Revenues from the sales of lasers and instrumentation increased during the three-month and six-month periods ended June 30, 2003 compared to the same periods in 2002. The three-month period increase primarily was driven by a higher volume of GreenLight PV™ lasers sold. The GreenLight PV is a surgical laser used in the treatment of benign prostatic hyperplasia (BPH), a procedure called Photo Vaporization of the Prostate (PVP™). In the three-month period ended June 30, 2003 we sold 20 Greenlight PV units compared to nine units in the corresponding period in 2002. The six-month period increase primarily was driven by a higher sales volume of aesthetic lasers and accompanying instruments. This was in large part due to the increasing success of the distribution arrangement with McKesson Corporation which began in 2001. Also, through the six month period of 2003 we shipped 26 GreenLight PV laser units for revenue while at the same time building a backlog of 20 units. In the first six months of 2002, we had sold 15 GreenLight PV lasers. The Company expects that sales of lasers and instrumentation will continue to be a major source of revenue. In addition, as the year progresses, we anticipate increased sales of GreenLight PV lasers.

Our commitment to delivering a quality product for the GreenLight PV procedure has stretched some of our vendors to the point where we were unable to fulfill our GreenLight PV laser backlog during the first and second quarters of 2003 due to a shortage of some critical components. We have made progress and we are continuing to work with these suppliers to overcome these issues. In addition, we have qualified some new suppliers to overcome the shortages. We expect to be able to fulfill our backlog and field needs during the third quarter and we will closely monitor our suppliers’ progress toward the eventual goal of being able to ship within 30 to 60 days after receipt of a customer order.

Revenues from the sales of disposable supplies increased 99% and 73% during the three month and six month periods ended June 30, 2003 compared to the corresponding periods in 2002. The increase in revenues in both the three and six month periods is driven by higher unit sales of GreenLight PV fibers. In the first six months of 2003 we sold approximately 4,475 GreenLight PV fibers whereas in the first six months of 2002 we sold approximately 680 GreenLight PV fibers. This was a direct result of an increase in our GreenLight PV installed base as well as a higher number of

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fibers purchased per laser in the installed base. The Company expects revenues from the sales of disposable supplies to incrementally increase as we ship more GreenLight PV lasers, which require a single-use fiber optic energy delivery device.

Laserscope’s service revenues increased during the three and six-month periods ended June 30, 2003 compared to the same periods in 2002. Increased service revenues were primarily experienced in the domestic region as a result of a larger contract installed base. 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 decreased three percentage points and one percentage point, respectively, during the three and six month periods ended June 30, 2003 relative to the corresponding periods of 2002. The decrease in gross margin percentage is due primarily to lower aesthetic laser average selling prices. Laserscope expects gross margin as a percentage of revenues to increase for the remainder of 2003.

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 and six month periods ended June 30, 2003 compared to the same periods in 2002, but increased 6% and 3%, respectively, in absolute terms. The Company expects the amounts spent in research and development throughout the remainder of the year to remain at levels similar to the quarter ended June 30, 2003 as other development projects are pursued.

Selling, general and administrative expenses as a percentage of revenues during the quarter and six months ended June 30, 2003 decreased two percentage points and increased one percentage point, respectively, relative to the corresponding periods of 2002, but increased in absolute terms in both periods. The increase is due primarily to higher variable selling expenses resulting from higher revenues in the three and six month periods ended June 30, 2003 relative to the same periods last year and to higher marketing expenses for aesthetic and GreenLight PV products. We expect amounts spent in selling, general and administrative expenses to increase during the remainder of 2003 as we continue to expand marketing programs related to the GreenLight PV and aesthetic products.

Liquidity and Capital Resources.

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

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.

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During the six months ended June 30, 2003, cash provided in operating activities totaled $0.7 million. This was the combined result of the following sources: depreciation and amortization — $0.5 million; an increase in other current liabilities- $0.5 million, an increase in deferred revenue- $0.4 million; an increase in accrued compensation- $0.2 million; and a decrease in other current assets- $0.1 million; and a net income of $0.5 million. These sources were offset by: a decrease in accounts payable- $0.8 million, due to increased payments to vendors in the six months ended June 30, 2003 compared to the six months ended June 30, 2002. Sources of cash were also partly offset by an increase in inventory- $0.4 million, due to higher material purchases and an increase in accounts receivable- $0.3 million.

During the six months ended June 30, 2003, cash used in investing activities consisted of capital expenditures of $0.4 million. The increase in capital expenditures is due to higher purchases of manufacturing machinery and equipment and office equipment.

During the six months ended June 31, 2003, cash provided by financing activities consisted of the sale of common stock under stock plans — $0.6 million; and was partly offset by payments on obligations under capital leases of $0.1 million.

In February of 2000, the Company sold $3 million of 8.00% convertible debentures in a private placement. The debentures mature in February 2007 and pay interest monthly. In the first six months of 2003, $400,000 of the debentures were converted to Laserscope common stock. As a result, principal and interest payments in the future will be lower. Principal is to be prepaid at a rate of 1% per month of the outstanding principal beginning in August 2003, with full payment due February 2007. Interest is to be paid monthly at a rate of 8.00%.

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 annual interest at a rate equal to the prime rate plus 1.5%. Credit is extended and collateralized based on eligible accounts receivable and inventory. At June 30, 2003, we had approximately $2.3 million in borrowing capacity available and $1.2 million in letter of credit reserve requirements. As of June 30, 2003, we had no outstanding borrowings under the line and were in compliance with all covenants associated with the line of credit and our convertible debentures. We anticipate that future changes in cash and working capital will be dependent on a number of factors including:

•		our ability to effectively manage inventory and accounts receivable;
•		our ability to anticipate and adapt to the changes in our industry such as new and alternative medical procedures;
•		our level of profitability;
•		our determination to acquire or invest in products and businesses complementary to ours; and
•		the market price for our common stock as it affects the exercise of stock options and sale of common stock under stock plans.

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

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

Recent accounting pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company does not believe that the adoption of FIN No. 46 will have a material impact on the Company’s financial statements.

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

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

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Risk Factors.

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

Limited Working Capital; Potential Need to Raise Additional Capital.

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

History of Losses; Uncertain Future Profitability.

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

Government Regulation; Uncertainty of Obtaining Regulatory Approval.

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

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

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

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

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

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

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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.

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 2002, the Centers for Medicare and Medicaid Services (CMS) announced its final rule with respect to Ambulatory Payment Classification (APC) reimbursement codes to be implemented in January 2003. One of the APC codes that was affected is currently being used by hospitals to bill Medicare for the Photo Vaporization of the Prostate (“PVP”) procedures. In February 2003, CMS issued a technical correction to this APC code which represents the reimbursement under this code for 2003. The reimbursement level to the hospital for this code was reduced approximately 19% for the hospital site of service for Medicare patients compared to the reimbursement during 2002.

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 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. 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

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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.

Dependence on Single-Source Suppliers and Certain Third Parties.

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

Manufacturing.

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

A challenge we have been recently experiencing relates to some of our component suppliers. Our commitment to delivering a quality product for the GreenLight PV procedure has stretched some of our vendors to the point where we were unable to fulfill our GreenLight PV laser backlog during the first and second quarters of 2003 due to a shortage of some critical components. We have made progress and we are continuing to work with these suppliers to overcome these issues. In addition, we have qualified some new suppliers to overcome the shortages. We expect to be able to fulfill our backlog and field needs during the third quarter and we will closely monitor our suppliers’ progress toward the eventual goal of being able to ship within 30 to 60 days after receipt of a customer order.

Competition.

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

•		market acceptance of our products;
•		product performance;
•		price;
•		customer support;
•		the success and timing of new product development; and
•		continued development of successful distribution channels.

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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 competitors, many of which have substantial resources and have made substantial investments in competing technologies, will not seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, issue, use and sell our products.

Intellectual Property Infringement Claims.

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

•		be time-consuming to defend;
•		result in costly litigation;
•		divert management’s time and attention from developing our business;
•		require us to enter into royalty and licensing agreements that we would not normally find acceptable;
•		require us to stop selling or to redesign our products; and
•		require us to pay money as damages or to satisfy indemnification obligations that we have with our customers.

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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. If we are unable to attract and retain key employees it would have a material adverse effect on our business, financial condition and results of operations.

Reliance on Key Customers.

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

Fluctuations in Quarterly Operating Results.

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

Potential of Product Defects.

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

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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;
	•		diversion of development and engineering resources; and
	•		legal actions by our customers.

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

Product Liability Risk; Limited Insurance Coverage.

Our business has significant risks of product liability claims. We have experienced product liability claims from time to time, which we believe are ordinary for our business. While we cannot predict or determine the outcome of the actions brought against us, we believe that these actions will not ultimately have a material adverse impact on Lasercope’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.

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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.

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 July 31, 2003, we had 17,639,536 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

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•

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.

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

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

Legal Proceedings.

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

Interest Rate Risk.

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

Warranty Obligations.

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

No Dividends.

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

“Penny Stock” Rules.

Our common stock is traded on the National Association of Securities Dealers Automated Quotation (“NASDAQ”) National Market System, which requires that a company have, among other things, a minimum bid price of $1.00 in order to qualify for continued listing. If we fail to maintain our listing for our common stock on the NASDAQ National Market System, and no other

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exclusion from the definition of “penny stock” under the Exchange Act is available, any brokers engaging in transactions in our securities would be required to provide their customers with a risk disclosure document. The rules require that, prior to a transaction in a penny stock not otherwise exempt from the rules, the broker-dealer must: (i) deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market; (ii) provide the customer with current bid and offer quotations for the penny stock; (iii) disclose the compensation of the broker-dealer and its salesperson in connection with the transaction; (iv) provide the customer monthly account statements showing the market value of each penny stock held in the customer’s account; and (v) make a special written determination that the penny stock is a suitable investment for the customer and receive the customer’s written agreement to the transaction. If brokers become subject to the “penny stock” rules when engaging in transactions in our securities, they may become less willing to engage in such transactions, thereby making it more difficult for shareholders to dispose of their shares of Laserscope common stock.

Dilution.

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

Other.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Interest Rate Risk.

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

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interest rates fall, while floating rate borrowings, such as our line of credit, may require greater interest payments if interest rates rise. Additionally, our future interest expense may be greater than expected due to changes in interest rates.

Foreign Currency Risk.

Our international revenues were 28% of total revenues in each of the quarters ended June 30, 2003 and 2002. Our international sales are made through international distributors and wholly owned subsidiaries with payments to the Company typically denominated in the local currencies of the United Kingdom and France, and in U.S. dollars in the rest of the world. Our international business is subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors. We do not engage in hedging transactions for speculative or trading purposes.

Item 4. Controls and Procedures.

(a)  Evaluation of disclosure controls and procedures

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

(b)  Changes in internal controls

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

     Not applicable.

Item 2. Changes in Securities and Use of Proceeds.

     Not applicable.

Item 3. Defaults upon Senior Securities.

     Not applicable.

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

	(a)		The annual meeting of shareholders was held on June 27, 2003.
	(b)		The first matter voted upon at the meeting was the election of directors and the results of that vote were as follows:

(c)

The second matter voted upon at the meeting and the results of that vote were as follows: