##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 ___________________ FORM 10-Q (Mark One) þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the quarterly period ended March 31, 2004 or o
    
    Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
 For the transition period from ______ to ______ Commission file number 0-18053 LASERSCOPE 
  CALIFORNIA
    
    77-0049527(State or Other Jurisdiction
of Incorporation or Organization)
    
    (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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES þ NO o The number of shares of Registrants common stock issued and outstanding as of
April 30, 2004 was 20,878,396.




---



TABLE OF CONTENTS PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Results of Operations
    
    
    12Liquidity and Capital Resources
    
    
    14Risk Factors
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    27PART II. OTHER INFORMATION
    
    
    27Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    27SIGNATURES
    
    
    28EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION. 
 Item 1. Financial Statements. 
 Laserscope
Condensed Consolidated Balance Sheets
(unaudited) March 31,
    
    December 31,(thousands)
    
    2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    8,700
    
    
    $
    7,158Accounts receivable, net
    
    
    12,754
    
    
    
    12,711Inventories, net
    
    
    14,681
    
    
    
    13,368Other current assets
    
    
    1,465
    
    
    
    1,315Total current assets
    
    
    37,600
    
    
    
    34,552Property and equipment, net
    
    
    1,596
    
    
    
    1,645Goodwill
    
    
    655
    
    
    
    655Other assets
    
    
    197
    
    
    
    176Total assets
    
    $
    40,048
    
    
    $
    37,028Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    2,893
    
    
    $
    4,094Accrued compensation
    
    
    3,118
    
    
    
    2,360Deferred revenue
    
    
    2,313
    
    
    
    2,022Other current liabilities
    
    
    5,506
    
    
    
    5,354Total current liabilities
    
    
    13,830
    
    
    
    13,830Contingencies (Note 7)Shareholders equity:Common stock
    
    
    61,124
    
    
    
    60,427Accumulated deficit
    
    
    (34,788
    )
    
    
    (37,002
    )Accumulated other comprehensive loss
    
    
    (118
    )
    
    
    (227
    )Total shareholders equity
    
    
    26,218
    
    
    
    23,198Total liabilities and shareholders equity
    
    $
    40,048
    
    
    $
    37,028
 See Accompanying Notes to Condensed Consolidated Financial Statements 3




---



##### Table of Contents



Laserscope
Condensed Consolidated Statements of Operations
(Unaudited) Three months endedMarch 31,(thousands, except per share amounts)
    
    2004
    
    2003Net revenue
    
    $
    18,750
    
    
    $
    12,456Cost of sales
    
    
    8,164
    
    
    
    6,191Gross margin
    
    
    10,586
    
    
    
    6,265Operating expenses:Research and development
    
    
    1,239
    
    
    
    1,008Selling, general and administrative
    
    
    6,733
    
    
    
    5,064Total operating expenses
    
    
    7,972
    
    
    
    6,072Operating income
    
    
    2,614
    
    
    
    193Interest and other expenses
    
    
    (69
    )
    
    
    (36
    )Income before income taxes
    
    
    2,545
    
    
    
    157Provision for income taxes
    
    
    331
    
    
    
    22Net income
    
    $
    2,214
    
    
    $
    135Basic net income per share
    
    $
    0.11
    
    
    $
    0.01Diluted net income per share
    
    $
    0.10
    
    
    $
    0.01Shares used in basic per share calculations
    
    
    20,342
    
    
    
    16,899Shares used in diluted per share calculations
    
    
    22,682
    
    
    
    18,858
 See Accompanying Notes to Condensed Consolidated Financial Statements 4




---



##### Table of Contents



Laserscope
Condensed Consolidated Statements of Cash Flows
(Unaudited) Three Months EndedMarch 31,(thousands)
    
    2004
    
    2003Cash flows from operating activities:Net income
    
    $
    2,214
    
    
    $
    135Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation and amortization
    
    
    209
    
    
    
    285Amortization of debt issuance costs
    
    
    
    
    
    
    34Provision for doubtful accounts
    
    
    138
    
    
    
    34Provision for excess and obsolete inventory
    
    
    297
    
    
    
    309Changes in assets and liabilities:Accounts receivable, net
    
    
    (92
    )
    
    
    (732
    )Inventories
    
    
    (1,600
    )
    
    
    (124
    )Prepayments and other current assets
    
    
    (169
    )
    
    
    222Accounts payable
    
    
    (1,439
    )
    
    
    (413
    )Accrued compensation
    
    
    760
    
    
    
    (116
    )Warranty
    
    
    10
    
    
    
    158Deferred revenue
    
    
    291
    
    
    
    229Other current liabilities
    
    
    170
    
    
    
    48Tax payable
    
    
    230
    
    
    
    14Net cash provided by operating activities
    
    
    1,019
    
    
    
    83Cash flows from investing activities:Acquisition of property and equipment
    
    
    (186
    )
    
    
    (107
    )Net cash used in investing activities
    
    
    (186
    )
    
    
    (107
    )Cash flows from financing activities:Payments on obligations under capital leases
    
    
    (15
    )
    
    
    (72
    )Proceeds from the sale of common stock under stock plans
    
    
    697
    
    
    
    182Proceeds from bank loans
    
    
    
    
    
    
    200Repayment of bank loans
    
    
    
    
    
    
    (200
    )Net cash provided by financing activities
    
    
    682
    
    
    
    110Effect of exchange rate changes on cash
    
    
    27
    
    
    
    7Net increase in cash and cash equivalents
    
    
    1,542
    
    
    
    93Cash and cash equivalents, beginning of period
    
    
    7,158
    
    
    
    4,661Cash and cash equivalents, end of period
    
    $
    8,700
    
    
    $
    4,754Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    20
    
    
    $
    67Income taxes
    
    $
    96
    
    
    $
    8
 See Accompanying Notes to Condensed Consolidated Financial Statements 5




---



##### Table of Contents



Laserscope Notes to Unaudited Condensed Consolidated Financial Statements:  1.
    
    Basis of presentation The accompanying unaudited condensed consolidated financial statements include
Laserscope (the Company, management, we, us, our) and its wholly
owned subsidiaries. All intercompany transactions and balances have been
eliminated. While the financial information in this report is unaudited, in
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations as of and for the periods indicated have been recorded. We suggest
that these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes for the year ended December 31,
2003 included in the Companys annual report on Form 10-K for the year ended
December 31, 2003. The December 31, 2003 balance sheet data has
been derived from the audited financial statements at that date. The results of operations for the three month period ended
March 31, 2004 are not necessarily indicative of the results expected for the
full year or any other interim period.  2.
    
    Stock-Based Compensation The Company accounts for stock-based
compensation arrangements in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees and its interpretations, and complies with the disclosure provisions
of Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation. Under APB Opinion
No. 25, compensation expense is based on the difference, if any, on the date of
grant, between the fair value of the Companys stock and the exercise price.
SFAS No. 123 defines a fair value based method of accounting for an employee
stock option or similar equity instrument. The Company accounts for equity
instruments issued to non-employees in accordance with the provisions of SFAS
No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods and Services (EITF Issue No. 96-18). Under SFAS No. 123 and EITF
Issue No. 96-18, the fair value of options granted to non-employees is
estimated using the Black-Scholes option pricing model and is periodically
remeasured as the options vest. Had compensation cost for stock-based employee compensation arrangements been
determined based on the fair value at the date of the awards consistent with
the provisions of SFAS No. 123, the impact on the Companys net income would be
as follows (in thousands, except per share data): 6




---



##### Table of Contents



Three months endedMarch 31,2004
    
    2003Net income as reported
    
    $
    2,214
    
    
    $
    135Add: Stock-based compensation expense
included in reported net loss, net of related tax effects
    
    
    
    
    
    
    Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of related tax effects
    
    
    (366
    )
    
    
    (240
    )Pro forma
net income (loss)
    
    $
    1,848
    
    
    $
    (105
    )Net
income (loss) per share:Basic-as reported
    
    $
    0.11
    
    
    $
    0.01Basic-pro forma
    
    $
    0.09
    
    
    $
    (0.01
    )Diluted-as reported
    
    $
    0.10
    
    
    $
    0.01Diluted-pro forma
    
    $
    0.08
    
    
    $
    (0.01
    )
  3.
    
    Inventories Inventories were comprised of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Sub-assemblies and purchased parts
    
    $
    7,453
    
    
    $
    6,356Work-in-process
    
    
    3,979
    
    
    
    3,213Finished goods
    
    
    3,249
    
    
    
    3,799$
    14,681
    
    
    $
    13,368
  4.
    
    Warranty and Service Contracts Warranty
We have a direct field service organization that provides service for our
products. We generally provide a twelve month warranty on our laser systems.
After the warranty period, maintenance and support is provided on a service
contract basis or on an individual call basis. Our warranties and premium
service contracts provide for a 99.0% Uptime Guarantee on our laser systems.
Under provisions of this guarantee, we extend the term of the related warranty
or service contract if specified system uptime levels are not maintained. The
number of warranties extended under this program are not material. 7




---



##### Table of Contents



The Company currently provides for the estimated cost to repair or replace
products under warranty at the time of sale. The cost estimate is based on
warranty costs experienced in the prior 12 months, and the outstanding warranty
liability is revalued on a quarterly basis. Three months endedMarch 31,Warranty Reserve (in thousands)
    
    2004
    
    2003Balance at beginning of period
    
    $
    1,947
    
    
    $
    1,127Add:
    
    Accruals for warranties issued
    
    
    546
    
    
    
    571Accruals related to pre-existing warranties
    
    
    12
    
    
    
    14Less:
    
    Settlements made during the period
    
    
    (548
    )
    
    
    (427
    )Balance at end of period
    
    $
    1,957
    
    
    $
    1,285
 Service Contracts
Deferred service contract revenue is recognized on a pro rata basis
over the period of the applicable service contract. Costs are
recognized as incurred. Three months endedMarch 31,Deferred Service Contract Revenue (in thousands)
    
    2004
    
    2003Balance at beginning of period
    
    $
    1,433
    
    
    $
    1,086Add:
    
    Payments received
    
    
    1,234
    
    
    
    925Costs incurred under extended service contracts
    
    
    594
    
    
    
    442Less:
    
    Revenue recognized
    
    
    (900
    )
    
    
    (671
    )Settlements made under extended servicecontracts during the period
    
    
    (594
    )
    
    
    (442
    )Balance at end of period
    
    $
    1,767
    
    
    $
    1,340
  5.
    
    Net income per share Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted net income per share is computed by giving effect to all dilutive
potential common shares, including options, warrants, and convertible 8




---



##### Table of Contents



debentures. A reconciliation of the numerator and denominator used in the
calculation of historical basic and diluted net income per share follows: Three months endedMarch 31,(thousands)
    
    2004
    
    2003Numerator:Net income used in computing basic and
diluted net income per share
    
    $
    2,214
    
    
    $
    135Denominator:Weighted average number of common
shares outstanding used in computing
basic net income per share
    
    
    20,342
    
    
    
    16,899Add: Dilutive potential common shares used
in computing dilutive net income per share
    
    
    2,340
    
    
    
    1,959Total weighted average number of shares
used in computing diluted net income
per share
    
    
    22,682
    
    
    
    18,858
 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 per common share for
the periods ended March 31, 2004 and 2003 because including them would have had
an antidilutive effect: Three months endedMarch 31,(thousands)
    
    2004
    
    2003Options to purchase common stock
    
    
    58
    
    
    
    279Warrants to purchase common stock
    
    
    
    
    
    
    444Convertible debentures
    
    
    
    
    
    
    2,40058
    
    
    
    3,123
 9




---



##### Table of Contents





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

Total comprehensive income during the periods ended March 31, 2004 and 2003
consisted of (in thousands):

Three months endedMarch 31,2004
    
    2003Net income
    
    $
    2,214
    
    
    $
    135Translation adjustments
    
    
    109
    
    
    
    (14
    )Comprehensive income
    
    $
    2,323
    
    
    $
    121
  7.
    
    Contingencies The Company is at times a party to legal proceedings and claims arising in the
ordinary course of its business. While it is not feasible to predict or
determine the outcome of the actions brought against the Company, management
believes that the ultimate resolution of these claims will not ultimately have
a material adverse effect on the Companys financial position, results of
operations, or future cash flows.  8.
    
    Indemnifications In the ordinary course of business, the Company enters into contractual
arrangements under which the Company may agree to indemnify the third party to
such arrangement from any losses incurred relating to the services they perform
on behalf of the Company or for losses arising from certain events as defined
within the particular contract, which may include, for example, patents,
litigation or claims relating to past performance. Such indemnification
obligations may not be subject to maximum loss clauses. Historically, payments
made related to these indemnifications have been immaterial. The Company has entered into indemnification agreements with its directors and
officers that may require the Company: to indemnify its directors and officers
against liabilities that may arise by reason of their status or service as
directors or officers, other than liabilities arising from willful misconduct
of a culpable nature; to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified; and to make good
faith determination whether or not it is practicable for the Company to obtain
directors and officers insurance. The Company currently has directors and
officers insurance.  9.
    
    Recent accounting pronouncements In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS No. 150 requires that an issuer classify
those financial instruments as liabilities (or assets in some circumstances).
Under previous guidance, issuers could account for those financial instruments
as equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. In November 2003, certain
elements of SFAS No. 150 were deferred to fiscal periods beginning after
December 15, 2004. SFAS No. 150 is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of 10




---



##### Table of Contents



SFAS No. 150 and still existing
at the beginning of the interim period of adoption. Restatement is not
permitted. The adoption of the effective elements of SFAS No. 150 had no
material effect on the Companys financial position or results of operations.
The Company does not expect the adoption of the deferred elements of SFAS No.
150 to have a material effect on its financial position or results of
operations. In December 2003, the FASB issued a revised FASB Interpretation No. 46 (FIN
No. 46R), Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51. The FASB published the revision to clarify and amend some of the
original provisions of FIN No. 46, which was issued in January 2003, and to
exempt certain entities from its requirements. A variable interest entity
(VIE) refers to an entity subject to consolidation according to the
provisions of this Interpretation. FIN No. 46R applies to entities whose equity
investment at risk is insufficient to finance that entitys activities without
receiving additional subordinated financial support provided by any parties,
including equity holders, or where the equity investors (if any) do not have a
controlling financial interest. FIN No. 46R provides that if an entity is the
primary beneficiary of a VIE, the assets, liabilities, and results of
operations of the VIE should be consolidated in the entitys financial
statements. In addition, FIN No. 46R requires that both the primary beneficiary
and all other enterprises with a significant variable interest in a VIE provide
additional disclosures. The provisions of FIN No. 46R are effective to the
first reporting period ending after March 15, 2004. The adoption of FIN No.
46R had no material effect on the Companys financial position or results of
operations. 
  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, 2003 under the heading Risk Factors. Readers are
cautioned not to place undue reliance on forward-looking statements. Moreover,
neither we nor any other person assumes responsibility for the accuracy and
completeness of those statements. We are under no duty to publicly release any
revision to the forward-looking statements after the date of this document. Overview. Laserscope is a leading provider of medical laser systems for surgical and
aesthetic applications. Founded in 1984, we are a pioneer developer of
innovative technologies with over 7000 lasers installed worldwide in doctors
offices, out-patient surgical centers and hospitals. Our product 11




---



##### Table of Contents



portfolio
consists of more than 150 products, including KTP/532, Nd:YAG, Er:YAG, and Dye
medical laser systems and related energy delivery devices. Laserscope primarily serves the needs of two medical specialties: urology and
aesthetic surgery. Our newest product, the GreenLight laser, offers a
breakthrough treatment for a
urological disorder called benign prostatic hyperplasia (BPH), an enlargement
of the prostate gland experienced by most men after the age of fifty. For aesthetic applications, we offer a full line of products used to perform a
wide variety of treatments including the removal of leg and facial veins,
unwanted hair, pseudo-folliculitis and wrinkles. In the United States, we distribute our products to hospitals, outpatient
surgical centers and physician offices through our own direct sales force and
through the McKesson Corporation Medical Group, (McKesson). In December
2000, we signed a five year distribution agreement that grants to McKesson the
exclusive distribution rights for our core aesthetic laser products in the
United States. McKessons Primary Care Division has a sales force of more than
500 representatives throughout the United States who are supported by our own
direct sales force. In the United Kingdom and France, we distribute our products to hospitals,
outpatient surgical centers and physician offices through our own direct sales
force. Elsewhere, we sell our products through regional distributor networks
throughout Europe, the Middle East, Latin America, Asia and the Pacific Rim.
Laserscope is both ISO 9001 and CE certified. During the three months ended March 31, 2004, the center for Medicare and
Medicaid Services announced the assignment of the Companys Photoselective
Vaporization of the Prostate procedure for the treatment of Benign Prostate
Hyperplasia, or enlarged prostate, to a New Technology Ambulatory Payment
Classification code. The new classification carries with it a payment rate of
$3,750.00, approximately twice that of the old rate. 
 Results of Operations. The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes included in Part I 
Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes contained in the Companys Annual Report on Form 10-K for
the year ended December 31, 2003 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 quarters ended March 31, 2004 and 2003 (in thousands, except
percentages): Three months endedMarch 31, 2004
    
    March 31, 2003
    
    %Amount
    
    %(a)
    
    Amount
    
    %(a)
    
    ChangeRevenues from sales of:Lasers & Instrumentation
    
    $
    11,663
    
    
    
    62
    %
    
    
    8,876
    
    
    
    71
    %
    
    
    31
    %Disposable supplies
    
    
    5,319
    
    
    
    28
    %
    
    
    2,108
    
    
    
    17
    %
    
    
    152
    %Service
    
    
    1,768
    
    
    
    10
    %
    
    
    1,472
    
    
    
    12
    %
    
    
    20
    %Total net revenues
    
    
    18,750
    
    
    
    100
    %
    
    
    12,456
    
    
    
    100
    %
    
    
    51
    %Gross margin
    
    
    10,586
    
    
    
    56
    %
    
    
    6,265
    
    
    
    50
    %
    
    
    69
    %Operating expenses:Research & development
    
    
    1,239
    
    
    
    7
    %
    
    
    1,008
    
    
    
    8
    %
    
    
    23
    %Selling, general & administrative
    
    
    6,733
    
    
    
    37
    %
    
    
    5,064
    
    
    
    41
    %
    
    
    33
    %Net income
    
    $
    2,214
    
    
    
    12
    %
    
    $
    135
    
    
    
    1
    %
    
    
    1,540
    %
   (a)
    
    expressed as a percentage of total net revenues. 12




---



##### Table of Contents



Revenues from the sales of lasers and instrumentation increased 31% during the
three months ended March 31, 2004 compared to the same period in 2003. The
increase primarily was driven by a higher volume of GreenLight
surgical lasers sold.
First quarter 2004 revenue shipments of GreenLight lasers were 49 units, which
is an approximate eight-fold increase over first quarter 2003 shipments of 6
units. GreenLight backlog remained at 19 units at March 31,
2004, the same as at the end of the fourth quarter of 2003. First
quarter 2004 worldwide aesthetic laser and instrumentation revenues increased
4% compared to the same period in 2003. The increase is due to higher average
selling prices, partially offset by decreased international aesthetic laser
sales. We believe that we will see moderate increases in our sales of
lower-priced office-based aesthetic lasers in the worldwide market due to a
strong distribution channel with McKesson and the introduction of the Gemini
laser. The Gemini, introduced at the American Academy of Dermatology
Annual Meeting, held February 7-10, 2004, is FDA-approved for the treatment of acne, permanent hair
reduction and wrinkle reduction, is now approved for a total of 21 different
procedures, and can perform over 90% of all aesthetic laser procedures
available in a physicians office. We also believe we will see a continued
trend of increasing GreenLight laser shipments.

Revenues from the sales of disposable supplies increased 152% during the three
months ended March 31, 2004 compared to the corresponding period in 2003. This
increase is driven by a 5,000 unit increase in shipments of GreenLight
disposable fiber-optic devices. Increased GreenLight fiber sales is a direct
result of an increase in our GreenLight installed base. The Company expects
revenues from the sales of disposable supplies to incrementally increase as a
result of a recent increase in the Medicare reimbursement rate for the BPH
procedure that uses Laserscopes GreenLight laser and fiber optic delivery
device. Also, revenues are expected to increase as the Company ships more
GreenLight lasers, which require a single-use fiber optic energy delivery
device.

Laserscopes service revenues increased 20% during the three months ended March
31, 2004 compared to the same period in 2003 due to higher service
contracts sold worldwide. Service revenue increased $189,000
in the Domestic region, or 16%, and $107,000 in the International region, or 35%.
The Company believes that increases in future revenues depend on increases to
the installed base of lasers as well as the acceptance of its service contracts
by its customers.

Gross margin as a percentage of revenues increased during the quarter ended
March 31, 2004 relative to the corresponding period of 2003. The increase in
gross margin percentage is due primarily to a change in the product mix and
better average selling prices for the GreenLight laser.

Research and development expenses are the result of activities related to the
development of new laser, instrumentation and disposable products and the
modification and enhancement of Laserscopes existing products. These expenses
decreased marginally as a percentage of sales during the three months ended
March 31, 2004 compared to the same period in 2003, but increased in absolute
terms. This was primarily due to our efforts in finishing the development of
the new Gemini laser as well as our efforts on enhancements for the GreenLight
and aesthetic

13



---



##### Table of Contents



lasers. The Company expects that amounts spent in research and
development during 2004 will be higher in absolute terms than that spent in
2003 but lower as a percentage of net revenues Selling, general and administrative expenses increased during the quarter ended
March 31, 2004 compared to the corresponding period in 2003. The increase is
due primarily to higher
sales and marketing expenses related to the Companys GreenLight and Gemini
products, as well as higher direct selling expenses for domestic aesthetic
products. We expect amounts spent in selling, general and administrative
expenses to increase during the remainder of 2004 relative to the first quarter
of 2004 as we continue to expand marketing programs related to the GreenLight
and aesthetic products. Provision for income taxes
increased $309,000, from $22,000 to $331,000 during the three months
ended March 31, 2004 compared to the corresponding period in 2003.
The effective tax rate in the three month period ended march 31, 2004
was 13% compared to 14% in the corresponding period in 2003. Due to
experiencing only a short history of profitability, management
believes that there is sufficient uncertainty regarding the
realization of deferred tax assets and a full valuation allowance was
appropriate at March 31, 2004 and 2003. Management reviews its
assumptions regarding the realization of deferred tax assets on an
ongoing basis. Continued profitability and future changes in
managements assumptions may result in a partial or full release
of the deferred tax valuation allowance. A release of the valuation
allowance would have a favorable impact on the tax provision within
the statement of operations. 
 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
March 31, 2004 and for the three months then ended (in thousands): March 31,
    
    December 31,2004
    
    2003Cash and cash equivalents
    
    $
    8,700
    
    
    $
    7,158Total assets
    
    $
    40,048
    
    
    $
    37,028Total liabilities
    
    $
    13,830
    
    
    $
    13,830Net working capital
    
    $
    23,770
    
    
    $
    20,722
 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 three months ended March 31, 2004, cash provided in operating
activities totaled $1.0 million. This was the combined result of the following
sources: net income- $2.2 million; an increase in accrued compensation- $0.8
million due to an increase in accrued salaries and wages and company bonuses;
an increase in provision for excess and obsolete inventory- $0.3 million; an increase in deferred
revenue- $0.3 million; an increase in tax payable- $0.2 million due to a
higher tax provision as a result of an increase in income; an increase in other
accrued liabilities- $0.2 million; depreciation- $0.2 million; and an increase
in provision of doubtful accounts receivable- $0.1 million. These sources were
offset by: an increase in inventory- $1.6 million due to an increase in
material purchases; a decrease in accounts payable- $1.4 million as Laserscope
increased payments to suppliers during the quarter; an increase in other
current assets- $0.2 million due to early payments for future expenses; and an
increase in accounts receivable- $0.1 million. During the three months ended March 31, 2004, cash provided by financing
activities consisted of the sale of common stock under stock plans - $0.7
million In the first quarter of 2004, cash used in investing activities consisted of
capital expenditures of $0.2 million. We have in place an asset based line of credit which provides up to $5.0
million in borrowings off-set against $1.0 million in letter of credit reserve
requirements. The line of credit expires September 2004. Credit is extended
based on the Companys eligible accounts receivable and inventory. At March
31, 2004, the Company had approximately $4.0 million in borrowing capacity
under the line of credit facility. The Companys assets collateralize the line
of credit which bears 14




---



##### Table of Contents



an interest rate equivalent to the banks prime rate plus
2.0%. Borrowings against the line of credit are paid down as the Company
collects its accounts receivable. Provisions of the bank loan agreement
prohibit the payment of dividends on non-preferred stock, or the redemption,
retirement, repurchase or other acquisition of Company stock. The
agreement further requires the Company to maintain a minimum tangible net
worth. As of March 31, 2004, the Company was in compliance with all covenants
and had no outstanding borrowings under the line of credit facility. We anticipate that future changes in cash and working capital will be dependent
on a number of factors including:  
    
    our ability to effectively manage inventory and accounts receivable;  
    
    our ability to anticipate and adapt to the changes in our industry
such as new and alternative medical procedures;  
    
    our level of profitability;  
    
    our determination to acquire or invest in products and businesses
complementary to ours; and  
    
    the market price for our common stock as it affects the exercise of
stock options and sale of common stock under stock plans. We have historically financed acquisitions using our existing cash resources.
While we believe our existing cash resources, including our bank line of
credit, will be sufficient to fund our operating needs for the next twelve
months, additional financing may be required for our currently envisioned
long-term needs. There can be no assurance that any additional financing will be available on
terms acceptable
to us, or at all. In addition, future equity financings could result in
dilution to our shareholders, and future debt financings could result in
certain financial and operational restrictions. Off-Balance Sheet Arrangements. As part of our ongoing business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities (SPEs), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As of March 31, 2004, we are not involved in any
unconsolidated SPE transactions. Contractual Obligations. We did not enter into any additional material contractual obligations during
the quarter ended March 31, 2004. Recent Accounting Pronouncements. In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial 15




---



##### Table of Contents



instruments with characteristics of
both liabilities and equity. SFAS No. 150 requires that an issuer classify
those financial instruments as liabilities (or assets in some
circumstances). Under previous guidance, issuers could account for those
financial instruments as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. In November 2003, certain elements of SFAS No. 150 were deferred to
fiscal periods beginning after December 15, 2004. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of SFAS
No. 150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of the effective elements of SFAS
No. 150 had no material effect on the Companys financial position or results
of operations. The Company does not expect the adoption of the deferred
elements of SFAS No. 150 to have a material effect on its financial position or
results of operations. In December 2003, the FASB issued a revised FASB Interpretation No. 46 (FIN
No. 46R), Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51. The FASB published the revision to clarify and amend some of the
original provisions of FIN No. 46, which was issued in January 2003, and to
exempt certain entities from its requirements. A variable interest entity
(VIE) refers to an entity subject to consolidation according to the
provisions of this Interpretation. FIN No. 46R applies to entities whose equity
investment at risk is insufficient to finance that entitys activities without
receiving additional subordinated financial support provided by any parties,
including equity holders, or where the equity investors (if any) do not have a
controlling financial interest. FIN No. 46R provides that if an entity is the
primary beneficiary of a VIE, the assets, liabilities, and results of
operations of the VIE should be consolidated in the entitys financial
statements. In addition, FIN No. 46R requires that both the primary beneficiary
and all other enterprises with a significant variable interest in a VIE provide
additional disclosures. The provisions of FIN No. 46R are effective to the
first reporting period ending after March 15, 2004. The adoption of FIN No.
46R had no material effect on the Companys financial position or results of
operations. 
 Risk Factors. Our business, financial condition and results of operations have been, and in
the future may be, affected by a variety of factors, including those set forth
below and elsewhere in this report. Limited Working Capital; Potential Need to Raise Additional Capital.
Current and anticipated demand for our products as well as procurement and
production affect our need for capital. Changes in these or other factors could
have a material impact on capital requirements and may require us to raise
additional capital. History of Losses; Uncertainty of 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. 16




---



##### Table of Contents



Laserscope and its products are regulated in the United States by the Food and
Drug Administration (the FDA) under the Federal Food, Drug and Cosmetic Act
(the FDC Act)
and the Radiation Control for Health and Safety Act. The FDC Act provides two
basic review procedures for medical devices. Certain products qualify for a
Section 510(k) (510(k)) procedure under which the manufacturer gives the FDA
pre-market notification of the manufacturers intention to commence marketing
the product. The manufacturer must, among other things, establish that the
product to be marketed is substantially equivalent to a previously marketed
product. In some cases, the manufacturer may be required to include clinical
data gathered under an investigational device exemption (IDE) granted by the
FDA allowing human clinical studies. 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. If the product does not qualify for the 510(k) procedure, the manufacturer must
file a pre-market approval application (PMA) based on testing intended to
demonstrate that the product is both safe and effective. The PMA requires more
extensive clinical testing than the 510(k) procedure and generally involves a
significantly longer FDA review process. Approval of a PMA allowing commercial
sale of a product requires pre-clinical laboratory and animal tests and human
clinical studies conducted under an IDE establishing safety and effectiveness.
Generally, because of the amount of information required, the 510(k) procedure
takes less time than the PMA procedure. To date, all of our products (except for the 600 Series Dye Module) have been
marketed through the 510(k) procedure. Future products, however, may require
clearance through the PMA procedure. There can be no assurance that such
marketing clearances can be obtained 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. 17




---



##### Table of Contents



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. We believe that we are in material
compliance with these requirements. 18




---



##### Table of Contents



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. A substantial portion of our laser sales are for aesthetic procedures that are
generally not subject to reimbursement by government or private health
insurance. The general absence of insurance coverage for these cosmetic
procedures may restrict the development of this market. In November 2003, CMS notified Laserscope that its application for assignment
of photoselective vaporization of the prostate (PVP) to treat BPH to a new technology APC had been accepted. In March 2004,
CMS determined that PVP meets the new technology APC qualification criteria and
assigned a new APC code effective April 1, 2004. The new classification
carries with it a payment rate of $3,750.00, approximately twice that of the
old rate. Over the next few months, we will continue to work closely with CMS
and the American Urological Association to ensure that the hospital outpatient
reimbursement rates for furnishing PVP continue to reflect the appropriate
costs of performing the procedure. If CMS were to reduce reimbursement rates, it will likely have a short-term
adverse effect on the adoption and sales growth of the PVP procedure in the
United States as some customers who would normally consider adopting the PVP
procedure delay their purchases or adoption in hopes of a favorable change in
the reimbursement climate. Uncertainty of Technological Change; Uncertainty of New Product Development and
Acceptance.
We operate in an industry that is subject to rapid technological change. Our
ability to remain competitive and future operating results will depend upon,
among other things,
our ability to anticipate and respond rapidly to such change by developing,
manufacturing and marketing technologically innovative products in sufficient
quantities at acceptable costs to meet such demand. As we introduce new
products this may cause some of our existing products to become obsolete, which
may result in the write-off of inventory. However, without new products and
enhancements, our existing products will likely become obsolete due to
technological advances by other companies, which could result in the write-off
of inventory as well as diminished revenues. Therefore, we intend to continue
to invest significant amounts in research and development. We anticipate that our ability to compete will require significant research and
development expenditures with a continuing flow of innovative, high-quality
products. We cannot assure that we will be successful in designing,
manufacturing or selling enhanced or new products in a timely manner. Nor can
we assure that a competitor could not introduce a new or enhanced product or
technology that could have an adverse effect on our competitive position. Our current research and development programs are directed toward the
development of new laser systems and delivery devices. We cannot assure that
these markets will develop as anticipated or that our product development
efforts will prove successful. Nor can we assure that such new products, if
developed and introduced, will be accepted by the market. 19




---



##### Table of Contents



Dependence on
Single-Source Suppliers and Certain Third Parties.
Certain of the components used in our laser products, including certain optical
components, are purchased from single sources. While we believe that most of
these components are available from alternate sources, an interruption of these
or other supplies could adversely affect our ability to manufacture lasers. Manufacturing.
We manufacture in the United States the laser resonators, system chassis and
certain accessories including disposable products and re-usable hand pieces
used in our laser systems. Our laser manufacturing operations concentrate on
the assembly and test of components and subassemblies manufactured to our
designs and specifications by outside vendors. We believe that we have
sufficient manufacturing capacity in our present facilities to support current
operations at least through the end of 2004. Competition.
We compete in the non-ophthalmic surgical segment of the worldwide medical
laser market. In this market, lasers are used in hospital operating rooms,
outpatient surgery centers and individual physician offices for a wide variety
of procedures. This market is highly competitive. Our competitors are numerous
and include some of the worlds largest organizations as well as smaller,
highly specialized firms. Our ability to compete effectively depends on such
factors as:  
    
    market acceptance of our products;  
    
    product performance;  
    
    price;  
    
    customer support;  
    
    the success and timing of new product development; and  
    
    continued development of successful distribution channels. Some of our current and prospective competitors have or may have significantly
greater financial, technical, research and development, manufacturing and
marketing resources than we have. To compete effectively, we will need to
continue to expand our product offerings, periodically enhance our existing
products and continue to enhance our distribution. Certain surgical laser manufacturers have targeted their efforts on narrow
segments of the market, such as angioplasty and lithotripsy. Their products
may compete for the same capital equipment funds as our products, and
accordingly, these manufacturers may be considered our competitors. Generally,
surgical laser manufacturers such as Laserscope compete with standard surgical
methods and other medical technologies and treatment modalities. We cannot
assure that we can compete effectively against such competitors. In addition,
we cannot assure that these or other companies will not succeed in developing
technologies, products or treatments that are more effective than ours or that
would render our technology or products obsolete or non-competitive. Reliance on Patents and Licenses.
We hold several patents issued in the United States, generally covering
surgical laser systems, delivery devices, calibration inserts and the laser
resonator. We have also licensed certain technologies from others. We cannot assure that any patents or licenses that we hold or that may be
issued as a result of our patent applications will provide any competitive
advantages for our products. Nor can
we assure that any of the patents that we now hold or may hold in the future
will not be successfully challenged, invalidated or circumvented in the future.
In addition, we cannot assure that 20




---



##### Table of Contents



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. Furthermore, we cannot be certain that the steps we have taken will prevent the
misappropriation of our intellectual property, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States. We believe that we own or have the right to use the basic patents covering our
products. However, the laser industry is characterized by a very large number
of patents, many of which are of questionable validity and some of which appear
to overlap with other issued patents. As a result, there is a significant
amount of uncertainty in the industry regarding patent protection and
infringement. Because patent applications are maintained in secrecy in the
United States until such patents are issued and are maintained in secrecy for a
period of time outside the United States, we can conduct only limited searches
to determine whether our technology infringes any patents or patent
applications of others. Potential Intellectual Property Litigation.
Our industry has been characterized by frequent demands for licenses and
litigation. Our competitors or other patent holders may assert that our
products and the methods we employ are covered by their patents. In addition,
we do not know whether our competitors will apply for and obtain patents that
will prevent, limit or interfere with our ability to make, use, sell or import
our products. Although we may seek to resolve any potential future claims or
actions, we may not be able to do so on reasonable terms, or at all. If
following a successful third-party action for infringement, we cannot obtain a
license or redesign our products, we may have to stop manufacturing and
marketing our products, and our business would suffer as a result. We may become involved in litigation not only as a result of alleged
infringement of a third partys intellectual property rights but also to
protect our own intellectual property. We have and may hereafter become
involved in litigation to protect the trademark rights associated with our
company name or the names of our products. If we have to change the name of
our products, we may experience a loss in goodwill associated with customer
confusion and a loss of sales. Infringement and other intellectual property claims, with or without merit, can
be expensive and time-consuming to litigate, and could divert managements
attention from our core business. We do not know whether necessary licenses
would be available to us on satisfactory terms, or whether we could redesign
our products or processes to avoid infringement. If we lose this kind of
litigation, a court could require us to pay substantial damages, and prohibit
us from using technologies essential to our products, any of which would have a
material adverse effect on our business, results of operations and financial
condition. Failure to Attract or Retain Key Personnel Can Adversely Affect Results.
We depend upon the efforts and abilities of a number of current key personnel.
If we are unable to attract and retain key employees it would have a material
adverse effect on our business, financial condition, results of operations, and
future cash flows. 21




---



##### Table of Contents



Reliance on Key Customers.
In December 2000, Laserscope and 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. At March 31,
2004, accounts receivable from McKesson accounted for approximately 15% of our
total accounts receivable. If we are unable to maintain a favorable
relationship with McKesson or if McKesson encounters financial difficulties, it
would have a material adverse effect on our business, financial condition,
results of operations, and future cashflows. Fluctuations in Quarterly Operating Results.
A number of factors affect our quarterly financial results including the timing
of shipments and orders. Our laser products are relatively expensive pieces of
medical capital equipment and the precise shipment date of specific units can
have a marked effect on our results of operations on a quarterly basis. Any
delay in product shipments near the end of a quarter could cause our quarterly
results to fall short of anticipated levels. Furthermore, to the extent we
receive orders near the end of a quarter, we may not be able to fulfill the
order during the balance of that same quarter. Moreover, we typically receive
a disproportionate percentage of orders toward the end of each quarter. To the
extent that we do not receive anticipated orders or orders are delayed beyond
the end of the applicable quarter, our results may be adversely affected and
may be unpredictable from quarter to quarter. In addition, because a
significant portion of our revenues in each quarter result from orders received
in that quarter, we base our production, inventory and operating expenditure
levels on anticipated revenue levels. Thus, if sales do not occur when
expected, expenditure levels could be disproportionately high and operating
results for that quarter and potentially future quarters, would be adversely
affected. We cannot assure that Laserscope will accomplish revenue growth or
profitability on a quarterly or annual basis. Nor can we assure that revenue
growth or profitability will not fluctuate significantly from quarter to
quarter. Potential of Product Defects.
Laser systems are inherently complex in design and require ongoing regular
maintenance. The manufacture of our lasers, laser products and systems
involves a highly complex and precise process. As a result of the technical
complexity of our products, changes in our or our suppliers manufacturing
processes or the inadvertent use of defective materials by us or our suppliers
could result in a material adverse effect on our ability to achieve acceptable
manufacturing yields and product reliability. To the extent that we do not
achieve such yields or product reliability, our business, operating results,
financial condition and customer relationships would be adversely affected. Our customers may discover defects in our products after the products have been
fully deployed and operated under peak stress conditions. In addition some of
our products are combined with products from other vendors, which may contain
defects. As a result, should problems occur, it may be difficult to identify
the source of the problem. If we are unable to fix defects or other problems,
we could experience, among other things:  
    
    loss of customers;  
    
    increased costs of product, returns and warranty expenses;  
    
    damage to our brand reputation;  
    
    failure to attract new customers or achieve market acceptance; 22




---



##### Table of Contents




    
    diversion of development and engineering resources; and  
    
    legal actions by our customers. The occurrence of any one or more of the foregoing factors could seriously harm
our business, financial condition and results of operations. Product Liability Risk; Limited Insurance Coverage.  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
United States 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;  
    
    delays in customer purchases in anticipation of new products or
product
enhancements by Laserscope or its competitors; and  
    
    the risk of loss or interruption to our operations or increased costs
due to earthquakes, the availability of power and energy supplies and other
events beyond our control. 23




---



##### Table of Contents



The market price of our common stock may be subject to significant
fluctuations. These fluctuations may be due to factors specific to Laserscope,
such as:  
    
    quarterly fluctuations in our financial results;  
    
    changes in analysts estimates of future results;  
    
    changes in investors perceptions of our products;  
    
    announcement of new or enhanced products by us or our competitors;  
    
    announcements relating to acquisitions and strategic transactions by
us  
    
    or our competitors;  
    
    general conditions in the medical equipment industry; and  
    
    general conditions in the financial markets. The stock market has from time to time experienced extreme price and volume
fluctuations, particularly among stocks of high technology companies, which, on
occasion, have been unrelated to the operating performance of particular
companies. Factors not directly related to Laserscopes performance, such as
negative industry reports or disappointing earnings announcements by publicly
traded competitors, may have an adverse impact on the market price of our
common stock. As of April 30, 2004, we had 20,878,396 shares of outstanding common stock.
The sale of a substantial number of shares of common stock or the perception
that such sales could occur, could adversely affect prevailing market prices
for our common stock. International Business.
Our international sales are made through international distributors and
wholly-owned subsidiaries with payments to us typically denominated in the
local currencies of the United Kingdom and France, and in U.S. Dollars in the
rest of the world. We intend to continue our operations outside of the United
States and potentially to enter additional international markets, These
activities, require significant management attention and financial resources
and further subject us to the risks of operating internationally. These risks
include, but are not limited to:  
    
    changes in regulatory requirements;  
    
    delays resulting from difficulty in obtaining export licenses for
certain technology;  
    
    customs, tariffs and other barriers and restrictions; and  
    
    the burdens of complying with a variety of foreign laws. We are also subject to general geopolitical risks in connection with our
international operations, such as:  
    
    differing economic conditions;  
    
    changes in political climate;  
    
    differing tax structures; and  
    
    changes in diplomatic and trade relationships and war. In addition, fluctuations in currency exchange rates may negatively affect our
ability to compete in terms of price against products denominated in local
currencies. 24




---



##### Table of Contents



Accordingly, our future results could be materially adversely affected by
changes in these regulatory, geopolitical and other factors. We do not engage in hedging transactions for speculative or trading purposes. Legal
Proceedings.  Interest Rate Risk.  Warranty Obligations.
We have a direct field service organization that provides service for our
products. We generally provide a twelve month warranty on our laser systems.
After the warranty period, maintenance and support is provided on a service
contract basis or on an individual call basis. Our warranties and premium
service contracts provide for a 99.0% Uptime Guarantee on our laser systems.
Under provisions of this guarantee, we extend the term of the related warranty
or service contract if specified system uptime levels are not maintained.
Although most systems covered by this guarantee have achieved a 99.0% uptime
rate to date, we cannot assure that we can maintain such uptime rates in the
future. No Dividends.  Penny Stock Rules.  25




---



##### Table of Contents



Dilution.  Other.  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Laserscope is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments, outstanding debt balances and
foreign currency fluctuations. In the normal course of business, the Company
employs established policies and procedures to manage its exposure to
fluctuations in interest rates and foreign currency values. Interest Rate Risk. Our exposure to market rate risk for changes in interest rates relates
primarily to our outstanding debt. However, at March 31, 2004, we had no bank
loans or debentures. Also, in the three months ended March 31, 2004 and 2003,
we did not use derivative financial instruments. We invest our excess cash in
money market funds. Historically, our debt financings generally consisted 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. While we had no borrowing in the current quarter, if we
borrow in the future, our interest expense may be greater than expected due to
changes in interest rates. Foreign Currency Risk. Our International revenues were 27% and 23% of total revenues in the quarters
ended March 31, 2004 and 2003. Our international sales are made through
international distributors and wholly owned subsidiaries with payments to the
Company typically denominated in the local currencies of the United Kingdom and
France, and in United States 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. 
 26




---



##### Table of Contents



Item 4. Controls and Procedures. (a) Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer, after evaluating
the effectiveness of the Companys disclosure controls and procedures as
defined in the Securities Exchange Act of 1934, as amended (the Exchange
Act), Rules 13a-15(e) or 15d-15(e) as of the end of the period covered by
this report (the Evaluation Date), have concluded that, as of the Evaluation
Date, our disclosure controls and procedures were adequate based on the
evaluation of these controls and procedures required by paragraph (b) of
Exchange Act Rules 13a-15 or 13d-15. (b) Changes in internal controls.
No change in the Companys internal control over financial reporting identified
in connection with the evaluation required by paragraph (d) of Exchange Act
Rules 13a-15 or 15d-15 that occurred during the Companys first fiscal quarter
has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting. 
 PART II. OTHER INFORMATION 
  Item 6.
    Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits filed herewith (numbered in accordance with Item 601 of
Regulation S-K): ExhibitNumber
    
    Description10.1
    
    Form of Management Continuity Agreement.31.1
    
    Certification of Principal Executive Officer pursuant to
Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal
Executive Officer pursuant to 18 U.S.C.
Section 1350.32.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350.
  (b)
    
    Reports on form 8-K:On February 12, 2004, the Company filed a current report on Form 8-K
reporting the issuance of a Press Release dated February 12, 2004
announcing the Companys financial results for the fiscal quarter
and year ended December 31, 2003. 27




---



##### Table of Contents



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 LaLumandiereDennis LaLumandiereDate:  May 7, 2004
    Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer) 28




---



##### Table of Contents



Exhibit Index ExhibitNumber
    
    Description10.1
    
    Form of Management Continuity Agreement.31.1
    
    Certification of Principal Executive Officer pursuant to
Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C
Section 1350.32.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350.