - |  | -----------------------------



| |  |  | changes in diplomatic and trade relationships and war.
| | - |  | ------------------------------------------------------

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

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

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

Legal Proceedings.

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

Interest Rate Risk.

(See Item 3.-Quantitative and Qualitative Disclosures About Market Risk in this
Quarterly Report on Form 10-Q.)

Warranty Obligations.

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

No Dividends.

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

Penny Stock Rules.

Our common stock is traded on the National Association of Securities Dealers
Automated Quotation (NASDAQ) National Market System, which requires that a
company have, among other things, a minimum bid price of $1.00 in order to
qualify for continued listing. If we fail to maintain our listing for our
common stock on the NASDAQ National Market System, and no other exclusion from
the definition of penny stock under the Exchange Act is available, any
brokers engaging in transactions in our securities would be required to provide
their customers with a risk disclosure document. The rules require that, prior
to a transaction in a penny stock not otherwise exempt from the rules, the
broker-dealer must: (i) deliver a standardized risk disclosure document that
provides information about penny stocks and the risks in the penny stock
market; (ii) provide the customer with current bid and offer quotations for
the penny stock; (iii) disclose the compensation of the broker-dealer and its
salesperson in connection with the transaction; (iv) provide the customer
monthly account statements showing the market value of each penny stock held in
the customers account; and (v) make a special written determination that the
penny stock is a suitable investment for the customer and receive the
customers written agreement to the transaction. If brokers become subject to
the penny stock rules when engaging in transactions in our securities, they
may become less willing to engage in such transactions, thereby making it more
difficult for shareholders to dispose of their shares of Laserscope common
stock.

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Dilution.

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

Other.

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






|        |                                                            
|------- | -----------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk.

Laserscope is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments, outstanding debt balances and
foreign currency fluctuations. In the normal course of business, the Company
employs established policies and procedures to manage its exposure to
fluctuations in interest rates and foreign currency values.

Interest Rate Risk.

Laserscopes exposure to market rate risk for changes in interest rates relates
primarily to our outstanding debt. In 2003 and 2002, we did not use derivative
financial instruments. We invest excess cash in money market funds. Our debt
financing consists of convertible debentures and bank loans requiring either
fixed or variable rate interest payments. Investments in and borrowings under
both fixed-rate and floating-rate interest-earning instruments carry a degree
of interest rate risk. On the investment side, fixed-rate securities may have
their fair market value adversely affected due to a rise in interest rates,
while floating-rate securities may produce less income than expected if
interest rates fall. In addition, our future investment income may fall short
of securities analyst expectations due to changes in interest rates, or we may
suffer losses in principal if forced to sell securities which have declined in
market value due to changes in interest rates. On the debt side, borrowings,
such as our convertible notes, that require fixed-rate interest payments
require greater than current market rate interest payments if interest rates
fall, while floating rate borrowings, such as our line of credit, may require
greater interest payments if interest rates rise. Additionally, our future
interest expense may be greater than expected due to changes in interest rates.

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Foreign Currency Risk.

Our international revenues were 25% of total revenues in the quarter ended
September 30, 2003 compared to 28% in the quarter ended June 30, 2003. Our
international sales are made through international distributors and wholly
owned subsidiaries with payments to the Company typically denominated in the
local currencies of the United Kingdom and France, and in U.S. dollars in the
rest of the world. Our international business is subject to risks typical of
an international business, including, but not limited to, differing economic
conditions, changes in political -climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility.
Accordingly, our future results could be materially adversely affected by
changes in these or other factors. We do not engage in hedging transactions
for speculative or trading purposes.






|        |                         
|------- | ------------------------
|Item 4. | Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted
an evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this report. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures need improvement. (See Item 4(b) below)

(b) Changes in internal controls.

In connection with the preparation of the Companys financial statements as of
and for the year ended December 31, 2002, management, in conjunction with our
financial advisors,
identified significant deficiencies that relate to our foreign subsidiaries and
that were primarily caused by turnover of accounting personnel. Since December
31, 2002, we have made significant progress in our controls and procedures
relating to our foreign subsidiaries. While there were no material
misstatements of our consolidated financial results for any quarter of 2003 or
any quarter of 2002, corrective actions are continuing to be instituted.
These matters have been discussed with our independent accountants and the
Audit Committee of the Board of Directors of the Company.

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|         |                  
|-------- | -----------------
|PART II. | OTHER INFORMATION






|        |                                  
|------- | ---------------------------------
|Item 6. | Exhibits and Reports on Form 8-K.



| | (a) |  | Exhibits filed herewith (numbered in accordance with Item 601 of
Regulation S-K):
| | --- |  | ---------------------------------------------------------------------------------

ExhibitNumber
    
    Description10.1
    
    
        
    Amendment to the Loan and Security Agreement
between the Registrant and Silicon Valley Bank dated September
25, 2003.10.2
    
    
        
    Amendment to the Convertible Debentures Agreement
between the Registrant and Renaissance Capital Growth and
Income Fund III, Inc.31.1
    
    Certification of Principal Executive Officer pursuant to
Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C
Section 1350.32.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.




| | (b) |  | Reports on form 8-K:
| | --- |  | --------------------



| |  |  | On July 24, 2003, the Company filed a current report on Form 8-K
reporting the issuance of a Press Release dated July 24, 2003
announcing the Companys financial results for the fiscal quarter
ended June 30, 2003.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

LASERSCOPERegistrant/s/ Dennis LaLumandiereDennis LaLumandiereVice President, Financeand Chief Financial Officer(Principal Financial andAccounting Officer)Date:    November 13, 2003


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Exhibit Index

ExhibitNumber
    
    Description10.1
    
    Amendment to the Loan and Security Agreement
between the Registrant and Silicon Valley Bank dated September 25, 2003.10.2
    
    Amendment to the Convertible Debentures Agreement
between the Registrant and Renaissance Capital Growth and
Income Fund III, Inc.31.1
    
    Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C
Section 1350.32.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350.


29