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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

________________________

FORM 10-Q

(Mark One)

or

Commission file number 0-18053

LASERSCOPE

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.

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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

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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

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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

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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):

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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:

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:

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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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

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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.

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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;

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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

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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.

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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.

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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.

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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

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