##### 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, 2002

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 0-18053

LASERSCOPE

(Exact name of Registrant as Specified in Its Charter)


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

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

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

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  [   ]

The number of shares of Registrants common stock issued and outstanding as of
October 31, 2002 was 16,624,717.

1



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TABLE OF CONTENTS



|                              |                                                                                                |                                                      |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements.                                                                 
|                              |                                                                                                | Condensed Consolidated Balance Sheets               
|                              |                                                                                                | Condensed Consolidated Statements Of Operations     
|                              |                                                                                                | Condensed Consolidated Statements of Cash Flows     
|                              |                                                                                                | Notes to 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 1. Legal Proceedings.                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds.                                            
|                              | Item 3. Defaults upon Senior Securities.                                                      
|                              | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|                              | Item 5. Other Information.                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K.                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 10.11J               
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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##### Table of Contents



TABLE OF CONTENTS

|                               |  |                                                                                         |    |  |    |      |  | 
|------------------------------ |  | --------------------------------------------------------------------------------------- | -- |  | -- | ---- |  | 
|                               |  |                                                                                         |    |  |    | Page
|                               |  |                                                                                         |    |  |    |     
|PART I.  FINANCIAL INFORMATION |  |                                                                                         | 3  | 
|Item 1.                        |  | Financial Statements (unaudited)                                                        |    |  | 3  |     
|                               |  | Condensed Consolidated Balance Sheets                                                   |    |  | 3  |     
|                               |  | Condensed Consolidated Statements of Operations                                         |    |  | 4  |     
|                               |  | Condensed Consolidated Statements of Cash Flows                                         |    |  | 5  |     
|                               |  | Notes to Condensed Consolidated Financial Statements                                    |    |  | 6  |     
|Item 2.                        |  | Managements Discussion and Analysis of
  Financial Condition and Results of Operations |    |  | 8  |     
|                               |  | Results of Operations                                                                   |    |  | 9  |     
|                               |  | Liquidity and Capital Resources                                                         |    |  | 10 |     
|                               |  | Risk Factors                                                                            |    |  | 12 |     
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                              |    |  | 19 |     
|Item 4.                        |  | Controls & Procedures                                                                   |    |  | 20 |     
|PART II.  OTHER INFORMATION    |  |                                                                                         | 20 | 
|Item 1.                        |  | Legal Proceedings                                                                       |    |  | 20 |     
|Item 2.                        |  | Changes in
Securities and Use of Proceeds                                               |    |  | 21 |     
|Item 3.                        |  | Defaults upon Senior Securities                                                         |    |  | 21 |     
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                     |    |  | 21 |     
|Item 5.                        |  | Other
Information                                                                       |    |  | 21 |     
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                        |    |  | 21 |     
|SIGNATURES                     |  |                                                                                         | 22 | 

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial Statements.




Laserscope
Condensed Consolidated Balance Sheets
(Unaudited)

|                                                            |                                                      |                             |                                            |         |               |        |              |         |        |        | 
|----------------------------------------------------------- | ---------------------------------------------------- | --------------------------- | ------------------------------------------ | ------- | ------------- | ------ | ------------ | ------- | ------ | ------ | 
|                                                            |                                                      |                             |                                            |         | September 30, |        | December 31,
|(thousands)                                                 |                                                      | 2002                        |                                            | 2001   
|                                                            |                                                      |                             |                                            |        
|Assets                                                      |                                                      |                             |                                            |         |               |        |              |        
|Current assets:                                             |                                                      |                             |                                            |         |               |        |              |        
|                                                            | Cash and cash equivalents                            |                             | $                                          | 4,093   |               |        | $            | 3,408   |       
|                                                            | Accounts receivable, net                             |                             |                                            | 9,893   |               |        |              | 8,427   |       
|                                                            | Inventories                                          |                             |                                            | 10,070  |               |        |              | 9,228   |       
|                                                            | Other current assets                                 |                             |                                            | 1,299   |               |        |              | 1,283   |       
|                                                            |                                                      |                             |                                            |         |               |        |              |        
|                                                            |                                                      | Total current assets        |                                            |         | 25,355        |        |              |         | 22,346 |       
|Property and equipment, net                                 |                                                      |                             | 2,000                                      |         |               |        | 2,067        |        
|Goodwill                                                    |                                                      |                             | 655                                        |         |               |        | 655          |        
|Other assets                                                |                                                      |                             | 312                                        |         |               |        | 414          |        
|                                                            |                                                      |                             |                                            |         |               |        |              |        
|                                                            |                                                      |                             | Total assets                               |         | $             | 28,322 |              |         | $      | 25,482 | 
|                                                            |                                                      |                             |                                            |         |               |        |              |        
|Liabilities and Shareholders Equity                        |                                                      |                             |                                            |         |               |        |              |        
|Current liabilities:                                        |                                                      |                             |                                            |         |               |        |              |        
|                                                            | Short-term bank loans                                |                             | $                                          | 1,200   |               |        | $            | 1,135   |       
|                                                            | Accounts payable                                     |                             |                                            | 3,123   |               |        |              | 2,821   |       
|                                                            | Accrued compensation                                 |                             |                                            | 1,716   |               |        |              | 1,588   |       
|                                                            | Deferred revenue                                     |                             |                                            | 1,239   |               |        |              | 1,031   |       
|                                                            | Convertible subordinated debentures, current portion |                             |                                            | 232     |               |        |              |        |       
|                                                            | Other current liabilities                            |                             |                                            | 3,127   |               |        |              | 2,435   |       
|                                                            |                                                      |                             |                                            |         |               |        |              |        
|                                                            |                                                      | Total current liabilities   |                                            |         | 10,637        |        |              |         | 9,010  |       
|Convertible subordinated debentures, net of current portion |                                                      |                             | 2,768                                      |         |               |        | 3,000        |        
|Obligations under capital leases                            |                                                      |                             | 71                                         |         |               |        | 60           |        
|                                                            |                                                      |                             |                                            |         |               |        |              |        
|                                                            |                                                      | Total long-term liabilities |                                            |         | 2,839         |        |              |         | 3,060  |       
|                                                            |                                                      |                             |                                            |         |               |        |              |        
|Contingencies (Note 5)                                      |                                                      |                             |                                            |         |               |        |              |        
|Shareholders equity:                                       |                                                      |                             |                                            |         |               |        |              |        
|                                                            | Common stock                                         |                             |                                            | 55,490  |               |        |              | 54,712  |       
|                                                            | Accumulated deficit                                  |                             |                                            | (39,570 | )             |        |              | (39,843 | )     
|                                                            | Accumulated other comprehensive loss                 |                             |                                            | (949    | )             |        |              | (1,332  | )     
|                                                            | Notes receivable from shareholders                   |                             |                                            | (125    | )             |        |              | (125    | )     
|                                                            |                                                      |                             |                                            |         |               |        |              |        
|                                                            |                                                      |                             | Total shareholders equity                 |         |               | 14,846 |              |         |        | 13,412 | 
|                                                            |                                                      |                             |                                            |         |               |        |              |        
|                                                            |                                                      |                             | Total liabilities and shareholders equity |         | $             | 28,322 |              |         | $      | 25,482 | 
|                                                            |                                                      |                             |                                            |         |               |        |              |        

See Accompanying Notes to Condensed Consolidated Financial Statements

3



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Laserscope
Condensed Consolidated Statements Of Operations
(Unaudited)

|                                              |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |        | 
|--------------------------------------------- | ----------------------------------- | ---- | ------------------ | ----- | ----------------- | ---- | ------ | ----- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                              |                                     |      | Three months ended |       | Nine months ended
|                                              |                                     |      | September 30,      |       | September 30,    
|                                              |                                     |      |                    |       |                  
|(thousands, except per share amounts)         |                                     | 2002 |                    | 2001  |                   | 2002 |        | 2001 
|                                              |                                     |      |                    |       |                   |      |        |      
|Net revenue                                   |                                     | $    | 10,479             |       |                   | $    | 7,953  |       |  | $ | 30,428 |        |  | $ | 25,483 |       
|Cost of sales                                 |                                     |      | 4,822              |       |                   |      | 4,154  |       |  |   | 14,578 |        |  |   | 12,954 |       
|                                              |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |       
|Gross margin                                  |                                     |      | 5,657              |       |                   |      | 3,799  |       |  |   | 15,850 |        |  |   | 12,529 |       
|                                              |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |       
|Operating expenses:                           |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |       
|                                              | Research and development            |      |                    | 841   |                   |      |        | 930   |  |   |        | 2,890  |  |   |        | 2,721  | 
|                                              | Selling, general and administrative |      |                    | 4,487 |                   |      |        | 3,375 |  |   |        | 12,323 |  |   |        | 10,459 | 
|                                              |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |       
|                                              |                                     |      | 5,328              |       |                   |      | 4,305  |       |  |   | 15,213 |        |  |   | 13,180 |       
|                                              |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |       
|Operating income (loss)                       |                                     |      | 329                |       |                   |      | (506   | )     |  |   | 637    |        |  |   | (651   | )     
|Interest and other expenses, net              |                                     |      | (107               | )     |                   |      | (135   | )     |  |   | (301   | )      |  |   | (266   | )     
|                                              |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |       
|Income (loss) before income taxes             |                                     |      | 222                |       |                   |      | (641   | )     |  |   | 336    |        |  |   | (917   | )     
|Provision for income taxes                    |                                     |      | 30                 |       |                   |      |       |       |  |   | 63     |        |  |   | 32     |       
|                                              |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |       
|Net income (loss)                             |                                     | $    | 192                |       |                   | $    | (641   | )     |  | $ | 273    |        |  | $ | (949   | )     
|                                              |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |       
|Basic net income (loss) per share             |                                     | $    | 0.01               |       |                   | $    | (0.04  | )     |  | $ | 0.02   |        |  | $ | (0.06  | )     
|                                              |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |       
|Diluted net income (loss) per share           |                                     | $    | 0.01               |       |                   | $    | (0.04  | )     |  | $ | 0.01   |        |  | $ | (0.06  | )     
|                                              |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |       
|Shares used in basic per share calculations   |                                     |      | 16,541             |       |                   |      | 16,003 |       |  |   | 16,355 |        |  |   | 15,929 |       
|                                              |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |       
|Shares used in diluted per share calculations |                                     |      | 18,582             |       |                   |      | 16,003 |       |  |   | 18,534 |        |  |   | 15,929 |       
|                                              |                                     |      |                    |       |                   |      |        |       |  |   |        |        |  |   |        |       

See Accompanying Notes to Condensed Consolidated Financial Statements

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Laserscope
Condensed Consolidated Statements of Cash Flows
(Unaudited)

|                                                  |                                                                                          |                                                                                   |                           |        |                   |        |       |        |     |        |  
|------------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------- | ------ | ----------------- | ------ | ----- | ------ | --- | ------ | -
|                                                  |                                                                                          |                                                                                   |                           |        | Nine Months Ended
|                                                  |                                                                                          |                                                                                   |                           |        | September 30,    
|                                                  |                                                                                          |                                                                                   |                           |        |                  
|(thousands)                                       |                                                                                          | 2002                                                                              |                           | 2001  
|                                                  |                                                                                          |                                                                                   |                           |       
|Cash flows from operating activities:             |                                                                                          |                                                                                   |                           |        |                   |        |       |       
|                                                  | Net income (loss)                                                                        |                                                                                   | $                         | 273    |                   |        | $     | (949   | )  
|                                                  | Adjustments to reconcile net income (loss) to
net cash provided by operating activities: |                                                                                   |                           |        |                   |        |       |        |    
|                                                  |                                                                                          | Depreciation and amortization                                                     |                           |        | 887               |        |       |        | 859 |       
|                                                  |                                                                                          | Changes in assets and liabilities:                                                |                           |        |                   |        |       |        |     |       
|                                                  |                                                                                          |                                                                                   | Accounts receivable, net  |        |                   | (1,277 | )     |        |     | 872    |  
|                                                  |                                                                                          |                                                                                   | Inventories               |        |                   | (708   | )     |        |     | (1,136 | )
|                                                  |                                                                                          |                                                                                   | Other current assets      |        |                   | 23     |       |        |     | (274   | )
|                                                  |                                                                                          |                                                                                   | Accounts payable          |        |                   | 278    |       |        |     | 516    |  
|                                                  |                                                                                          |                                                                                   | Accrued compensation      |        |                   | 128    |       |        |     | 31     |  
|                                                  |                                                                                          |                                                                                   | Deferred revenue          |        |                   | 208    |       |        |     | 710    |  
|                                                  |                                                                                          |                                                                                   | Other current liabilities |        |                   | 646    |       |        |     | 373    |  
|                                                  |                                                                                          |                                                                                   |                           |        |                   |        |       |       
|Net cash provided by operating activities         |                                                                                          |                                                                                   | 458                       |        |                   |        | 1,002 |       
|                                                  |                                                                                          |                                                                                   |                           |        |                   |        |       |       
|Cash flows from investing activities:             |                                                                                          |                                                                                   |                           |        |                   |        |       |       
|                                                  | Acquisition of property and equipment                                                    |                                                                                   |                           | (538   | )                 |        |       | (719   | )  
|                                                  |                                                                                          |                                                                                   |                           |        |                   |        |       |       
|Net cash used in investing activities             |                                                                                          |                                                                                   | (538                      | )      |                   |        | (719  | )     
|                                                  |                                                                                          |                                                                                   |                           |        |                   |        |       |       
|Cash flows from financing activities:             |                                                                                          |                                                                                   |                           |        |                   |        |       |       
|                                                  | Payments on obligations under capital leases                                             |                                                                                   |                           | (202   | )                 |        |       | (252   | )  
|                                                  | Proceeds from the sale of common stock under stock plans                                 |                                                                                   |                           | 778    |                   |        |       | 134    |    
|                                                  | Proceeds from bank loans                                                                 |                                                                                   |                           | 6,220  |                   |        |       | 9,550  |    
|                                                  | Repayment of shareholder notes                                                           |                                                                                   |                           |       |                   |        |       | 9      |    
|                                                  | Repayment of bank loans                                                                  |                                                                                   |                           | (6,155 | )                 |        |       | (9,252 | )  
|                                                  |                                                                                          |                                                                                   |                           |        |                   |        |       |       
|Net cash provided by financing activities         |                                                                                          |                                                                                   | 641                       |        |                   |        | 189   |       
|                                                  |                                                                                          |                                                                                   |                           |        |                   |        |       |       
|Effect of exchange rate changes on cash           |                                                                                          |                                                                                   | 124                       |        |                   |        | (23   | )     
|Net increase in cash and cash equivalents         |                                                                                          |                                                                                   | 685                       |        |                   |        | 449   |       
|Cash and cash equivalents, beginning of period    |                                                                                          |                                                                                   | 3,408                     |        |                   |        | 2,698 |       
|                                                  |                                                                                          |                                                                                   |                           |        |                   |        |       |       
|Cash and cash equivalents, end of period          |                                                                                          | $                                                                                 | 4,093                     |        |                   | $      | 3,147 |       
|                                                  |                                                                                          |                                                                                   |                           |        |                   |        |       |       
|Supplemental disclosure of cash flow information: |                                                                                          |                                                                                   |                           |        |                   |        |       |       
|                                                  |                                                                                          | Cash paid during the period for:                                                  |                           |        |                   |        |       |        |     |       
|                                                  |                                                                                          |                                                                                   | Interest                  |        | $                 | 75     |       |        | $   | 287    |  
|                                                  |                                                                                          |                                                                                   | Income taxes              |        | $                 | 79     |       |        | $   | 10     |  
|                                                  |                                                                                          | Non-cash increase in obligations under capital leases                             |                           | $      | 172               |        |       | $      |    |       
|                                                  |                                                                                          | Acquisition of minority interest in affiliate in exchange
for accounts receivable |                           | $      |                  |        |       | $      | 555 |       

See Accompanying Notes to Condensed Consolidated Financial Statements

5



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Laserscope Notes to 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 and majority-owned subsidiaries. All intercompany transactions
and balances have been eliminated. The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of
the information and footnotes required for complete financial statements.
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, 2001 included in the Companys annual report
on Form 10-K for the year ended December 31, 2001. The results of
operations for the three and nine month periods ended September 30, 2002
are not necessarily indicative of the results expected for the full year.
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Inventories were comprised of the following (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                |  |               |        |              |  |   |       | 
|--------------- |  | ------------- | ------ | ------------ |  | - | ----- | 
|                |  | September 30, |        | December 31,
|                |  | 2002          |        | 2001        
|                |  |               |        |             
|Raw materials   |  | $             | 4,445  |              |  | $ | 4,743 | 
|Work-in-process |  |               | 2,550  |              |  |   | 2,345 | 
|Finished goods  |  |               | 3,075  |              |  |   | 2,140 | 
|                |  |               |        |              |  |   |       | 
|                |  | $             | 10,070 |              |  | $ | 9,228 | 
|                |  |               |        |              |  |   |       | 

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|3. |  | Net income (loss) per share
|-- |  | ---------------------------



| |  | Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during
the period. Diluted net income (loss) 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 (loss) per share follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|             |                                                                                                          |      |                    |        |                   |      |   |        |   |  |   |        |  |  |   |        |  
|------------ | -------------------------------------------------------------------------------------------------------- | ---- | ------------------ | ------ | ----------------- | ---- | - | ------ | - |  | - | ------ |  |  | - | ------ | -
|             |                                                                                                          |      | Three months ended |        | Nine months ended
|             |                                                                                                          |      | September 30,      |        | September 30,    
|             |                                                                                                          |      |                    |        |                  
|(thousands)  |                                                                                                          | 2002 |                    | 2001   |                   | 2002 |   | 2001  
|             |                                                                                                          |      |                    |        |                   |      |   |       
|Numerator:   |                                                                                                          |      |                    |        |                   |      |   |        |   |  |   |        |  |  |   |       
|             | Net income (loss) used in computing
basic and diluted net income (loss)
per share                        |      | $                  | 192    |                   |      | $ | (641   | ) |  | $ | 273    |  |  | $ | (949   | )
|Denominator: |                                                                                                          |      |                    |        |                   |      |   |        |   |  |   |        |  |  |   |       
|             | Weighted average number of common
shares outstanding used in computing
basic net income (loss) per share |      |                    | 16,541 |                   |      |   | 16,003 |   |  |   | 16,355 |  |  |   | 15,929 |  
|             | Add: Dilutive potential common shares used
in computing dilutive net income (loss)
per share             |      |                    | 2,041  |                   |      |   |       |   |  |   | 2,179  |  |  |   |       |  
|             |                                                                                                          |      |                    |        |                   |      |   |        |   |  |   |        |  |  |   |       
|             | Total weighted-average number of shares
used in computing diluted net
income (loss) per share            |      |                    | 18,582 |                   |      |   | 16,003 |   |  |   | 18,534 |  |  |   | 15,929 |  
|             |                                                                                                          |      |                    |        |                   |      |   |        |   |  |   |        |  |  |   |       



| |  | The following outstanding options and warrants (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 (loss) per common share for the periods ended September 30, 2002
and 2001 because including them would have had an antidilutive effect:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  |  |                    |       |                   |  |      |       |      |  |  |       |  |  |  |       | 
|--------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|                                  |  | Three months ended |       | Nine months ended
|                                  |  | September 30,      |       | September 30,    
|                                  |  |                    |       |                  
|(thousands)                       |  | 2002               |       | 2001              |  | 2002 |       | 2001
|                                  |  |                    |       |                   |  |      |       |     
|Options to purchase common stock  |  |                    | 1,389 |                   |  |      | 2,959 |      |  |  | 1,317 |  |  |  | 2,989 | 
|Warrants to purchase common stock |  |                    |      |                   |  |      | 459   |      |  |  |      |  |  |  | 459   | 
|Convertible debentures            |  |                    | 2,400 |                   |  |      | 2,400 |      |  |  | 2,400 |  |  |  | 2,400 | 
|                                  |  |                    |       |                   |  |      |       |      |  |  |       |  |  |  |       | 
|                                  |  |                    | 3,789 |                   |  |      | 5,818 |      |  |  | 3,717 |  |  |  | 5,848 | 
|                                  |  |                    |       |                   |  |      |       |      |  |  |       |  |  |  |       | 



|4. |  | Comprehensive income (loss)                                                                                        
|-- |  | -------------------------------------------------------------------------------------------------------------------
|  
|   |  | Total comprehensive income (loss) during the periods ended September 30,
2002 and 2001 consisted of (in thousands):

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|                            |  |                    |     |                   |  |      |      |      |  |   |     |  |  |   |      |  
|--------------------------- |  | ------------------ | --- | ----------------- |  | ---- | ---- | ---- |  | - | --- |  |  | - | ---- | -
|                            |  | Three months ended |     | Nine months ended
|                            |  | September 30,      |     | September 30,    
|                            |  |                    |     |                  
|                            |  | 2002               |     | 2001              |  | 2002 |      | 2001
|                            |  |                    |     |                   |  |      |      |     
|Net income (loss)           |  | $                  | 192 |                   |  | $    | (641 | )    |  | $ | 273 |  |  | $ | (949 | )
|Translation adjustments     |  |                    | 97  |                   |  |      | 379  |      |  |   | 383 |  |  |   | (23  | )
|                            |  |                    |     |                   |  |      |      |      |  |   |     |  |  |   |      |  
|Comprehensive income (loss) |  | $                  | 289 |                   |  | $    | (262 | )    |  | $ | 656 |  |  | $ | (973 | )
|                            |  |                    |     |                   |  |      |      |      |  |   |     |  |  |   |      |  



|5. |  | Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company is at times a party to various 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|6. |  | Recent accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | In July 2002, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. This Statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). This
Statement requires that a liability for costs associated with an exit or
disposal activity be recognized and measured initially at fair value only
when the liability is incurred. The provisions of this Statement are
effective for exit or disposal activities that are initiated after
December 31, 2002. The Company believes that the adoption of this standard
will have no impact on its financial statements.




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, 2001 under the heading Risk Factors. Readers are
cautioned not to place undue reliance on forward-looking

8



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statements. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of those statements. We undertake no
obligation to publicly release any revision to the forward-looking statements
after the date of this document.




Results of Operations:

The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes included in Part I  Item 1 of
this Quarterly Report and the audited financial statements and notes contained
in the Companys Annual Report on Form 10-K for the year ended December 31,
2001 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, 2002 (in thousands, except
for percentages):

|                          |                                   |   |                    |       |               |  |        |    |                   |   |               |       |        |  |      |    |        |  |      |    |        |   |        |        |  |  |     |    |   |   |        |        |  |  |     |    |   |  |    |    |  
|------------------------- | --------------------------------- | - | ------------------ | ----- | ------------- |  | ------ | -- | ----------------- | - | ------------- | ----- | ------ |  | ---- | -- | ------ |  | ---- | -- | ------ | - | ------ | ------ |  |  | --- | -- | - | - | ------ | ------ |  |  | --- | -- | - |  | -- | -- | -
|                          |                                   |   | Three months ended |       |               |  |        |    | Nine months ended |   |               |       |       
|                          |                                   |   | Sept 30, 2002      |       | Sept 30, 2001 |  | %      |    | Sept 30, 2002     |   | Sept 30, 2001 |       | %     
|                          |                                   |   | Amount             |       | %(a)          |  | Amount |    | %(a)              |   | Change        |       | Amount |  | %(a) |    | Amount |  | %(a) |    | Change
|                          |                                   |   |                    |       |               |  |        |    |                   |   |               |       |        |  |      |    |        |  |      |    |       
|Revenues from sales of:   |                                   |   |                    |       |               |  |        |    |                   |   |               |       |        |  |      |    |        |  |      |    |        |   |        |        |  |  |     |    |   |   |        |        |  |  |     |    |   |  |    |   
|                          | Lasers                            |   | $                  | 4,415 |               |  |        | 42 | %                 |   | $             | 3,489 |        |  |      | 44 | %      |  |      | 27 | %      |   | $      | 13,194 |  |  |     | 43 | % |   | $      | 11,735 |  |  |     | 46 | % |  |    | 12 | %
|                          | Instruments &
disposable supplies |   |                    | 4,642 |               |  |        | 44 | %                 |   |               | 3,129 |        |  |      | 39 | %      |  |      | 48 | %      |   |        | 12,950 |  |  |     | 43 | % |   |        | 9,494  |  |  |     | 37 | % |  |    | 36 | %
|                          | Service                           |   |                    | 1,422 |               |  |        | 14 | %                 |   |               | 1,335 |        |  |      | 17 | %      |  |      | 7  | %      |   |        | 4,284  |  |  |     | 14 | % |   |        | 4,254  |  |  |     | 17 | % |  |    | 1  | %
|                          |                                   |   |                    |       |               |  |        |    |                   |   |               |       |        |  |      |    |        |  |      |    |        |   |        |        |  |  |     |    |   |   |        |        |  |  |     |    |   |  |    |   
|Total net revenues        |                                   | $ | 10,479             |       |               |  | 100    | %  |                   | $ | 7,953         |       |        |  | 100  | %  |        |  | 32   | %  |        | $ | 30,428 |        |  |  | 100 | %  |   | $ | 25,483 |        |  |  | 100 | %  |   |  | 19 | % 
|Gross margin              |                                   | $ | 5,657              |       |               |  | 54     | %  |                   | $ | 3,799         |       |        |  | 48   | %  |        |  | 49   | %  |        | $ | 15,850 |        |  |  | 52  | %  |   | $ | 12,529 |        |  |  | 49  | %  |   |  | 27 | % 
|Research & development    |                                   | $ | 841                |       |               |  | 8      | %  |                   | $ | 930           |       |        |  | 12   | %  |        |  | (10  | )% |        | $ | 2,890  |        |  |  | 9   | %  |   | $ | 2,721  |        |  |  | 11  | %  |   |  | 6  | % 
|Selling, general & admin. |                                   | $ | 4,487              |       |               |  | 43     | %  |                   | $ | 3,375         |       |        |  | 42   | %  |        |  | 33   | %  |        | $ | 12,323 |        |  |  | 40  | %  |   | $ | 10,459 |        |  |  | 41  | %  |   |  | 18 | % 



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

Net revenues increased for the three month and nine month periods ended
September 30, 2002 relative to the corresponding periods of 2001.

Revenues from the sales of laser systems increased during the three-month and
nine-month periods ended September 30, 2002 relative to the same periods in
2001. While unit sales increased 16% and 23%, respectively, for the three and
nine-month periods ended September 30, 2002 relative to the same periods in
2001, average selling prices decreased. This price decrease is due to a change
in the mix of laser types sold, as well as our distribution agreement with
McKesson Corp. The distribution arrangement with McKesson Corp. was
implemented during the first quarter of 2001, and unit volumes through that
channel were lower in the start-up period than in the first three quarters of
2002. We expect that sales of aesthetic lasers will continue to be a major
source of revenue. In addition, as the year progresses, we anticipate
increasing the sales of Niagara PVTM lasers. The Niagara PV is a surgical
laser used for the treatment of benign prostatic hyperplasia (BPH). Our first
revenue shipments of the Niagara PV laser were in the three month period ended
March 31, 2002 during which we sold six units. We sold nine of these units in
each of the three-month periods ended June 30, 2002 and September 30 2002.

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Revenues from the sales of instrumentation and disposable supplies increased
during the three and nine months ended September 30, 2002 compared to the
corresponding periods in 2001. The increases are driven by the higher laser
unit volumes and the associated increase in volume of accessories that are sold
with lasers. We expect revenues from the sales of instrumentation and
disposable supplies to incrementally increase as we ship more Niagara PV lasers
and experience the corresponding recurring revenue from sales of the Niagara
PVs single-use fiber optic energy delivery device.

Our service revenues increased during the three and nine-month periods ended
September 30, 2002 compared to the same periods in 2001. Increased service
revenues were primarily experienced internationally as a result of an increase
in the number of billable service calls performed. We believe that future
service revenues primarily depend on increases to the installed base of lasers
as well as the acceptance of its service contracts by our customers.

Gross margin as a percentage of revenues during the quarter and nine months
ended September 30, 2002 increased six percentage points and increased three
percentage points, respectively, relative to the corresponding periods of 2001.
This was due to lower manufacturing overhead rates resulting from a higher
volume of product manufactured. We expect that gross margin as a percentage of
revenues for the remainder of 2002 may vary from preceding quarters as product
and distribution mix may vary.

Research and development expenses are the result of activities related to the
development of new laser, instrumentation and disposable products and the
enhancement of our existing products. These expenses decreased during the
three month period ended September 30, 2002, but increased during the nine
month period ended September 30, 2002 compared to the same periods in 2001.
The increase during the nine-month period was due primarily to higher expenses
for clinical evaluation of the Niagara laser during the early part of the year.
The decrease for the quarter was primarily driven by a redirection of efforts
from product development to sustaining engineering. We expect amounts spent in
research and development to increase only marginally in absolute terms in the
remainder of the year relative to the third quarters level.

Selling, general and administrative expenses increased during the quarter and
nine-month periods ended September 30, 2002, compared to the corresponding
periods in 2001. The nine-month period was impacted by an approximate $1
million increase in expenses relating to the promotion of the Niagara PV laser
and to a lesser extent, increased expenses in support of our aesthetic lasers
as well as an increase in legal expenses. We expect amounts spent in selling,
general and administrative expenses to increase during the remainder of 2002 as
variable selling and marketing expenses increase with higher sales volumes and
administrative expense is marginally impacted by higher legal expenses.




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, 2002 and for the nine months then ended (in thousands):

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|                          |  |               |        |              |  |   |        | 
|------------------------- |  | ------------- | ------ | ------------ |  | - | ------ | 
|                          |  | September 30, |        | December 31,
|                          |  | 2002          |        | 2001        
|                          |  |               |        |             
|Cash and cash equivalents |  | $             | 4,093  |              |  | $ | 3,408  | 
|Total assets              |  | $             | 28,322 |              |  | $ | 25,482 | 
|Total liabilities         |  | $             | 13,476 |              |  | $ | 12,070 | 
|Net working capital       |  | $             | 14,718 |              |  | $ | 13,336 | 

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

During the nine months ended September 30,
2002, cash provided by operating activities totaled $0.5 million. This was the
combined result of the following sources: depreciation and amortization   $0.9
million; increase in other current liabilities 
$0.6 million; net income  $0.3 million; increase in accounts payable  $0.3 million; increase in deferred
revenue  $0.2 million; increase in accrued compensation  $0.1 million; These
sources were partially offset by an increase in accounts receivable  $1.3
million, due to higher revenues in the quarter ended September 30, 2002 versus
those of the quarter ended December 31, 2001 as well as timing of collections
in Europe. Sources of cash were also partly offset by an increase in inventory
 $0.7 million.

During the nine months ended September 30,
2002, cash used in investing activities consisted of capital expenditures of $0.5
million.

During the nine months ended September 30,
2002, cash provided by financing activities consisted of the sale of common stock under
stock plans  $0.8 million; and an increase in short-term borrowing  $0.1
million; which was partially offset by payments on obligations under capital
leases  $0.2 million.

We have in place an asset-based line of credit that provides for borrowing up
to $5.0 million and expires in September 2003. The line of credit bears
interest at a rate equal to the prime rate plus 1.5%. Credit is extended and
secured based on eligible accounts receivable and inventory. At September 30,
2002, we had approximately $3.3 million in borrowing capacity available
against borrowings of $1.2 million outstanding and $1.1 million in letter of
credit reserve requirements. This resulted in $1.0 million of unused borrowing
capacity. As of September 30, 2002, we 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.

11



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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.




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 and in the other documents we file with the
SEC.

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.

We anticipate that future changes in cash and working capital will be dependent
on a number of factors including:



| |  | Our ability to manage effectively non-cash assets such as inventory and accounts receivable;                      
|- |  | ------------------------------------------------------------------------------------------------------------------
| 
| |  | Our ability to anticipate and adapt to the changes in our industry such as new and alternative medical procedures;
| 
| |  | Our level of profitability; and                                                                                   
| 
| |  | Our determination to acquire or invest in products and businesses complementary to ours.                          

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

There 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.

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.

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.

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Laserscope and its products are regulated in the United States by the 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.

In August 2002, the Center for Medicare and Medicaid Services (CMS) announced
proposed plans to reduce the 2003 reimbursement rates for a number of hospital
outpatient procedures by reducing the payments paid under certain APC
(Ambulatory Payment Classification) reimbursement codes. In November 2002, the
Center for Medicare and Medicaid Services (CMS) announced its final rule with
respect to APC (Ambulatory Payment Classification) reimbursement codes to be
implemented in January 2003. One of the APC codes that was affected is
currently being used by hospitals to bill Medicare for the PVP procedures. The

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reimbursement level for this code will be reduced approximately by 28% for the
hospital site of service for Medicare patients.

This reduction 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.
In addition, there are no assurances that CMS nor other reimbursement setting
agencies will not change the classification of the PVP procedure to a
reimbursement code or codes that that further negatively impact the adoption of
the procedure in either the hospital outpatient or other settings.

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. Without new products and
enhancements, our existing products will likely become technologically
obsolete, 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.

Our current research and development programs are directed toward the
development of new laser systems and delivery devices. For example, we are
currently developing new laser systems for the emerging aesthetic market and
the urology market. 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.

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. We cannot assure that we can compete successfully
against these organizations. Our ability to compete effectively depends on
such factors as:



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

14



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| |  | product performance;                                      
|- |  | ----------------------------------------------------------
| 
| |  | price;                                                    
| 
| |  | customer support;                                         
| 
| |  | the success and timing of new product development; and    
| 
| |  | continued development of successful distribution channels.

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

Certain surgical laser manufacturers have targeted their efforts on narrow
segments of the market, such as angioplasty and lithotripsy. Their products may
compete for the same capital equipment funds as our products, and accordingly,
these manufacturers may be considered our competitors. More 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, the laser
resonator and the connector used to attach disposable and reusable
instrumentation to our laser systems. 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;

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| |  | 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.

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.
The loss of services of any of our key personnel, the inability to retain and
attract qualified personnel in the future, or delays in hiring required
personnel, particularly engineering and sales personnel, could make it
difficult to meet key objectives, such as timely and effective product
introductions. 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.

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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;                                                                                                                                                                                
| 
| |  | material costs;                                                                                                                                                                                               
| 
| |  | revenue and expenses related to new products and enhancements to existing
products; and delays in customer purchases in anticipation of new products or
product enhancements by Laserscope or its competitors.

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                                  

17



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| |  | 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. Our business is subject to the effects of general economic
conditions in the United States and globally. Factors not directly related to
Laserscopes performance, such as negative industry reports or disappointing
earnings announcements by publicly traded competitors, may also have an adverse
impact on the market price of our common stock.

As of October 31, 2002, we had 16,624,717 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.

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.                             

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
our 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 variety of
service contract bases or on an individual call basis. We also have 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.

18



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No Dividends.

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

Penny Stock Rules.

Our common stock is traded on the National Association of Securities Dealers
Automated Quotation (NASDAQ) National Market System, which requires that a
company have, 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 compensation of the
broker/dealer in the transaction and monthly account statements showing the
market values of our securities held in the customers accounts. The bid and
offer quotations and compensation information must be provided prior to
effecting the transaction and must be contained on the customers confirmation.
If brokers become subject to the penny stock rules when engaging in
transactions in our securities, they would become less willing to engage in
such transactions, thereby making it more difficult for shareholders to dispose
of their shares of Laserscope common stock.

Dilution.

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

We are exposed to a variety of risks, including changes in interest rates
affecting the return on our investments, outstanding debt balances and foreign
currency fluctuations. In the normal course of business, we employ established
policies and procedures to manage our exposure to fluctuations in interest
rates and foreign currency values.

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates
primarily to our outstanding debt. In 2002 and 2001 we did not use derivative
financial instruments. We

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invest our excess cash in money market funds. Our
debt financings consist of convertible debentures and bank loans requiring
either fixed or variable rate interest payments.
Investments in and borrowings under both fixed-rate and floating-rate
interest-earning instruments carry a degree of interest rate risk. On the
investment side, fixed-rate securities may have their fair market value
adversely affected due to a rise in interest rates, while floating-rate
securities may produce less income than expected if interest rates fall. In
addition, our future investment income may fall short of expectations due to
changes in interest rates or we may suffer losses in principal if forced to
sell securities that have declined in market value due to changes in interest
rates. On the debt side, borrowings that require fixed-rate interest payments
require greater than current market rate interest payments if interest rates
fall, while floating rate borrowings may require greater interest payments if
interest rates rise. Additionally, our future interest expense may be greater
than expected due to changes in interest rates.

Foreign Currency Risk

Our International revenues were 24% and 25% of total revenues in the three and
nine month periods ended September 30, 2002, compared to 27% and 32% during the
comparable periods in 2001. 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.

Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Companys periodic Securities and Exchange Commission filings. No significant
changes were made in the Companys internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.




PART II. OTHER INFORMATION




Item 1. Legal Proceedings.

Not applicable.

20



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Item 2. Changes in Securities and Use of Proceeds.

Not applicable.




Item 3. Defaults upon Senior Securities.

Not applicable.




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

Not applicable.




Item 5. Other Information.

Not applicable.




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

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

|        |  |                                                                                                                  
|------- |  | -----------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                  
|Number  |  | Description                                                                                                      
|        |  |                                                                                                                  
|10.11J  |  | Amendment to Loan and Security Agreement between the Registrant and
Silicon Valley Bank dated September 26, 2002.
|       
|99.1    |  | Certification of Principal Executive Officer pursuant to 18 U.S.C.
section 1350.                                 
|       
|99.2    |  | Certification of Principal Financial Officer pursuant to 18 U.S.C.
section 1350.                                 

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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.



| | LASERSCOPE
| | ----------



| | Registrant
| | ----------



| |  |                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------
| |  | /s/  Dennis LaLumandiere                                                                                            
| |  |                                                                                                                     
| |  | Dennis LaLumandiere
Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)

Date:  November 13, 2002

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CERTIFICATIONS

I, Eric M. Reuter, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Laserscope;                                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                      



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date:  November 13, 2002

| |  |                                                                     
| |  | --------------------------------------------------------------------
| |  | /s/  Eric M. Reuter                                                 
| |  |                                                                     
| |  | Eric M. Reuter
Chief Executive Officer
(Principal Executive Officer)

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I, Dennis LaLumandiere, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Laserscope;                                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                      



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date:  November 13, 2002

| |  |                                                                          
| |  | -------------------------------------------------------------------------
| |  | /s/  Dennis LaLumandiere                                                 
| |  |                                                                          
| |  | Dennis LaLumandiere
Chief Financial Officer
(Principal Financial Officer)

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EXHIBIT INDEX

|        |  |                                                                                                                 
|------- |  | ----------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                 
|Number  |  | Description                                                                                                     
|        |  |                                                                                                                 
|10.11J  |  | Amendment to Loan and Security Agreement between the Registrant and
Silicon Valley Bank dated September 26, 2002
|       
|99.1    |  | Certification of Principal Executive Officer pursuant to 18 U.S.C.
section 1350                                 
|       
|99.2    |  | Certification of Principal Financial Officer pursuant to 18 U.S.C.
section 1350