LASER POWER CORP/FA, SB-2/A, 1997-04-22

LASER POWER CORP/FA
SB-2/A, 1997-04-22
OPTICAL INSTRUMENTS & LENSES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1997

REGISTRATION NO. 333-24421

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1

FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------

LASER POWER CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 3827 95-3423358
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

12777 HIGH BLUFF DRIVE
SAN DIEGO, CA 92130
(619) 755-0700
(ADDRESS, TELEPHONE NUMBER, OF PRINCIPAL EXECUTIVE OFFICES)
------------------------

12777 HIGH BLUFF DRIVE
SAN DIEGO, CA 92130
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR INTENDED PRINCIPAL PLACE OF BUSINESS)
------------------------

GLENN H. SHERMAN, PH.D.
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
LASER POWER CORPORATION
12777 HIGH BLUFF DRIVE
SAN DIEGO, CA 92130
(619) 755-0700
(NAME, ADDRESS, TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
D. BRADLEY PECK, ESQ. PAUL E. KREUTZ, ESQ.
EDWARD C. Y. YIP, ESQ. REBECCA SCHMITT, ESQ.
ALEXANDER A. FITZPATRICK, ESQ. MARK LEHBERG, ESQ.
COOLEY GODWARD LLP GRAY CARY WARE & FREIDENRICH
4365 EXECUTIVE DRIVE, SUITE 1100 4365 EXECUTIVE DRIVE, SUITE 1600
SAN DIEGO, CA 92121 SAN DIEGO, CA 92121
(619) 550-6000 (619) 677-1400
</TABLE>

------------------------

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the Registration Statement becomes effective.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------

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CALCULATION OF REGISTRATION FEE
==============================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value................... 2,817,500 $8.50 $23,948,750 $7,257
==============================================================================================================================
</TABLE>

(1) Includes 367,500 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act of
1933.
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED APRIL 2, 1997
PROSPECTUS

2,450,000 SHARES

LOGO

COMMON STOCK
------------------------

Of the 2,450,000 shares of Common Stock offered hereby, 2,000,000 shares
are being sold by Laser Power Corporation ("Laser Power" or the "Company") and
450,000 shares are being sold by certain stockholders of the Company (the
"Selling Stockholders"). The Company will not receive any portion of the
proceeds from the sale of shares by the Selling Stockholders. See "Principal and
Selling Stockholders."

Prior to this offering, there has been no public market for the Common
Stock of the Company. It is estimated that the initial public offering price
will be between $6.50 and $8.50 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "LPWR."
------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION
PROSPECTIVE INVESTORS SHOULD CONSIDER.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A

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CRIMINAL OFFENSE.
=======================================================================================================
UNDERWRITING PROCEEDS TO
DISCOUNTS PROCEEDS TO SELLING
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------
Per Share......................... $ $ $ $
- -------------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $ $
=======================================================================================================
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Act"). The Company has also agreed
to sell to the Representatives of the Underwriters warrants to purchase up
to 200,000 shares of Common Stock exercisable at 130% of the initial public
offering price per share (the "Representatives' Warrants"). See
"Underwriting."

(2) Before deducting expenses payable by the Company estimated at $912,500,
including the Representatives' non-accountable expense allowance.

(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 367,500 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
------------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to withdraw, cancel or modify such offer and
reject orders in whole or in part. It is expected that delivery of the
certificates for the Common Stock will be made at the offices of Cruttenden Roth
Incorporated, Irvine, California on or about , 1997.

CRUTTENDEN ROTH L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
INCORPORATED

THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
------------------------

The Company intends to furnish annual reports to stockholders containing
audited financial statements, quarterly reports and such other periodic reports
as it may determine to be appropriate or as may be required by law.
------------------------

Turbo-Cooled(R) is a registered trademark and Laser Power (stylized), the
Laser Power logo and MP-5 are trademarks of the Company. All other trademarks or
service marks used in this Prospectus are the property of their respective
holders.

2
<PAGE> 4

PROSPECTUS SUMMARY

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Except as otherwise noted, all
information in this Prospectus (i) assumes no exercise of the Underwriters'
over-allotment option, the Representatives' Warrants, other warrants outstanding
as of the date of this Prospectus, or options granted or reserved under the
Company's stock option plans, (ii) assumes no conversion of the outstanding
Series A Convertible Subordinated Debentures (the "Debentures"), (iii) reflects
the 1-for-1.5 reverse stock split of the Common Stock to be effected prior to
the closing of this offering, and (iv) reflects the exchange of all outstanding
shares of the Company's Preferred Stock for 1,193,252 shares of Common Stock
immediately prior to the closing of this offering. See "Certain Transactions,"
"Principal and Selling Stockholders," "Description of Capital Stock,"
"Underwriting" and Note 5 of Notes to Consolidated Financial Statements.

THE COMPANY

Laser Power Corporation ("Laser Power" or the "Company") designs,
manufactures and markets high performance laser optics for industrial, medical
and military lasers and laser systems. Laser optics are precision lenses,
reflectors and mirrors used to reflect, collect and focus laser beams. The
Company's products are sold to laser system OEMs and end users as original and
replacement components in high power CO(2) and other lasers. The Company's core
competencies lie in its surface finishing and thin film coatings, which are key
elements involved in all high-performance laser optics. The Company believes
that its expertise in these areas provides it with a significant competitive
advantage.

The Company's customers use high power CO(2) lasers in a variety of
industrial processing applications, such as sheet metal cutting, automobile body
welding, surface hardening for engine components and scribing and drilling
delicate ceramic circuits. The Company also sells high performance laser optics
to medical equipment OEMs for lower power CO(2) lasers used in certain
therapeutic and cosmetic procedures, including surgery and skin wrinkle removal.
In addition, the Company has developed very low absorption thin film coatings
for optics for laser anti-missile systems. The Company also conducts contract
research in the development and applications of advanced solid state lasers.
Substantially all of the Company's product revenues to date are attributable to
the sale of laser optics products for the industrial processing and medical
industries.

The Company has leveraged its expertise in thin film coatings, surface
finishing and solid state lasers to develop proprietary miniature solid state
lasers that are excited or "pumped" by diode lasers. These "microlasers" have
significant size advantages, are generally 100 times more energy efficient and
have longer estimated lifetimes than conventional gas and solid state lasers.
Laser Power shipped the first microlaser evaluation units in March 1997, and
expects to begin commercial deliveries of microlasers to a medical equipment OEM
to replace gas lasers in dermatology systems by the end of fiscal 1997. The
Company believes that microlasers can replace other lasers in additional medical
equipment. The Company is also developing microlasers for projection display and
telecommunications applications.

STRATEGY

The Company's strategy is to expand its existing high performance laser
optics business through a continual improvement in quality and customer service
while introducing new products, such as the Company's low absorption,
non-radioactive MP-5 thin film coatings and Turbo-Cooled optics. The Company
also plans to leverage its optics expertise to enter new high margin markets for
high performance optics for neodymium-yttrium aluminum garnet ("YAG") and
visible lasers and thin film filters for dense wavelength division multiplexers
("WDM"). In addition, to increase margins on optics sales, the Company plans to
increase manufacturing automation and transfer additional labor intensive
operations to its facility in Mexico.

The Company's strategy is to build its microlaser infrastructure by
entering lower volume medical, biotechnology and industrial markets where its
blue and green microlasers can replace other lasers. This infrastructure will
then serve as the platform for launching microlasers in higher volumes for
projection display applications. In addition, the Company has developed
prototypes of microlaser based projectors for the high end, high resolution
projector market. The Company also is developing a microlaser for fiber optic
telecommunications applications. The Company's strategy is to use this
microlaser as a platform to build a family of telecommunications products.

The Company was incorporated in California in August 1979 and
reincorporated in Delaware in July 1983. The Company's executive offices are
located at 12777 High Bluff Drive, San Diego, California 92130, and its
telephone number is (619) 755-0700.

3
<PAGE> 5

THE OFFERING

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<S> <C>
Common Stock offered by the Company.......... 2,000,000 shares
Common Stock offered by Selling 450,000 shares
Stockholders...............................
Common Stock outstanding after the 6,202,354 shares
offering...................................
Use of Proceeds.............................. Additions to plant and equipment, repayment of
debt, working capital and other general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol....... LPWR
</TABLE>

- ---------------

(1) Excludes: (i) 1,291,619 shares of Common Stock reserved for issuance upon
exercise of outstanding options; (ii) 386,660 shares of Common Stock
issuable upon exercise of outstanding warrants; (iii) 200,000 shares of
Common Stock issuable upon exercise of the Representatives' Warrants; (iv)
up to 368,888 shares of Common Stock issuable upon conversion of the
Debentures; and (v) an aggregate of 1,250,000 shares of the Common Stock
reserved for future issuance under the Company's 1997 Equity Incentive Plan
(the "1997 Plan") and the Employee Stock Purchase Plan.

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, FEBRUARY 29/28,
--------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Product sales............................. $8,622 $8,720 $10,158 $11,859 $15,194 $ 6,880 $ 7,995
Contract research and development......... 1,149 963 1,727 2,714 3,713 1,682 3,129
------ ------ ------- ------- ------- ------- ------
Total revenues..................... 9,771 9,683 11,885 14,573 18,907 8,562 11,124
Cost of revenues:
Product sales............................. 5,125 5,392 6,550 7,994 9,888 4,601 5,475
Contract research and development......... 941 766 1,308 2,059 2,942 1,262 2,502
------ ------ ------- ------- ------- ------- ------
Total cost of revenues............. 6,066 6,158 7,858 10,053 12,830 5,863 7,977
Gross profit:
Product sales............................. 3,497 3,328 3,608 3,865 5,306 2,279 2,520
Contract research and development......... 208 197 419 655 771 420 627
------ ------ ------- ------- ------- ------- ------
Total gross profit................. 3,705 3,525 4,027 4,520 6,077 2,699 3,147
Income (loss) from operations............... 485 (629) (745) (1,920) (918) (845) 480
Net income (loss)........................... $ 312 $ (816) $(1,013) $(2,269) $(1,231) $(1,004) $ 313
Pro forma net income (loss) per share(1).... $ (0.29) $ 0.06
Shares used in per share computations(1).... 4,311 4,887
OTHER DATA:
Effect of microlaser operations on income
(loss) from operations(2)............... $ -- $ (294) $ (983) $(2,104) $(2,035) $(1,161) $ (164)
</TABLE>

<TABLE>
<CAPTION>
FEBRUARY 28, 1997
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 128 $ 11,951
Working capital............................................................ 1,992 14,112
Total assets............................................................... 12,728 24,551
Long-term debt, net of current portion..................................... 687 582
Subordinated convertible debentures........................................ 1,660 1,660
Total stockholders' equity................................................. 5,557 18,557
</TABLE>

- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of the pro forma net income (loss) per share and the
number of shares used in the pro forma per share calculation.

(2) The effect of microlaser operations on income (loss) from operations
includes gross profit, research and development expenses and incremental
selling, general and administrative expenses. It does not include any
allocations of corporate expenses, interest or taxes.

(3) As adjusted to reflect the exchange of all outstanding convertible Preferred
Stock for 1,193,252 shares of Common Stock immediately prior to the closing
of this offering and to give effect to the sale of 2,000,000 shares of
Common Stock to be sold in the offering by the Company hereby at an assumed
initial public offering price of $7.50 and after deducting estimated
underwriting discounts and commissions and offering expenses and the
application of the net proceeds from the sale of such shares. See "Use of
Proceeds" and "Capitalization".

4
<PAGE> 6

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing shares of the Common Stock offered hereby.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements that involve risks and
uncertainties. Factors that might cause such a difference include, but are not
limited to, those discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" as well as those
discussed elsewhere in this Prospectus.

HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT

As a result of substantial investments in research and development, the
Company incurred operating losses in each of the last three fiscal years and at
February 28, 1997 had an accumulated deficit of $4.9 million. The development,
sales, marketing and support of new products will require continued substantial
expenditures for the foreseeable future, which could result in additional
operating losses. The Company has funded a substantial portion of its product
development efforts through development contracts. Any failure by the Company to
maintain its external funding sources could result in increased operating
losses. There can be no assurance that the Company will maintain its external
funding sources or be profitable in the future or that the net proceeds of this
offering, together with any funds provided by operations and present capital,
will be sufficient to fund the Company's future capital requirements. See "Use
of Proceeds," "Selected Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Research and Development."

COMPETITION

The industries in which the Company sells its products, and will sell its
products under development, are highly competitive. In each of the markets it
serves, the Company faces intense competition from established competitors, many
of which have substantially greater financial, engineering, research and
development, manufacturing, sales, marketing, service and support resources,
including greater name recognition, a larger installed base of products and
longer standing customer relationships. There can be no assurance that the
Company will be able to compete successfully in the laser optics, laser and
laser systems industries in the future, that the Company will be able to make
the technological advances necessary to maintain its competitive position or
that its new products will receive market acceptance. In addition, there can be
no assurance that technological changes or development efforts by the Company's
competitors will not render the Company's products or technologies obsolete or
uncompetitive. See "Business -- Sales and Marketing" and "-- Competition."

DEVELOPMENT RISKS RELATING TO MICROLASER TECHNOLOGIES

The Company has devoted substantial resources to developing its microlasers
and future microlaser based products. To date, sales of the Company's
microlasers have been limited to customer evaluation sales. Other microlasers
and microlaser based products are still in the early stages of development.
There can be no assurance that the Company will successfully develop any
microlaser or microlaser based products. There also can be no assurance that the
Company's microlasers will be successfully designed into customers' products or
that the Company's products under development will achieve commercial sales
volumes. The Company believes that it will be necessary to continue to reduce
the cost of manufacturing and to broaden the variety of wavelengths provided by
its microlaser to achieve commercial acceptance. If the Company is unable to
successfully gain market acceptance of its microlasers and microlaser based
products, its business, operating results and financial condition will be
materially and adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Products and
Products under Development," "-- Laser Power's Strategy" and "-- Research and
Development."

5
<PAGE> 7

DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS

Certain materials and components used in the manufacture of the Company's
products are currently obtained from single or limited source suppliers. The
Company purchases all of its zinc selenide (a critical raw material used in the
manufacture of the Company's optics) from Morton International, Inc. ("Morton").
In addition, the Company believes that Cerac Incorporated ("Cerac"), from which
the Company purchases all of its thorium fluoride for use in its low absorption
thin film coatings, is the sole source for high quality thorium fluoride. Any
interruption or cessation of supply by Morton or Cerac would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company does not have long term or volume purchase agreements
with its suppliers, and there can be no assurance that materials and components
needed by the Company will be available in the quantities required by the
Company, if at all. See "Business -- Manufacturing."

DEPENDENCE ON NEW PRODUCTS AND PROCESSES

To meet its strategic objectives, the Company must continue to develop,
manufacture and market new products, develop new processes and improve its
existing processes. As a result, the Company expects to continue to make
significant investments in research and development and to continue to consider
from time to time the strategic acquisition of businesses, products, or
technologies complementary to the Company's business. The success of the Company
in developing, introducing and selling new and enhanced products depends upon a
variety of factors, including product selection, timely and efficient completion
of product design and development, timely and efficient implementation of
manufacturing and assembly processes, effective sales and marketing and product
performance in the field. There can be no assurance that the Company will be
able to develop and introduce new products or enhancements to its existing
products and processes in a manner that satisfies customer needs or achieves
market acceptance. The failure to do so would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Laser Power's Strategy" and "-- Research and Development."

DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS

The Company's success will depend in large part on its ability, and the
ability of its licensees and licensors, to obtain patents for its technologies
and any products resulting from the application of such technologies, to defend
such patents once obtained and to maintain trade secrets, both in the United
States and in foreign countries. The commercial success of the Company will also
depend upon avoiding the infringement of patents issued to others and
maintaining the technology licenses upon which certain of the Company's current
products are, or any future products might be, based.

The Company owns certain U.S. patents and has filed additional patent
applications in the United States and foreign jurisdictions. There can be no
assurance that other patents will be issued to the Company or its licensors as a
result of pending or future patent applications or that, if issued, such patents
will contain claims sufficiently broad to afford protection against competitors
with similar technology. Although the Company may file additional patent
applications outside the United States, the Company believes that obtaining
foreign patents may be more difficult than obtaining U.S. patents because of
differences in patent laws and believes the protection provided by foreign
patents, if obtained, and any other foreign intellectual property protection may
be weaker than that provided in the United States. There can be no assurance
that any patents issued to the Company or for which the Company has license
rights, will not be challenged, narrowed, invalidated or circumvented, or that
the rights granted under such patents will provide competitive advantages to the
Company. Litigation, which could result in substantial cost to the Company, may
be necessary to enforce the Company's patent and license rights, to enforce or
defend an infringement claim, or to determine the scope and validity of others'
proprietary rights. Some of the Company's competitors have, or are affiliated
with companies having, substantially greater resources than the Company, and
such competitors may be able to sustain the costs of complex patent litigation
to a greater degree and for longer periods of time than the Company.
Uncertainties resulting from the initiation and continuation of any patent or
related litigation could have a material adverse effect on the Company's
business, financial condition and results of operations. If others file patent
applications that claim technology also claimed by the Company, the Company may
have to

6
<PAGE> 8

participate in interference proceedings declared by the U.S. Patent and
Trademark Office (the "USPTO") to determine the priority of invention, or
opposition proceedings in a foreign patent office, either of which could result
in substantial cost to the Company, even if the outcome is favorable to the
Company. An adverse outcome could subject the Company to significant liabilities
to third parties and require the Company to cease using the technology or to
license disputed rights from third parties, which licenses may not be available
at reasonable cost, if at all.

The Company has a license to certain technology used in its blue
microlaser. The Company has received a letter from a third party claiming that
the Company's license was granted improperly by the licensor. While the Company
believes that such license was properly granted, there can be no assurance that
the Company's license would not be voided if subjected to a legal challenge. In
such an event, there can be no assurance that the Company would be able to
obtain a replacement license on favorable terms, if at all. Failure to obtain
such a license would have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company is aware that patents held by other parties may relate to the
Company's microlaser technology. The Company believes that it does not infringe
on such patents and that it has adequate design-arounds if it is held to
infringe such patents. The Company may, however, decide to enter into license
agreements with such patent holders to avoid costly litigation. There can be no
assurance that the Company will obtain any licenses that it might seek on
favorable terms, if at all. If it is determined that the patents held by these
other laser companies cover the Company's technology, the Company's inability to
obtain licenses for such technology could have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company has developed certain of its proprietary technology pursuant to
development contracts, including contracts with federal government agencies.
Under standard provisions in government contracts, the government may retain
certain rights in technology developed under such contracts. In addition, under
its other development contracts, the Company has granted significant rights to
third parties under such contracts. The Company's strategy is to continue to
develop a significant portion of its proprietary technology pursuant to funding
received from development contracts. There can be no assurance that the Company
will be able to continue to obtain funding for the development of its
proprietary technology, or that, if received, the Company will obtain rights to
such technology sufficient to permit the Company to develop and market new
products or to prevent third parties from using such technology to compete with
the Company.

The Company relies substantially on certain technologies that are not
patentable or proprietary and are therefore available to the Company's
competitors. The Company also relies on certain proprietary trade secrets and
know-how that are not patentable. Although the Company has taken steps to
protect its unpatented trade secrets and know-how, in part through the use of
confidentiality agreements with its employees, consultants and certain of its
contractors, there can be no assurance that such agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
developed or discovered by competitors.

The Company's academic collaborators have certain rights to publish data
and information in which the Company has rights. There is considerable pressure
on academic institutions to publish discoveries in the high-technology and
physics fields. There can be no assurance that such publication would not
adversely affect the Company's ability to obtain patent protection for certain
technologies in which it may have a commercial interest. See
"Business -- Patents and Proprietary Rights."

LIMITED MICROLASER MANUFACTURING EXPERIENCE; SCALE-UP RISK

The Company has no experience in producing microlasers other than in small
developmental quantities. The Company's microlasers are assembled from component
parts at the Company's San Diego facility. The Company purchases component parts
for its microlasers, including laser crystals, nonlinear crystals and diode
lasers, from various sources around the world. However, none of the Company's
suppliers of microlaser component parts have experience in supplying components
with the Company's specifications at such increased volumes. The Company does
not have long term or volume purchase agreements with any of its

7
<PAGE> 9

suppliers and currently purchases components on a purchase order basis. There
can be no assurance that these suppliers will be able to provide components to
the Company in the quantities, with the quality or at the prices necessary for
production quantities of the Company's products under development. The Company
must increase its manufacturing capacity to polish and coat crystals and to
perform the required complex assembly steps. Such an increase in its
manufacturing capacity will require significant scale-up expenditures and
additions to the Company's facilities. See "Use of Proceeds." In the event the
Company is unable to locate sufficient sources of supply of microlaser component
parts, or is unable to expand its manufacturing capacity to produce microlasers
and microlaser based products, the Company will not be able to manufacture its
products on commercially reasonable terms, if at all, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."

LIMITED MICROLASER SALES, MARKETING AND DISTRIBUTION EXPERIENCE

The Company has only limited experience marketing and selling its
microlasers, and does not have experience marketing and selling such products in
commercial quantities. The Company intends to sell its microlasers and
microlaser based products through a direct sales force in North America and a
direct sales force and distributors in Europe. In Asia, the Company intends to
sell its microlasers and microlaser based products primarily through agreements
with distributors or representatives, although the Company has not entered into
any such agreements or arrangements to date. To the extent that the Company
enters into distribution or representation arrangements for the sale of its
microlasers and microlaser based products, the Company will be dependent upon
the efforts of third parties. There can be no assurance that the Company will be
able to build a direct sales force or marketing organization for microlasers or
microlaser based products, that establishing such a direct sales force or
marketing organization will be cost effective, or that the Company's sales and
marketing efforts will be successful. There can be no assurance that the Company
will be able to enter into agreements with distributors or representation
arrangements on a timely basis, if at all, or that such distributors or
representatives will devote adequate resources to selling the Company's
microlasers and microlaser-based products. Failure to build an effective sales
and marketing organization or to establish effective distribution or
representation arrangements for the Company's microlaser products would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Sales and Marketing."

FUTURE CAPITAL REQUIREMENTS

Although the Company believes that the net proceeds from the sale by the
Company of Common Stock in this offering, together with existing cash balances,
cash flow from operations and available lines of credit, will be sufficient to
meet its capital requirements for at least the next 12 months, the Company may
seek additional equity or debt financing to compete effectively in these
markets. The timing and amount of the Company's capital requirements cannot be
precisely determined at this time and will depend on a number of factors,
including the demand for the Company's products and products under development.
There can be no assurance that such additional financing will be available when
needed, or, if available, will be on terms satisfactory to the Company. If
additional funds are raised by issuing equity securities, further dilution to
then existing stockholders will result. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

FLUCTUATION IN QUARTERLY PERFORMANCE

The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. The Company may incur
significant losses in the future due to product design, development,
manufacturing and marketing expenditures, especially in connection with its
microlasers and microlaser based products. If significant variations were to
occur between forecasts and actual orders with respect to its laser optics
business or microlasers and microlaser based products, the Company may not be
able to reduce its expenses proportionately and in a timely manner, and
operating results could be adversely affected. Such variations have occurred in
the past and could occur again in the future as a result of increases in
development expenditures for proposed new products, product introductions by
competitors, changes in customer ordering

8
<PAGE> 10

patterns and other factors. In addition, the Company's practice of filling
orders in a timely and responsive manner requires the Company to maintain
significant inventories of raw material and finished optics for replacement
orders. If product sales or prices were to decline substantially, inventory
writedowns could occur. Price reductions or increases in material costs could
also have an adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."

RISKS ASSOCIATED WITH INTERNATIONAL SALES

International sales accounted for approximately 43%, 45%, 44%, 43% and 48%
of the Company's total revenues in fiscal years 1994, 1995, 1996 and the six
months ended February 29, 1996 and February 28, 1997, respectively, and the
Company expects that international sales will continue to account for a
substantial portion of total revenues. The Company may continue to expand its
operations outside of the United States and to enter additional international
markets, both of which will require significant management attention and
financial resources. International sales are subject to inherent risks,
including unexpected changes in regulatory requirements, tariffs and other trade
barriers, political and economic instability in foreign markets, difficulties in
staffing and management and integration of foreign operations, longer payment
cycles, greater difficulty in accounts receivable collection, currency
fluctuations and potentially adverse tax consequences. Since substantially all
of the Company's foreign sales are denominated in U.S. dollars, the Company's
products may also become less price competitive in countries in which local
currencies decline in value relative to the U.S. dollar. The Company's business
and operating results may also be materially and adversely affected by lower
sales levels which typically occur during the summer months and the calendar
year end in Europe and certain other overseas markets. The sales of many of the
Company's OEM customers are dependent on international sales, which increases
the Company's exposure to the risks associated with international sales. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations," "Business -- Sales and Marketing" and "-- Competition."

DEPENDENCE ON KEY PERSONNEL

The Company is highly dependent upon the experience and continuing services
of certain scientists, engineers and production and management personnel.
Competition for the services of these personnel is intense, and there can be no
assurance that the Company will be able to retain or attract the personnel
necessary for the Company's success. The loss of the services of the Company's
key personnel would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Employees",
"Management -- Executive Officers and Directors" and "-- Other Key Employees."

ENVIRONMENTAL, HEALTH AND SAFETY CONCERNS

The Company is subject to a variety of federal, state and local
governmental regulations related to the storage, use and disposal of hazardous
materials used by the Company in connection with the manufacture of laser
optics. Both the governmental regulations and the costs associated with
complying with such regulations are subject to change in the future. There can
be no assurance that any such change will not have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company has made and continues to make substantial investments in protective
equipment, process controls, manufacturing procedures and training to minimize
the risks to employees, surrounding communities and the environment due to the
presence and handling of such hazardous materials. The failure to properly
handle such materials could lead to harmful exposure to employees or to the
improper discharge of hazardous materials. Since the Company does not carry
environmental impairment insurance, such a failure could result in a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Environmental, Health and Safety Matters."

9
<PAGE> 11

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of shares by existing security holders could have an adverse
effect on the market price of the Company's Common Stock. Upon completion of
this offering, the Company will have outstanding 6,202,354 shares of Common
Stock. In addition to the 2,450,000 shares sold in this offering which are
freely tradable, approximately 230,000 shares which are currently outstanding
will be eligible for immediate sale on the date of this Prospectus. In addition,
upon the expiration of lock-up agreements, 180 days after the effective date of
the registration statement of which this Prospectus is a part, an aggregate of
approximately 3,520,000 shares will be eligible for sale subject to compliance
in some cases with Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). Approximately an additional 1,426,000 shares issuable upon
exercise or conversion of outstanding vested options, warrants and debentures
will also be eligible for sale upon expiration of the lock-up agreements, 180
days after the Effective Date, subject in some cases to compliance with Rule
144. Commencing one year after the completion of this offering, Proxima
Corporation ("Proxima") and Union Miniere, which beneficially own an aggregate
of approximately 2,200,000 shares of Common Stock, will be entitled to certain
registration rights with respect to such shares. The exercise of such rights by
either Proxima or Union Miniere could result in a large number of shares being
sold in the public market after one year from the closing of this offering.
Future sales of shares by existing stockholders could have an adverse effect on
the market price of the Common Stock or otherwise impair the Company's ability
to raise additional capital. See "Certain Transactions," "Description of Capital
Stock" and "Shares Eligible for Future Sale."

RIGHTS TO ACQUIRE SHARES

As of the date of this Prospectus, options to purchase 950,290 shares under
the Company's option plans, additional options to purchase 341,329 shares and
warrants to purchase 386,660 shares of Common Stock are outstanding. In
addition, the Debentures will remain outstanding following the offering and will
be convertible into up to 368,888 shares of Common Stock. At the completion of
this offering, the Representatives will receive the Representatives' Warrants to
purchase up to 200,000 shares of Common Stock at an exercise price equal to 130%
of the initial public offering price per share. The Representatives, Warrants
will be exercisable during a period of four years commencing one year from the
date of this Prospectus. During the terms of the outstanding options, warrants
and Debentures and the Representatives' Warrants, the holders are given the
opportunity to profit from a rise in the market price of the Common Stock, and
their exercise or conversion of such options, warrants or Debentures will dilute
the ownership interest of existing stockholders, including investors in this
offering. The existence of the options, warrants and Debentures may adversely
affect the market price of the Common Stock or otherwise impair the Company's
ability to raise additional capital. See "Management -- Stock Option Plans,"
"Certain Transactions," "Description of Capital Stock -- Debentures" and
"Underwriting."

CONTROL BY EXECUTIVE OFFICERS, DIRECTORS AND AFFILIATED ENTITIES

Upon completion of this offering, the Company's executive officers and
directors and their affiliated entities will, in the aggregate, beneficially own
approximately 56.3% of the outstanding shares of Common Stock. As a result,
these stockholders will be able to exercise control over matters requiring
stockholder approval, including the election of directors, mergers,
consolidations and sales of all or substantially all of the assets of the
Company. This control may prevent or discourage tender offers for the Company's
Common Stock unless the terms are approved by such stockholders. See
"Management" and "Principal and Selling Stockholders."

IMMEDIATE AND SUBSTANTIAL DILUTION

Investors participating in this offering will incur immediate, substantial
dilution of $4.67 per share, assuming an initial public offering price of $7.50
per share. To the extent options or warrants to purchase

10
<PAGE> 12

Common Stock are exercised or the Debentures are converted into Common Stock,
there will be further dilution. See "Dilution" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS

Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") and Bylaws, including the inability
of stockholders to effect actions by written consent or to remove directors
without cause, may have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. Certain
provisions of the Restated Certificate allow the Company to issue Preferred
Stock without any vote or further action by the stockholders. These provisions
may make it more difficult for stockholders to take certain corporate actions
and could have the effect of delaying or preventing a change in control of the
Company. See "Management" and "Description of Capital Stock."

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Restated Certificate limits, to the maximum extent permitted by
Delaware General Corporation Law ("Delaware Law"), the personal liability of
directors for monetary damages for any breach of fiduciary duty as a director.
The Company's Bylaws provide that the Company shall indemnify its executive
officers and directors and may indemnify its other officers, employees and
agents to the fullest extent permitted by law. The Company has entered into
indemnification agreements with its executive officers and directors containing
provisions which are in some respects broader than the specific indemnification
provisions contained in Delaware Law. The indemnification agreements may require
the Company, among other things, to indemnify such officers and directors
against certain liabilities arising by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct of
a culpable nature) and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified. The Company has
purchased directors' and officers' liability insurance, however, there can be no
assurance that the Company will be able to obtain such liability insurance in
the future. Section 145 of the Delaware Law provides that a corporation may
indemnify a director, officer, employee or agent made or threatened to be made a
party to an action by reason of the fact that he was a director, officer,
employee or agent of the corporation or was serving at the request of the
corporation against expenses actually and reasonably incurred in connection with
such action if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, if he had no reasonable cause to believe
his conduct was unlawful. Delaware Law does not permit a corporation to
eliminate a director's duty of care, and the provisions of the Restated
Certificate have no effect on the availability of equitable remedies, such as
injunction or rescission, for a director's breach of the duty of care. See
"Management -- Limitations of Directors Liability and Indemnification."

DISCRETION OF MANAGEMENT AND THE BOARD OF DIRECTORS IN USE OF PROCEEDS

Although the Company intends to apply the net proceeds of this offering in
the manner described under "Use of Proceeds," the Company's management and the
Board of Directors have broad discretion within such proposed uses as to the
precise allocation of the net proceeds, the timing of expenditures and all other
aspects of the use thereof. The Company reserves the right to reallocate the net
proceeds of this offering among the various categories set forth under "Use of
Proceeds" as it, in its sole discretion, deems necessary or advisable based upon
prevailing business conditions and circumstances. See "Use of Proceeds."

NO PRIOR PUBLIC MARKET FOR COMMON STOCK; VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the offering. The initial public
offering price has been determined by negotiations between the Company and the
Representatives. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The trading price
of the Common Stock could be subject to significant fluctuations in

11
<PAGE> 13

response to variations in quarterly operating results, the gain or loss of
significant orders, changes in earning estimates by analysts, announcements of
technological innovations or new products by the Company or its competitors,
general conditions in the laser optics and laser industries and other events or
factors. In addition, the stock market in general has experienced extreme price
and volume fluctuations that have affected the market price for many companies
in industries similar or related to that of the Company and that have been
unrelated to the operating performance of those companies. These market
fluctuations may materially and adversely affect the market price of the Common
Stock.

12
<PAGE> 14

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $7.50 per share, after deducting estimated underwriting discounts and
commissions and initial offering expenses payable by the Company, are estimated
to be $13.0 million ($15.5 million if the Underwriters' over-allotment option is
exercised in full). The Company will not receive any proceeds of the sale of the
shares of Common Stock offered by the Selling Stockholders.

The Company anticipates that it will use approximately $4.7 million in net
proceeds of this offering for expansion of its facilities and additions to its
equipment for production of its current products, and microlasers and microlaser
based products under development. The Company intends to use approximately $1.0
million in net proceeds for prepayment of its term loan and repayment of amounts
outstanding under its line of credit with Wells Fargo Bank N.A. and
approximately $0.2 million in net proceeds for payment of certain promissory
notes issued to Proxima in connection with certain equipment financing. At
February 28, 1997, the term loan, line of credit and Proxima promissory notes
bore interest at the annual rates of 10.25%, 9.50% and 9.75%, respectively, and
have due dates of December 31, 1997, March 1, 1998 and May 30, 1999,
respectively. The Company intends to use the remaining net proceeds for working
capital and general corporate purposes. The Company may use a portion of the net
proceeds to acquire other businesses, products or technologies; the Company
currently has no plans, agreements or commitments, oral or written, with respect
to any such transaction. Pending such uses, the net proceeds will be invested in
interest bearing investment grade securities. Although the Company believes that
the net proceeds from the sale of the Common Stock in this offering, together
with existing cash balances, cash flow from operations and available lines of
credit, will be sufficient to meet its capital requirements for at least the
next 12 months, the Company may be required to seek additional equity or debt
financing. There can be no assurance that such additional financing will be
available when needed, or, if available, will be on terms satisfactory to the
Company.

DIVIDEND POLICY

To date, the Company has not declared nor paid any cash dividends on its
Common Stock. The Company currently intends to retain any future earnings to
finance the growth and development of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
Company's credit agreement with Wells Fargo Bank prohibits the payment of cash
dividends on its capital stock without the consent of the bank, and the
Debentures restrict payment of cash dividends in accordance with certain
financial covenants. See "Descriptions of Capital Stock -- Convertible
Subordinated Debentures."

13
<PAGE> 15

CAPITALIZATION

The following table sets forth as of February 28, 1997 (i) the actual
capitalization of the Company and (ii) the pro forma capitalization as adjusted
to give effect to the exchange of all outstanding shares of Preferred Stock for
1,193,252 shares of Common Stock and the sale of 2,000,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $7.50 per share (after deducting the estimated underwriting discounts and
commissions and offering expenses) and the application of the estimated net
proceeds therefrom.

<TABLE>
<CAPTION>
FEBRUARY 28, 1997
-------------------------
PRO FORMA, AS
ACTUAL ADJUSTED
------- -------------
<S> <C> <C>
Short-term debt, including current portion of long-term debt......... $ 1,178 $ 106
======= =======
Long-term debt, net of current portion(1)............................ $ 687 $ 582
Subordinated convertible debentures(1)............................... 1,660 1,660
------- -------
Total long term debt....................................... 2,347 2,242
Stockholders' equity:
Preferred Stock, $0.125 par value, 3,000,000 shares authorized,
1,610,891 shares issued and outstanding actual; $0.001 par
value, 3,000,000 shares authorized and no shares issued and
outstanding, pro forma as adjusted.............................. 201 --
Common Stock, $0.001 par value, 15,000,000 shares authorized,
3,009,102 shares issued and outstanding actual; $0.001 par value
15,000,000 shares authorized and 6,202,354 issued and
outstanding, pro forma as
adjusted (2).................................................... 3 6
Additional paid-in capital......................................... 10,264 23,462
Foreign currency translation adjustment............................ 6 6
Accumulated deficit................................................ (4,917) (4,917)
------- -------
Total stockholders' equity...................................... 5,557 18,557
------- -------
Total capitalization....................................... $ 7,904 $20,799
======= =======
</TABLE>

- ---------------
(1) See Note 3 of the Notes to Consolidated Financial Statements for a
description of the Company's long-term obligations and the Debentures.

(2) Excludes: (i) 1,224,953 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $3.92 per share;
(ii) 386,660 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $3.21 per share; (iii) 200,000 shares of
Common Stock issuable upon exercise of the Representatives' Warrants at an
exercise price equal to 130% of the initial public offering price per share;
(iv) up to 368,888 shares issuable upon conversion of Debentures; and (v) an
aggregate of 1,250,000 shares reserved for future issuance under the 1997
Plan and the Employee Stock Purchase Plan. See "Management -- Stock Option
Plans," "Certain Transactions," "Description of Capital Stock" and Note 5 of
the Notes to Consolidated Financial Statements.

14
<PAGE> 16

DILUTION

The pro forma net tangible book value of the Company as of February 28,
1997 was approximately $4.6 million or $1.09 per share. Pro forma net tangible
book value per share is equal to the Company's total tangible assets less its
total liabilities, divided by the number of outstanding shares of Common Stock,
assuming the exchange of all outstanding shares of Preferred Stock for 1,193,252
shares of Common Stock. After giving effect to the sale of the 2,000,000 shares
of Common Stock offered by the Company hereby (at an assumed initial public
offering price of $7.50 per share and after deducting estimated underwriting
discounts and commissions and offering expenses), the pro forma net tangible
book value of the Company at February 28, 1997 would have been approximately
$17.6 million or $2.83 per share. This represents an immediate increase in such
net tangible book value of $1.74 per share to existing stockholders and an
immediate dilution of $4.67 per share to new investors purchasing shares in this
offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $7.50
Pro forma net tangible book value per share as of February 28, 1997........ $1.09
Increase per share attributable to this offering........................... 1.74
-----
Pro forma net tangible book value per share after this offering.............. 2.83
-----
Dilution per share to new investors.......................................... $4.67
=====
</TABLE>

The following table summarizes, on a pro forma basis, as of February 28,
1997, the differences between the number of shares purchased from the Company,
assuming the exchange of all outstanding shares of Preferred Stock for Common
Stock, the total consideration paid and the average price paid per share by the
existing holders of Common Stock and by the new investors at an assumed initial
public offering price of $7.50 per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER(1) PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 4,202,354 68% $10,495,000 41% $2.50
New investors....................... 2,000,000 32 15,000,000 59 $7.50
--------- --- ----------- ---
Total..................... 6,202,354 100% $25,495,000 100%
========= === =========== ===
</TABLE>

- ---------------
(1) The sale of 450,000 shares by the Selling Stockholders in this offering will
reduce the number of shares held by existing stockholders to 3,752,354, or
60% of the total shares of Common Stock outstanding and will increase the
number of shares held by new investors to 2,450,000 or 40% of the total
shares of Common Stock outstanding after this offering. See "Principal and
Selling Stockholders."

The foregoing tables excludes: (i) 1,224,953 shares of Common Stock
reserved for issuance upon exercise of outstanding options at a weighted average
exercise price of $3.92 per share; (ii) 386,660 shares of Common Stock issuable
upon exercise of outstanding warrants at a weighted average exercise price of
$3.21 per share; (iii) 200,000 shares of Common Stock issuable upon exercise of
the Representatives' Warrants at an exercise price equal to 130% of the initial
public offering price per share; (iv) up to 368,888 shares issuable upon
conversion of the Debentures; and (v)an aggregate of 1,250,000 shares of the
Common Stock reserved for future issuance under the 1997 Plan and the Employee
Stock Purchase Plan. To the extent that options, warrants or Debentures are
exercised or converted in the future, there will be further dilution to new
stockholders. See "Management -- Stock Option Plans."

15
<PAGE> 17

SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus. The Consolidated Statements
of Operations Data for the years ended August 31, 1992, 1993, 1994, 1995 and
1996 and the Consolidated Balance Sheets Data as of August 31, 1992, 1993, 1994,
1995 and 1996 are derived from the Company's Consolidated Financial Statements,
which financial statements have been audited by Ernst & Young LLP, independent
auditors. The Consolidated Statements of Operations Data for the six months
ended February 29, 1996 and February 28, 1997 and the Consolidated Balance
Sheets Data as of February 28, 1997, are derived from the unaudited financial
statements of the Company. The results of operations for the six months ended
February 28, 1997 are not necessarily indicative of the results for the full
year or future periods. The unaudited financial statements have been prepared on
a basis consistent with the Company's audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, that
management believed necessary for a fair presentation of the Company's financial
position and results of operations for such periods.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, FEBRUARY 29/28,
---------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Product sales............................ $8,622 $ 8,720 $10,158 $11,859 $15,194 $ 6,880 $ 7,995
Contract research and development........ 1,149 963 1,727 2,714 3,713 1,682 3,129
------ ------- ------- ------- ------- ------- -------
Total revenues.................... 9,771 9,683 11,885 14,573 18,907 8,562 11,124
------ ------- ------- ------- ------- ------- -------
Costs and expenses:
Product sales............................ 5,125 5,392 6,550 7,994 9,888 4,601 5,475
Contract research and development........ 941 766 1,308 2,059 2,942 1,262 2,502
Microlaser internal research and
development............................ -- 294 983 2,071 1,968 1,115 99
Other internal research and
development............................ 481 890 585 786 721 346 290
Selling general and administrative....... 2,739 2,971 3,204 3,583 4,306 2,083 2,278
------ ------- ------- ------- ------- ------- -------
Total costs and expenses.......... 9,286 10,313 12,630 16,493 19,825 9,407 10,644
------ ------- ------- ------- ------- ------- -------
Income (loss) from operations.............. 485 (630) (745) (1,920) (918) (845) 480
Interest expense, net...................... 128 186 268 326 300 152 145
------ ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.......... 357 (816) (1,013) (2,246) (1,218) (997) 335
Income taxes............................... 45 -- -- 23 13 7 22
------ ------- ------- ------- ------- ------- -------
Net income (loss)................. $ 312 $ (816) $(1,013) $(2,269) $(1,231) $(1,004) $ 313
====== ======== ======== ======== ======== ======== ========
Pro forma net income (loss) per share(1)... $ (0.29) $ 0.06
======== ========
Shares used in per share computations(1)... 4,311 4,887
======== ========
OTHER DATA:
Effect of microlaser operations on income
(loss) from operations(2).............. $ -- $ (294) $ (983) $(2,104) $(2,035) $(1,161) $ (164)
====== ======== ======== ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
AUGUST 31,
---------------------------------------------- FEBRUARY 28,
1992 1993 1994 1995 1996 1997
------ ------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents.................. $ 621 $ 109 $ 394 $ 257 $ 298 $ 128
Working capital............................ 2,457 1,745 1,723 2,311 2,838 1,992
Total assets............................... 8,005 7,899 9,444 10,207 11,194 12,728
Long-term debt, net of current portion..... 895 943 1,049 802 559 687
Subordinated convertible debt.............. 1,660 1,660 1,660 1,660 1,660 1,660
Total stockholders' equity................. 3,783 3,234 3,787 4,670 5,320 5,557
</TABLE>

- ---------------

(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of the pro forma net income (loss) per share and the
number of shares used in the pro forma per share calculation.

(2) The effect on microlaser operations on income (loss) from operations
includes gross margin, research and development expenses and incremental
selling, general and administrative expenses. It does not include any
allocations of corporate expenses, interest or taxes.

16
<PAGE> 18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following contains forward-looking statements that involve risk and
uncertainties. The Company's actual results may differ materially from the
results discussed. Factors that might cause such a difference include, but are
not limited to, those discussed in "Risk Factors," as well as those discussed
elsewhere in this Prospectus.

OVERVIEW

Laser Power designs, manufactures and sells a broad range of optics and
optical assemblies for lasers used in industrial, medical and military
applications. The Company sells its optics products to major domestic and
foreign laser and laser system manufacturers and end users as original and
replacement components in high power CO2 and other lasers. The Company also
conducts contract research in advanced applications of lasers and optics,
primarily for U.S. government departments and agencies. The Company has also
developed miniature solid state lasers, or microlasers, which it expects to
manufacture, market and sell by the end of fiscal 1997.

The Company manufactures optics primarily for customer orders for scheduled
deliveries and to a lesser extent for inventory for same day delivery orders,
and ships in annual volumes ranging from several units to end user customers to
thousands of units to OEM customers and major distributors. As manufacturing
volume has increased, the Company has experienced longer manufacturing cycle
times due to capacity constraints in its polishing and coating operations. The
Company has recently made investments in additional manufacturing equipment and
facilities in the United States and Mexico that it believes will result in
reduced manufacturing costs when fully integrated into operations. See "Risk
Factors -- Dependence on New Products and Processes" and "-- Fluctuations in
Quarterly Performance."

Contract research and development allows the Company to develop
technologies that the Company believes may have significant commercial
applications without bearing all of the economic risks of such development.
Revenues from contract research are recognized based on the ratio of costs
incurred to total estimated costs. Typically, contract gross margins are lower
than gross margins on product sales. Revenues from contract research are
expected to remain relatively stable in absolute dollar terms and to decrease as
a percentage of revenues due to the higher anticipated growth rate of sales of
optics and the anticipated commencement of sales of microlasers.

A substantial portion of microlaser internal research and development has
been funded by the Company through the sale of equity securities. In the future,
the Company anticipates funding these development activities through funds
provided by operations or research and development contracts.

While optics and contract research operations (excluding interest and
taxes) have been profitable for all periods presented, the investment in
microlaser internal research and development has resulted in consolidated losses
for fiscal 1994, 1995 and 1996. Microlaser research has been primarily funded by
contracts since July 1996. As a result, the Company has operated profitably for
the six months ended February 28, 1997. Continued profitable operations will
depend on the cost and the period of time until development and
commercialization of microlasers are completed, pricing and other factors which
determine customer acceptance of these new products, and the success of
competing products and alternative technologies.

17
<PAGE> 19

RESULTS OF OPERATIONS

The following table sets forth certain statements of operations and other
data expressed as a percentage of revenues for the periods indicated.

<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED AUGUST ENDED
31, FEBRUARY 29/28,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Product sales.................................. 85.5% 81.4% 80.4% 80.4% 71.9%
Contract research and development.............. 14.5 18.6 19.6 19.6 28.1
----- ----- ----- ----- -----
Total revenues......................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Cost of product sales(1)....................... 64.5 67.4 65.1 66.9 68.5
Contract research and development(1)........... 75.7 75.9 79.2 75.1 80.0
Microlaser internal research and
development(2).............................. 8.3 14.2 10.4 13.0 0.9
Other internal research and development........ 4.9 5.4 3.8 4.0 2.6
Selling, general and administrative............ 27.0 24.6 22.8 24.3 20.5
Total cost and expenses................ 106.3 113.2 104.9 109.8 95.7
Income(loss) from operations..................... (6.3) (13.2) (4.9) (9.8) 4.3
Interest expense, net............................ 2.2 2.2 1.6 1.8 1.3
Income(loss) before income taxes................. (8.5) (15.4) (6.5) (11.6) 3.0
Income taxes................................... -- 0.2 -- 0.1 0.2
Net income(loss)................................. (8.5) (15.6) (6.5) (11.7) 2.8
OTHER DATA:
Effect of microlaser operations on income
(loss) from operations(3)................... (8.3) (14.4) (10.8) (10.4) (1.9)
</TABLE>

- ---------------
(1) Cost of product sales and cost of contract research and development revenues
are stated as percentages of product sales and contract research and
development revenues, respectively.

(2) Prior to fiscal 1997, microlaser research was funded internally by the
Company primarily through the sale of equity securities.

(3) The effect of microlaser operations on income (loss) from operations
includes gross margin, research and development expenses and incremental
selling, general and administrative expenses. It does not include any
allocations of corporate expenses, interest or taxes.

Six Months Ended February 28, 1997 Compared to Six Months Ended February 29,
1996

For the six months ended February 28, 1997, product sales were $8.0 million
compared to $6.9 million for the same period in fiscal 1996, an increase of $1.1
million or 16%. Contract research and development revenues were $3.1 million for
the six months ended February 28, 1997 compared to $1.7 million for the same
period in fiscal 1996, an increase of $1.4 million or 86%. The increase in
product sales was primarily due to increased worldwide demand for the Company's
laser optics as OEM customers increased sales of high power CO(2) lasers and
laser systems, the installed base of such systems increased, and end users
replaced optics more frequently due to increased utilization. The increase in
contract research and development revenues was due primarily to work performed
on a commercial microlaser display development contract that began in July 1996.

The Company's ability to maintain or improve on the increased product sales
in the first six months for the remainder of fiscal 1997 will depend on
maintaining increased orders for products, integrating into operations
additional manufacturing equipment purchased and facilities leased during the
first six months of

18
<PAGE> 20

fiscal 1997, hiring and training new employees for its expanded facility in
Mexico and commencing planned shipments of microlasers for medical and other
applications. The growth in contract research and development revenues is
expected to slow for the full year because the commercial display development
contract is scheduled to be completed prior to year end.

Gross profit on product sales was $2.5 million for the six months ended
February 28, 1997 compared to $2.3 million for the same period in fiscal 1996,
an increase of $241,000 or 11%. Gross profit on contract research and
development revenues was $627,000 for the six months ended February 28, 1997
compared to $420,000 for the same period in fiscal 1996, an increase of $207,000
or 49%. Gross margin on product sales decreased to 31.5% for the six months
ended February 28, 1997 from 33.1% for the same period in fiscal 1996. The
decrease was primarily due to manufacturing inefficiencies related to capacity
constraints and facility expansion to accommodate the increased volume of orders
and to a lesser extent reduced average selling prices of optics in certain
markets. Gross margin on contract research and development revenues decreased to
20.0% for the six months ended February 28, 1997 from 25.0% for the same period
in fiscal 1996 due to the lower negotiated gross profit on the commercial
display development contract.

Microlaser internal research and development expenses were $99,000 for the
six months ended February 28, 1997, compared to $1.1 million for the same period
in fiscal 1996, a decrease of $1.0 million or 91%. The decrease was due to the
transition of funding for certain microlaser development effects from internal
sources to contract sources. Microlaser internal research and development
expenses are expected to increase over the last six months of fiscal 1997.

Selling, general and administrative expenses were $2.3 million for the six
months ended February 28, 1997 compared to $2.1 million for the same period in
fiscal 1996, an increase of $194,000 or 9%. These expenses have decreased as a
percentage of revenues as absolute spending has increased at a slower rate than
the growth in revenues.

Income taxes were $22,000 for the six months ended February 28, 1997
compared to $7,000 for the same period in fiscal 1996, an increase of $15,000 or
218%. The increase was due to increased taxable income. The Company's effective
tax rate was reduced substantially by the utilization of federal and state tax
net operating loss carryforwards. The future availability of carryforwards may
be limited by the application of rules relating to a change in control as a
result of this offering.

Fiscal Year Ended August 31, 1996 Compared to Fiscal Year Ended August 31,
1995

Product sales were $15.2 million in fiscal 1996 compared to $11.9 million
in fiscal 1995, an increase of $3.3 million or 28%. Contract research and
development revenues were $3.7 million in fiscal 1996 compared to $2.7 million
in fiscal 1995, an increase of $1.0 million or 37%. The increase in product
sales was due to increased acceptance of the Company's OEM customers' lower
power lasers for certain industrial and medical applications and increased
worldwide demand for laser optics for new high power lasers and as replacement
parts in installed lasers. The increase in contract research and development
revenues was due to the increased number and average size of contracts awarded
to the Company.

Gross profit on product sales was $5.3 million in fiscal 1996 compared to
$3.9 million in fiscal 1995, an increase of $1.4 million or 37%. Gross profit on
contract research and development revenues was $771,000 in fiscal 1996 compared
to $655,000 in fiscal 1995, an increase of $116,000 or 18%. Gross margin on
product sales increased to 34.9% in fiscal 1996 from 32.6% in fiscal 1995. The
increase in gross margin was primarily due to improved manufacturing
efficiencies resulting from higher manufacturing volume and from increased
production in Mexico. Gross margin on contract research and development revenues
decreased to 20.8% in fiscal 1996 from 24.1% in fiscal 1995. The decrease was
primarily due to a cost-sharing contract that supplemented internal funding of
technology development for microlasers and microlaser based projection displays.

Microlaser internal research and development expenses were $2.0 million in
fiscal 1996 compared to $2.1 million in fiscal 1995, a decrease of $103,000 or
5%, due to the transition of certain microlaser development from internal
funding to contract funding late in fiscal 1996.

19
<PAGE> 21

Selling, general and administrative expenses were $4.3 million in fiscal
1996 compared to $3.6 million in fiscal 1995, an increase of $724,000 or 20%,
due primarily to the addition of personnel necessary to support the growth in
product sales and the anticipated production of microlasers and to a lesser
extent Company-wide bonus accruals; no bonuses were accrued in 1995. These
expenses decreased as a percentage of revenues as absolute spending increased at
a slower rate than the growth in revenues.

Fiscal Year Ended August 31, 1995 Compared to Fiscal Year Ended August 31,
1994

Product sales were $11.9 million in fiscal 1995 compared to $10.2 million
in fiscal 1994, an increase of $1.7 million or 17%. Contract research and
development revenues were $2.7 million in fiscal 1995 compared to $1.7 million
in fiscal 1994, an increase of $1.0 million or 57%. The increase in product
sales was due to increased worldwide demand in both industrial and medical
markets for laser optics for new lasers and as replacement parts in installed
lasers. The increase in contract research and development revenues was due to
the increased number and average size of contracts awarded to the Company.

Gross profit on product sales was $3.9 million in fiscal 1995 compared to
$3.6 million in fiscal 1994, an increase of $257,000 or 7%. Gross profit on
contract research and development revenues was $655,000 in fiscal 1995 compared
to $419,000 in fiscal 1994, an increase of $236,000 or 56%. Gross margin on
product sales decreased to 32.6% in fiscal 1995 from 35.5% in fiscal 1994,
primarily due to competitive pricing pressures. Gross margin on contract
research and development revenues decreased to 24.1% in fiscal 1995 from 24.3%
in fiscal 1994, due to cost increases that were not covered by increased prices.

Microlaser internal research and development expenses were $2.1 million in
fiscal 1995 compared to $1.0 million in fiscal 1994, an increase of $1.1 million
or 111%. Fiscal 1995 expenditures included a full year of development activity
under a joint development agreement with Proxima compared to seven months in
fiscal 1994. Other internal research and development expenses were $786,000 in
fiscal 1995 compared to $585,000 in fiscal 1994, an increase of $201,000 or 34%,
due to increased internal funding of new product development of laser optics and
optical assemblies.

Selling, general and administrative expenses were $3.6 million in fiscal
1995 compared to $3.2 million in fiscal 1994, an increase of $378,000 or 12%,
due to the addition of personnel and related increases in compensation. These
expenses have decreased as a percentage of revenues as absolute spending has
increased at a slower rate than the growth in revenues.

Net interest expense was $326,000 in fiscal 1995 compared to $268,000 in
fiscal 1994, an increase of $58,000 or 22%, due primarily to higher interest
rates on the portion of the Company's debt with interest rates based on the
prime rate.

Income taxes were $23,000 in fiscal 1995 and were for state income taxes.
There were no income taxes in fiscal 1994.

20
<PAGE> 22

QUARTERLY RESULTS

The following table presents certain unaudited consolidated quarterly
financial information for fiscal 1996 and the first two quarters of fiscal 1997.
In the opinion of the Company, this information has been prepared on the same
basis as the audited consolidated financial statements appearing elsewhere in
this Prospectus and includes all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the unaudited quarterly
results set forth herein. Operating results for any quarter are not necessarily
indicative of results for any future period or for a full fiscal year.

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
FISCAL 1996 FISCAL 1997
---------------------------------------- -------------------
NOV. 30, FEB. 29, MAY 31, AUG. 31, NOV. 30, FEB. 28,
1995 1996 1996 1996 1996 1997
-------- -------- ------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales............................... $3,352 $ 3,528 $4,262 $4,052 $4,060 $ 3,935
Contract research and development........... 782 900 980 1,051 1,562 1,567
------ ------ ------ ------ ------ ------
Total revenues...................... 4,134 4,428 5,242 5,103 5,622 5,502
------ ------ ------ ------ ------ ------
Costs and expenses:
Cost of product sales....................... 2,224 2,377 2,879 2,408 2,730 2,745
Contract research and development........... 581 681 769 911 1,315 1,187
Microlaser internal research and development(1)... 477 638 554 299 48 51
Other internal research and development..... 179 167 172 203 152 138
Selling, general and administrative......... 1,039 1,044 1,079 1,144 1,169 1,109
------ ------ ------ ------ ------ ------
Total cost and expenses............. 4,500 4,907 5,453 4,965 5,414 5,230
------ ------ ------ ------ ------ ------
Income (loss) from operations................. (366) (479) (211) 138 208 272
Interest expense, net....................... 70 82 74 74 67 78
------ ------ ------ ------ ------ ------
Income (loss) before income taxes............. (436) (561) (285) 64 141 194
Income taxes.................................. 4 3 3 3 12 10
------ ------ ------ ------ ------ ------
Net income (loss)............................. $ (440) $ (564) $ (288) $ 61 $ 129 $ 184
====== ====== ====== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
(AS A PERCENTAGE OF REVENUES)
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales............................... 81.1% 79.7% 81.3 % 79.4% 72.2% 71.5%
Contract research and development........... 18.9 20.3 18.7 20.6 27.8 28.5
------ ------ ------ ------ ------ ------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------
Costs and expenses:
Cost of product sales(2).................... 66.3 67.4 67.6 59.4 67.2 69.8
Contract research and development(2)........ 74.3 75.7 78.5 86.6 84.2 75.8
Microlaser internal research and
development(1)........................... 11.5 14.4 10.6 5.9 0.9 0.9
Other internal research and development..... 4.3 3.8 3.3 4.0 2.7 2.5
Selling, general and administrative......... 25.1 23.6 20.6 22.4 20.8 20.2
Total cost and expenses............. 108.9 110.8 104.0 97.3 96.3 95.1
Income (loss) from operations................. (8.9) (10.8) (4.0) 2.7 3.7 4.9
Interest expense, net....................... 1.7 1.8 1.4 1.5 1.2 1.4
Income (loss) before income taxes............. (10.6) (12.6) (5.4) 1.2 2.5 3.5
Income taxes........................ 0.1 0.1 0.1 -- 0.2 0.2
Net income (loss)............................. (10.7) (12.7) (5.5) 1.2 2.3 3.3
</TABLE>

- ---------------
(1) Prior to fiscal 1997, microlaser research was funded internally primarily
using funds provided through the sale of equity securities.

(2) Cost of product sales and cost of contract research and development revenues
are stated as percentages of product sales and contract research and
development revenues, respectively.

The Company's results of operations may vary significantly from time to
time due to a number of factors, including the timing of receipt of orders from
customers, the timing of new product introductions, variations in product mix,
competitive pricing pressures, the delay between incurring expense to expand
manufacturing

21
<PAGE> 23

capacity, and the realization of benefits from the added capacity, and seasonal
and foreign exchange factors related to international sales. See "Risk
Factors -- Fluctuation in Quarterly Performance."

Product sales include high unit price orders for custom optics and coating
and diamond turning services. Shipments of custom orders can cause significant
fluctuations in product sales from quarter to quarter. For example, the results
of operations for the quarter ended May 31, 1996 included unusually high product
sales attributable to custom orders. In addition, actions taken by the Company
to increase capacity in the latter part of the first quarter and throughout the
second quarter of fiscal 1997 restricted the Company's ability to maintain
shipments to keep pace with increased orders. As a result, product sales were
slightly lower in the second quarter of fiscal 1997 when compared to the
preceding three quarters, and the backlog of product orders increased 20% from
the start of the fiscal year to $3.6 million at February 28, 1997. The Company
believes that recent expansion of operations in Mexico and the addition of
polishing and thin film coating equipment will enable it to increase product
shipments to meet customer demand.

In the second quarter of fiscal 1997, gross margin on product sales was
30.2%, compared to an average of 36.7% for the preceding two quarters. The lower
gross margin was due to the impact on ongoing operations of facility expansion
in the United States and Mexico, additional engineering and material costs to
improve manufacturing processes and discounts provided to foreign distributors
to offset the impact of the stronger U.S. dollar.

Based on all of the above factors, as well as factors discussed elsewhere
in this Prospectus, the Company believes that quarter-to-quarter comparisons of
its results of operations and components thereof are not necessarily meaningful
and should not be relied upon as indications of future performance.

LIQUIDITY AND CAPITAL RESOURCES

From inception, the Company has financed operations through cash generated
by operating activities, private placements of debt and equity securities and
bank loans. In 1987, Union Miniere purchased the Debentures and shares of Common
Stock for total consideration of $2.8 million. From May 1993 to June 1996,
Proxima purchased shares of Common Stock and shares of Series A Preferred Stock
for total consideration of $6.7 million.

For the three year period ended August 31, 1996, purchases of capital
equipment and investments in other assets were funded by equity investments and
by long term borrowings. For the six months ended February 28, 1997, purchases
of capital equipment and investments in other assets were funded by available
cash and bank advances that will be converted to a term loan on August 1, 1997.

The Company maintains a $2.0 million secured bank line of credit which had
outstanding borrowings of $774,000 at February 28, 1997. The line of credit
expires on March 1, 1998 and bears interest at the bank's prime rate plus one
percent. The Company intends to use a portion of the net proceeds to the Company
from the offering to repay the outstanding balance on the line of credit. See
"Use of Proceeds."

Substantial additional capital funds will be required to acquire capital
equipment to increase capacity and automate production of laser optics and to
manufacture, assemble and test planned new microlaser products. The Company will
also require funds for facility expansion and investments in working capital and
other assets. The Company anticipates that net proceeds of this offering,
together with existing sources of cash and anticipated funds from operations,
will satisfy the Company's projected working capital and capital expenditure
requirements for at least the next 12 months. The timing and amount of
additional capital requirements depend on a number of factors, including
successful completion of development and commercialization efforts, the cost of
plant, equipment and infrastructure to support manufacturing of products under
development, and the amount of working capital necessary to start-up and
maintain operations supporting new products. There can be no assurance that
additional capital would be available. The lack of such capital would have a
material adverse effect on the Company's business, financial condition and
results of operations.

INFLATION

The Company does not believe that inflation has had a material impact on
its operations or financial results.

22
<PAGE> 24

BUSINESS

Laser Power designs, manufactures and markets high performance laser optics
for industrial, medical and military lasers and laser systems. Laser optics are
precision lenses, reflectors and mirrors used to reflect, collect and focus
laser beams. The Company's products are sold to laser system OEMs and end users
as original and replacement components in high power CO(2) and other lasers. The
Company's core competencies lie in its surface finishings and thin film
coatings, which are key elements involved in all high-performance laser optics.
The Company believes that its expertise in these areas provides it with a
significant competitive advantage.

The Company has leveraged its expertise in thin film coatings, surface
finishing and solid-state lasers to develop proprietary miniature solid-state
lasers that are excited or "pumped" by diode lasers. These "microlasers" have
significant size advantages, are generally 100 times more energy efficient and
have longer estimated lifetimes than conventional gas and solid state lasers.
Laser Power shipped the first microlaser evaluation units in March 1997, and
expects to begin commercial deliveries of microlasers to a medical equipment OEM
to replace gas lasers in dermatology systems by the end of fiscal 1997. The
Company believes that microlasers can replace other lasers in additional medical
equipment. The Company is also developing microlasers for projection display and
telecommunications applications.

INDUSTRY AND MARKET OVERVIEW

LASER TECHNOLOGY

The term "laser" is an acronym for "light amplification by the simulated
emission of radiation." A laser converts energy into an intense beam of light
comprised of a single or limited number of wavelengths. A laser beam may be
strong enough to cut sheet metal or may be precise enough to perform eye
surgery. To create a laser beam, an external source of energy, such as
electricity, light or a chemical reaction, is applied to a lasing medium which
becomes excited and emits light. The emitted light is then collected and
directed through or by a series of precision optics to form a laser beam.

The wavelength of the laser beam and therefore its use are determined by
the lasing medium. The most common types of lasing mediums are gases, such as
CO(2) or argon, semiconductor materials, and solid state crystals, such as YAG.

The precision optics which collect, form, reflect and transmit the laser
beam are crucial to a laser's function. In gas lasers, the lasing medium is
encased in a tube with precision optics at either end. These internal optics may
direct the beam from one tube to another, may turn the beam back on itself to
further energize the lasing medium or may allow part of the beam to exit the
tube while turning the rest of the beam back on itself. Conventional solid state
lasers are similar except that the tube is replaced by a laser crystal rod. In
addition to the internal optics, a number of external precision optics may be
used to deliver the beam for its intended application. These external optics may
include mirrors, beam splitters, focusing lenses and other special function
optics.

23
<PAGE> 25

High power CO(2) lasers are widely used in industrial applications, such as
welding automobile bodies, scribing delicate ceramic circuits and sheet metal
cutting. CO(2) lasers offer greater quality, speed, flexibility and automation
than conventional cutting and welding technologies. There are an estimated
24,000 CO(2) laser systems currently installed with approximately 3,200
additional systems estimated to be installed in 1997. These systems generally
contain 10 or more optics which must be replaced regularly as they become worn
or are contaminated. The Company estimates that in 1997 the market for optics
for use in high power CO(2) lasers will be approximately $60 million, of which
$40 million will be sales of optics to replace worn or contaminated optics.

[line drawing of CO(2) laser]

Lower power CO(2) lasers and argon lasers are used in medical and cosmetic
procedures, including heart surgery and the removal of tattoos and skin
wrinkles. Laser procedures reduce blood loss and post-operative pain compared to
other procedures.

Lasers employing a semiconductor medium (diode lasers) are used in
printers, compact disk players and telecommunications equipment. Diode lasers
can also be used to excite or "pump" solid state lasers. Solid state lasers,
which employ crystals as the lasing medium and are energized by light from
lamps, are used in various industrial, medical and biotechnology applications.
Recently, laser engineers have developed small, highly efficient solid state
lasers that are energized by diode lasers (diode pumped solid state lasers or
"DPSSLs"). Because of their small size and high efficiency, DPSSLs may address
many of the applications currently served by other lasers and may create new
applications. Microlasers are miniature DPSSLs.

PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

HIGH PERFORMANCE LASER OPTICS PRODUCTS

The Company produces optics, including total reflectors, output couplers,
beam splitters and lenses, for use in high power industrial, medical, scientific
and military lasers. The Company's expertise in the area of surface finishing
and, in particular, thin film coatings, are critical to producing high
performance laser optics. In general, the performance of an optic is primarily
dependent on the quality of the thin film coating. Thin film coatings include
various reflective coatings for mirrors and transmissive and partially
transmissive coatings for lenses, beam splitters and output couplers. The
Company believes that the high quality of its thin film coatings and its
commitment to customer service enhance its reputation as a supplier of high
power and technically advanced laser optics.

CO(2) Optics. Reliable operation of high power CO(2) lasers requires high
quality, low absorption optical elements. The Company supplies substantially all
types of optics used in CO(2) lasers and laser systems. Such optics fall broadly
into two categories: transmissive zinc selenide and reflective metal optics.

Zinc selenide is the substrate material of choice for high power CO(2)
laser transmissive optics such as lenses, output couplers and beam splitters
because of its low absorption of laser energy. Generally, zinc selenide optics
with low absorption thin film coatings are able to handle up to three kilowatts
of power. As laser power increases to the multi-kilowatt range, reflective metal
optics replace transmissive optics in certain applications.

Reflective metal optics (such as folding mirrors, phase shifting mirrors,
beam bending mirrors and focusing mirrors) utilize a metal substrate, such as
copper. Metal optics are fabricated by conventional polishing or single-point
diamond turning, a process which involves cutting by gem quality diamonds to
create a mirror finish. The Company is a leader in the uses of state-of-the-art,
single-point diamond turning methods to produce both standard metal optics and
those with complicated surfaces such as aspheres, parabolas and hyperbolas,
which are used with higher power CO(2) lasers. The Company's state-of-the-art
fabrication and thin

24
<PAGE> 26

film coating technologies have earned Laser Power a reputation as a leading
manufacturer of zinc selenide and metal optics.

The Company supplies zinc selenide and metal optics to high power CO(2)
laser and laser system manufacturers and to the aftermarket as replacement
parts. The aftermarket portion of the Company's optics business is growing
rapidly as industrial applications of CO(2) lasers proliferate worldwide.
Because CO(2) laser optics wear or become contaminated (average lifetime is
estimated to be 1,000 to 2,000 hours), every new laser installed increases the
market for replacement optics. In order to meet this growing aftermarket demand,
the Company provides same day shipment of critical replacement optics for most
high power CO(2) lasers.

Military Products. Working with Lockheed Martin Corporation ("Lockheed
Martin") and TRW, Inc. ("TRW"), the Company has developed thin film coatings
utilized in ongoing U.S. government programs to develop laser weapons for
missile defense. The Company has developed very low absorption thin film
coatings for uncooled optics, which are critical to a space-based laser for
defense against long range ballistic missiles. By using uncooled optics, the
weight of the laser system is reduced by approximately one-half, allowing the
laser to be boosted into orbit using one rocket instead of two. The Company
continues to develop these coatings for Lockheed Martin. The Company has also
developed coatings for TRW for use in ground-based lasers to defend against
short-range missiles. In addition, the Company has supplied coatings for
uncooled optics to TRW for an airborne laser defense system for use against
shorter range battlefield theater ballistic missiles.

The technology used to produce coatings for these weapons-grade lasers is
derived from technology used by the Company for CO(2) laser optics. The Company
believes that participation in these military programs fosters continued
improvement in CO(2) optics technology and that these improvements provide a
significant competitive advantage.

PRODUCTS UNDER DEVELOPMENT

Optics Products

At laser power levels above three kilowatts, zinc selenide loses its
ability to resist distortion and is often replaced by more expensive, beam
quality limiting solutions such as aspheric metal optics or aerodynamic windows.
However, the Company's Turbo Cooled technology enables zinc selenide optics to
function efficiently even at power levels up to the 10 to 20 kilowatt range. In
addition, the Company's MP-5 technology will enhance the performance of zinc
selenide optics because it has 25%-50% less absorption than many commercial thin
film coatings. The Company believes it will continue to be a leading supplier in
CO(2) laser optics as the industrial CO(2) laser industry continues to use
higher laser power.

Turbo Cooled refers to the Company's patented proprietary cooling design
for optical assemblies. Turbo Cooled optical assemblies incorporate transmissive
zinc selenide optics that operate with less distortion of the laser beam and at
much higher power levels than conventionally cooled optics. This capacity is
important for the industrial CO(2) laser industry's continual drive for higher
power and better beam quality. The Company has also developed laser output
couplers, focusing systems and beam integrators using this technology.

MP-5 refers to the Company's new class of proprietary low absorption
coatings to replace thorium fluoride based thin film coatings for CO(2) laser
optics. Thorium fluoride, a low-level radioactive material, is used by virtually
every manufacturer of high performance CO(2) laser optics. MP-5 coatings are
significantly less absorbing than thorium fluoride based coatings and are
non-radioactive. Low absorption reduces optic heating by the laser beam. Optic
heating causes the beam quality to deteriorate diminishing the ability of the
laser to perform a useful function. In addition, MP-5 technology will not
require the expense of handling, storage and disposal of low level radioactive
wastes associated with thorium fluoride. The Company has filed a patent
application covering the MP-5 technology. The Company believes that optics
manufactured with MP-5 coatings will gain market share and command premium
pricing in certain markets. The Company has performed successful beta-site
testing and expects to release MP-5 products for commercial sale by the third
quarter of fiscal year 1997.

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Microlaser Based Products

Recently, the Company has developed microlasers, which are miniature
DPSSLs. The miniaturization is accomplished by reducing the size of the solid
state material to mm or sub-mm dimensions and using laser diodes rather than
lamps as an energizing source. Microlasers have significant size advantages over
gas and other lasers in areas such as medicine, biotechnology and projection
displays. In addition, microlasers are generally 100 times more energy efficient
than gas lasers because they consume less electricity in creating their optical
output and require less cooling. Microlasers also have longer estimated
lifetimes than gas lasers. For example, an argon-ion tube will burnout after
5,000 to 10,000 hours, compared to an estimated lifetime of 10,000 to 15,000
hours for a microlaser. To date, revenues from sales of its microlaser products
have been insignificant.

[line drawing depicting the difference in size and power requirements
between a microlaser and an argon-ion laser]

Green and Blue Microlasers. The Company's green microlaser has size and
energy efficiency advantages over gas lasers used in certain medical
applications. The Company anticipates manufacturing and selling production
quantities of its green microlaser for use in ophthalmology and dermatology in
the fourth quarter of fiscal 1997.

The Company believes its 0.5 blue watt microlaser is the only high power
all solid state compact blue laser in existence. This laser has a number of
applications in which it can successfully replace argon-ion lasers, such as
dentistry, certain biomedical applications, dermatology and printing
applications.

The Company has developed prototype projectors using its blue and green
microlasers with red diode lasers to produce high quality images with color
quality equaling color movie film. The Company believes that such projectors
produce higher resolution and more colors than commercially available
projectors. In addition, microlaser based projectors are smaller and microlaser
light sources have longer estimated lifetimes compared to conventional light
sources. Conventional light sources have average lifetimes of 500-3,000 hours
compared to an estimated lifetime of 10,000-15,000 hours for microlaser light
sources. The Company expects that microlaser based projectors may also provide
advantages in a number of additional applications, including entertainment
displays, flight simulators, process and system control room displays, portable
large-venue projectors, videowalls and electronic cinema.

The Company has been awarded several government contracts to develop
advanced multi-beam, direct write microlaser projector technology, for which the
Company retains commercial rights. Such direct write technology will impress
video information directly on the microlaser beams. The beam writes the image
directly on to a screen similar to the way an electron beam writes a television
image, except that multiple lines are written simultaneously, which enables
super high resolution up to 5,000 by 4,000 pixels. The Company has been issued a
U.S. patent covering such technology. Since the beam from red diode lasers is
not suitable for use in direct write projection systems, the Company plans to
develop or acquire a suitable red microlaser to complete development of the
technology. There can be no assurance that the Company will be able to complete
development of a red microlaser, or if it is unable to develop such a
microlaser, that it will be able to acquire the rights to a suitable red laser
technology, at a commercially reasonable cost, if at all. If development of
direct write technology can be completed, the Company believes that such
technology may be the best method to produce the colorful super high resolution
images required by electronic cinema.

In addition, the Company currently has a collaborative arrangement to
develop microlasers for a conventional single beam direct write laser based
projection display system. Such systems have been commercially available using
gas lasers for approximately the past 20 years at very high prices ($200,000 to
$500,000). The Company's partner is developing technology which, when available,
and when combined with the Company's microlasers, will enable compact high
resolution projectors to be built with the ultimate aim of producing high
volume, low cost home entertainment systems.

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1550 nm Microlaser. Distributed feedback ("DFB") diode lasers emitting at
1550 nm wavelength are used in the telecommunications industry to transmit fiber
optic signals. Such lasers are gaining widespread acceptance in upgrades and new
installations of cable television ("CATV") and other telecommunications systems
worldwide. Microlasers generally create less signal noise and are capable of
generating higher power than DFB lasers. As a result, CATV fiber optic systems
employing 1550 nm microlasers will not require amplification to the same extent
as DFB lasers and will deliver a higher quality, lower noise signal to the
receiver. The Company's 1550 nm microlaser under development employs much of the
same design philosophy and proprietary technology developed for its blue and
green microlasers, especially key aspects which permit scaling to high power.
The Company believes that, if successfully developed, the high output power of a
1550 nm microlaser could eliminate erbium-doped fiber amplifiers ("EDFAs") which
are needed to increase the power of existing DFB lasers in CATV head-ends and
point-to-point transmitters thereby reducing the system costs. The Company
expects to sell its 1550 nm high power microlaser for substantially less than
the typical DFB laser EDFA combination, providing an impetus for industry
adoption of its 1550 nm microlaser in head-end and high power transmitters.

The ability of an EDFA to amplify any wavelength between 1530 nm and 1560
nm enables a cost-effective method of increasing information bandwidth and is
known as dense wavelength division multiplexing ("WDM"). WDM allows multiple
laser beams with different wavelengths to be launched into a single fiber optic
and amplified by a single EDFA. Dense WDM has been rapidly embraced by the
long-haul carriers for digital transmission because of significant cost and time
savings over laying additional fiber optic cable. In addition, the Regional Bell
Operating Companies ("RBOCs") and CATV operators are beginning to use dense WDM
increasingly as the technology advances, cost of equipment decreases and digital
transmission becomes more popular for local traffic. One telecommunications
industry market research firm estimates that the market for dense WDM
transmitters will grow to $1.3 billion in 2000 and $4.3 billion in 2005, a
substantial portion of which will consist of sales of lasers.

The wavelengths used for dense WDM must be precisely controlled. DFB laser
manufacturers are not able to control their semiconductor processes to the level
required to produce precise wavelength devices on demand and therefore existing
manufacturers must go through a selection process to find devices with the
desired wavelengths. Precise temperature control with active feedback is
required to keep the wavelength constant over the lifetime of the device. The
Company's 1550 nm microlaser under development is expected to be capable of
being tuned to any wavelength over the entire dense WDM band. The wavelength
could be controlled with a low-cost, passive optical element, and all devices
could be manufactured identically, with the desired wavelength selected with an
adjustment of the passive optic element. The Company believes these
characteristics will provide significant advantages for its 1550 nm microlaser
under development in the dense WDM market.

STRATEGY

The Company's strategy is to expand its current precision optics business
and to leverage its core expertise in high performance laser optics, low
absorption thin film coatings and solid-state lasers to become a world leader in
the manufacture, marketing and sale of microlasers and microlaser based
products. Key aspects of the Company's strategy include:

Continue to Grow High Performance CO(2) Laser Optics Business

The Company's core competencies in the design and manufacture of high
performance laser optics, including its advanced super polishing, diamond
turning technologies and thin film coatings have made Laser Power one of the
leading suppliers of such components, especially for high power CO(2) lasers.
The Company's strategy is to continually improve quality and customer service
while lowering production costs and introducing new products, such as the
Company's MP-5 coatings and Turbo-Cooled optics. See "-- Products and Products
under Development." The Company expects the high power CO(2) laser segment to
continue to

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grow and power levels to continue to rise. As the power of CO(2) lasers
increases, an increasing proportion of optics will be Turbo Cooled and metal
optics. To meet this increasing demand, the Company will continue to enhance its
Turbo Cooled and diamond turned metal optics technologies. The Company believes
it is well positioned to meet more stringent requirements for optics used in
higher power CO(2) lasers because of its proprietary and state-of-the-art
technologies.

Expand Markets for High Performance Optics Products

The Company believes that its technologies have applications in markets not
currently served by the Company. The Company has developed a coating technology
for optics used in weapons-grade lasers, which the Company believes is
applicable to the emerging erbium-YAG medical laser optics market as well. The
Company also plans to use its technology base developed for CO(2) laser optics
and microlaser crystal polishing and coating to produce certain optics for
neodymium-YAG lasers, visible lasers and thin film filter coatings for use in
dense WDMs.

In the industrial CO(2) laser market, the Company from time to time designs
solutions to customers material processing problems with unique
optical-mechanical systems employing the Company's optics and mechanical
components. The Company plans to expand this service in the future to increase
revenues and enhance the Company's technical reputation in the industrial CO(2)
laser market.

Increase Margins on Optics Products

The Company has a multifaceted strategy to reduce costs and increase
margins on its optics products. To reduce costs, the Company plans to increase
automation which will reduce labor costs and improve yields on certain
manufacturing processes. The Company also plans to transfer additional
labor-intensive operations to its facility in Mexico. To increase margins, the
Company plans to intensify its sales efforts on higher margin products such as
Turbo Cooled optics, and to serve high-performance, high-margin niches in such
markets as the emerging high power neodymium-YAG laser market and the dense WDM
telecommunication market.

Market Microlasers for Existing Industrial and Medical Applications

The Company intends to exploit the superior size and energy efficiency
characteristics of its microlasers to replace existing gas and solid state
lasers currently utilized in certain medical, industrial and other applications.
The Company has recently shipped three prototype green microlasers to a medical
laser OEM and negotiated a supply contract under which it expects to begin
shipping small quantities per month prior to fiscal year end 1997.

Develop and Market Microlasers for CATV and Telecommunications Applications

The Company is developing a high power, low noise 1550 nm microlaser that
it believes will provide substantial performance and cost advantages over
certain existing CATV transmission systems that are based on 1550 nm
semiconductor diode DFB lasers and EDFAs. In addition, the ability to tune and
control the microlaser's wavelength at any point over the entire EDFA wavelength
acceptance band will provide advantages over existing lasers used in digital
CATV and telecommunications applications.

Develop and Market Microlasers for High End Projection Display Applications

The Company has developed blue and green microlasers and is developing a
red microlaser, all of which can be arrayed together as the light source for a
high-end display projector. The Company believes that microlaser based
projectors will have significant performance and size advantages over existing
high-end lamp based and CRT based projectors.

Supplement Product Development Activities Through Contract Funding

The Company will opportunistically secure research contracts that will
enhance and advance its products under development. The Company has spent
approximately $9.4 million on microlaser development and

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<PAGE> 30

related display technology programs, substantially all of which was paid for
through joint ventures with strategic partners such as the U.S. government and
Proxima. See "-- Research and Development" and "Certain Transactions."

Expand Capabilities Through Strategic Alliances and Acquisitions

Through alliances with other companies, Laser Power has enhanced its high
performance laser optics technologies, broadened its research activities and
developed its microlaser technology. The Company believes that similar
relationships with leading companies in the medical equipment, high end
projection display and telecommunications industries will facilitate its entry
into those markets. In addition, the Company will continue to acquire
technologies or other companies that complement its current technologies.

SALES AND MARKETING

As of February 28, 1997, Laser Power employed 19 persons in sales and
marketing at sales offices in the U.S. and Belgium. The Company promotes its
optics and intends to promote its microlaser based products to OEM and end-user
customers through a multi-faceted program which includes trade journal
advertising, catalog distribution, direct mail promotion, field sales
presentations, technical seminars, trade show exhibits and direct telemarketing.
The Company sells its optics products through its direct sales force in the U.S.
and Belgium and through its distributors in the rest of the world. The Company
intends to sell its microlaser based products in North America, Europe and Asia
through a direct sales force and through distributors.

RESEARCH AND DEVELOPMENT

The Company believes that future success depends in large part on its
ability to complete products under development, to continue to enhance its
existing products and to develop new products. As of February 28, 1997, the
Company had 54 employees performing research and development in the U.S. and
Belgium. Under contracts for customers and strategic partners as well as
internal Company funds, the Company spent $2.9 million, $4.9 million and $5.6
million during fiscal years 1994, 1995 and 1996, respectively, and $2.7 million
and $2.9 million in the six months ended February 29, 1996 and February 28,
1997, respectively.

The Company expended $1.7, $3.0 and $1.9 million in fiscal years 1994, 1995
and 1996, respectively, and $0.8 and $0.6 million in the six months ended
February 29, 1996 and February 28, 1997 respectively, or approximately 57%, 61%,
34%, 29%, and 22% of the total research and development funds, respectively, to
fund core optical research and development and to increase manufacturing
efficiency. For example, the Company has been developing MP-5, a new class of
proprietary low absorption, non-radioactive coatings for high power CO(2)
lasers. The Company also has developed optics and thin film coatings for lasers
used in the defense industry. Current products under development include low
absorption thin film coatings for non-metal uncooled optics in sizes up to
approximately one-half meter in diameter. If adequate contract funding can be
secured, the Company intends to extend this production technology to produce
thin film coatings for uncooled optics in sizes greater than one meter in
diameter. There can be no assurance that the red microlaser, the 1550 nm
microlaser, MP-5, uncooled optics on the scale required by the military or any
of the Company's products under development will be successfully developed or
commercially available in the future. See "-- Products Under Development" and
"Risk Factors -- Development and other Risks Relating to Microlasers
Technologies."

The Company expended $1.2, $1.9 and $3.7 million in fiscal years 1994, 1995
and 1996, respectively, and $1.9 and $2.3 million in the six months ended
February 29, 1996 and February 28, 1997, respectively, or approximately 43%,
39%, 66%, 71% and 78% of the total research and development funds, respectively,
to fund research and development, for microlasers and microlaser based
projection technology. The Company has developed proprietary technologies which
allow the extraction of large amounts of power out of small laser crystals,
enabling the production of lasers producing more visible power per unit volume
than existing gas or solid-state laser technology. The Company's 0.5 watt blue
microlaser and 3.0 watt green microlaser are the first products to be developed
using these technologies. The Company has been able to leverage its microlaser
technology to secure projection display contracts leading to the development of
proprietary, large screen

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<PAGE> 31

projection display and head-mounted display technologies. The Company believes
that the development stage 1550nm microlaser has significant advantages over
existing 1550nm laser technology. The Company expects this microlaser,
originally developed under a U.S. Air Force satellite communications contract,
to have broad applications for CATV and long-haul, head-end and dense WDM
fiber-optic telecommunications.

As of February 28, 1997, the Company had contracts with $2.5 million in
future funding for continued research on various display technologies, including
the continued development of the Company's red microlaser for its projector. The
Company is developing a high resolution multimedia microlaser projector in
partnership with Proxima, under a contract with the U.S. Department of Commerce.
In addition, Laser Power is developing what it believes to be the first digital
color technology to project accurate colors for front and rear projection
systems under a contract with Defense Advanced Research Projects Agency. In July
1996, the Company entered into a collaborative agreement to develop microlasers
for a development stage projection display system. Additionally, the Company and
Evans and Sutherland Computer Corporation have been funded by the U.S. Air Force
to jointly develop advanced microlaser based projection displays for advanced
military training systems.

The Company is also continuing to develop its 1550nm microlaser technology
for telecommunications applications. Additionally, the Company has contracts
with the U.S. Army, Air Force and Navy to develop microlasers for various other
telecommunication applications.

MANUFACTURING

The Company manufactures high performance laser optics, microlasers and
related components. Some materials and components are available only from single
suppliers. See "Risk Factors -- Dependence on Sole and Limited Source
Suppliers."

The Company manufactures optics at its San Diego and Mexico facilities.
Thorium fluoride and zinc selenide are important to the manufacture of optics.
The Company purchases all of its thorium fluoride for use in its low absorption
thin film coating processes from Cerac, who the Company believes is the sole
source for high quality thorium fluoride. Any interruption or cessation of
supply by Cerac would have a material adverse effect on the Company's business,
financial condition and results of operations. While the Company is developing
MP-5, an alternate low absorption thin film coating technology, there can be no
assurance that such an alternative can be fully developed. See "Risk
Factors -- Dependence on Sole and Limited Source Suppliers."

In the case of zinc selenide, a critical raw material in the manufacture of
optics, the Company currently relies exclusively on one supplier, Morton's
Advanced Materials Division. To date, the Company has not experienced any
material difficulties in the adequacy or the quality of the zinc selenide
delivered. If any such problem arises in the future, the Company would have to
seek an alternate supplier. However, there can be no assurance that the Company
would be able to secure sufficient inventory of zinc selenide to produce
sufficient product to meet its customers' needs. A transition to alternate
arrangements would involve additional costs and delays in production. See "Risk
Factors -- Dependence on Sole and Limited Source Suppliers."

The Company's microlasers are assembled from component parts at the
Company's San Diego facility. The Company purchases component parts for its
microlasers, including laser crystals, nonlinear crystals, and semiconductor
diode lasers, from various sources around the world. The Company believes its
suppliers can supply the components in the quantities, with the quality and at
the prices required by the Company for volume production of microlasers for
medical, dental, telecommunications, industrial, display and other general
applications of the Company's microlaser products under development. However,
none of the Company's suppliers of microlaser component parts have experience in
supplying these components with the Company's specifications at the increased
volumes that the Company needs to achieve its growth goals. The Company does not
have long term or volume purchase agreements with any of its suppliers and
currently purchases components on a purchase order basis. See "Risk
Factors -- Limited Microlaser Manufacturing Experience; Scale-up Risk."

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<PAGE> 32

Moreover, the Company has no experience in producing microlasers other than
in small developmental quantities. The Company must increase its manufacturing
capability to polish and coat volume quantities of microlaser and nonlinear
crystals and to perform the required complex assembly steps. Such an increase in
its manufacturing capabilities will require significant scale-up expenditures
and additions to the Company's facilities. See "Risk Factors -- Limited
Microlaser Manufacturing Experience; Scale-Up Risk."

PATENTS AND PROPRIETARY RIGHTS

Laser Power's patent portfolio includes four patents issued by the USPTO
and one patent granted by the European Patent Office (the "EPO"), subsequently
filed in five European countries. The Company has filed nine patent applications
with the USPTO, two patent applications in foreign jurisdictions and has been
granted licenses to two patent applications owned by Proxima filed with the
USPTO. One of the Company's U.S. patents, issued in November 1996, covers
certain aspects of the Company's blue microlaser technology and another, issued
in July 1996, covers the Company's direct write concept and other aspects of
display technology associated with microlasers. One of the Company's U.S.
patents, issued in July 1992, covers basic technology behind the Company's
Turbo-Cooled optic products; the Company's patent granted by the EPO in April
1993 covers this same technology. Many of the Company's pending patent
applications relate to microlaser technology. One pending U.S. patent
application relates to the Company's MP-5 low absorption coating. The two
pending U.S. patent applications licensed from Proxima cover certain aspects of
microlaser display technology.

Because of lesser protection afforded by and the high cost of pursuing
patents in certain foreign jurisdictions, the Company has elected not to seek
patent protection for certain of its inventions covered by its U.S. patents in
foreign jurisdictions. Nevertheless, the Company intends to selectively pursue
foreign patent filings where the cost of and protection afforded by such
patents, if issued, are justified. However, the Company in general believes that
in certain cases obtaining foreign patents may be much less useful than
obtaining domestic patents because of differences in patent laws and costs of
patent enforcement, and further believes that the protection provided by foreign
patents, if obtained, and any other foreign intellectual proprietary protection
may be weaker than that provided domestically.

Laser Power's continued success will depend in part on its ability to
obtain patent protection for its products and processes, and to operate without
infringing the proprietary rights of third parties. There can be no assurance
that patent applications filed by Laser Power will result in patents being
issued, that the claims of such patents will offer significant protection of the
Company's technology, or that any patents issued to or licensed by Laser Power
will not be challenged, narrowed, invalidated or circumvented. The Company may
also be subject to legal proceedings that result in the revocation of patent
rights previously owned by or licensed to Laser Power, as a result of which the
Company may be required to obtain licenses from others to continue to develop,
test or commercialize its products. There can be no assurance that Laser Power
will be able to obtain such licenses on acceptable terms, if at all.

In addition, there may be pending or issued patents held by parties not
affiliated with Laser Power that relate to the technology utilized by Laser
Power. As a result, Laser Power may need to acquire licenses, to assert
infringement of, or contest the validity of, such patents or other similar
patents which may be issued. Laser Power could incur substantial costs in
defending itself against patent infringement claims, interference proceedings,
opposition proceedings or other challenges to its patent rights made by third
parties, or in bringing such proceedings or enforcing any patent rights of its
own.

The laser optics and laser industries have a history of patent litigation
and will likely to continue to have patent litigation suits concerning laser
technologies. A number of laser optic, laser component and laser manufacturing
companies maintain and continue to develop patent positions that could prevent
Laser Power from using technology covered by these patent positions. However,
the commercial success of the Company depends in part on neither infringing
patents or misappropriating proprietary rights of third parties nor breaching
licenses that may relate to the Company's technologies and products. The patent
positions of laser optic, laser component and laser manufacturing companies,
including the Company, are generally uncertain and involve complex legal and
factual questions. In addition, the Company has received invitations from third

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parties to license patents owned by third parties. Any action against the
Company or its collaborative partners claiming damages and seeking to enjoin
commercial activities relating to the affected products and processes could, in
addition to subjecting the Company to potential liability for damages, require
the Company or its collaborative partners to obtain a license in order to
continue to develop, manufacture or market the affected products and processes.
There can be no assurances that the Company or its collaborative partners would
prevail in any such action or that any license (including licenses proposed by
third parties) required would be made available on commercially acceptable
terms, if at all. There are a significant number of United States and foreign
patents and patent applications in the Company's area of interest, and the
Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If the Company becomes
involved in such litigation, it could consume a substantial portion of the
Company's managerial and financial resources, which could have material adverse
effect on the Company's business, financial condition and results of operations.

The Company has a license to certain technology used in its blue
microlaser. The Company has received a letter from a third party claiming that
the Company's license was granted improperly by the licensor. While the Company
believes that such license was properly granted, there can be no assurance that
the Company's license would not be voided if subjected to a legal challenge. In
such an event, there can be no assurance that the Company would be able to
obtain a replacement license on favorable terms, if at all. Failure to obtain
such a license would result in a material adverse effect to the Company's
business, financial condition and results of operations.

The Company is aware that patents held by other laser companies may relate
to the Company's microlaser technology. The Company does not believe it
infringes on such laser companies' patents and that it has adequate
design-arounds if it is held to be infringing. Nevertheless, for certain cost or
strategic reasons, the Company believes it may be advantageous to enter into
license agreements with such laser companies. The Company is currently
negotiating to obtain licenses from such parties for certain technology covered
by such patents. However, there can be no assurance that the Company will obtain
the license(s) on favorable terms, if at all. If it is determined that the
patents held by these other laser companies do cover the Company's technology,
the Company's inability to obtain licenses for such technology could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company has developed certain of its proprietary technology pursuant to
development contracts including contracts with federal government agencies.
Under standard provisions in government contracts, the government may retain
certain rights in technology developed under such contracts. In addition, the
Company has granted significant rights to third parties under such contracts.
The Company's strategy is to continue to develop a significant portion of its
proprietary technology pursuant to funding received from development contracts.
There can be no assurance that the Company will be able to continue to obtain
funding for the development of its proprietary technology, or that, if received,
the Company will obtain rights to such technology sufficient to permit the
Company to develop and market new products or to prevent third parties from
using such technology to compete with the Company.

In addition to patent protection, Laser Power also relies on copyright
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities to expand and bolster its competitive position. In an
effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, the Company requires employees, consultants and certain
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with the Company. These agreements are
intended to enable the Company to protect its proprietary information by
controlling the disclosure and use of technology to which it has rights and
provide for ownership by the Company of proprietary technology developed at the
Company or with the Company's resources. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's trade
secrets or other confidential information in the event of unauthorized use or
disclosure of such information or that adequate remedies would exist in the
event of such unauthorized use or disclosure. The loss or exposure of trade
secrets possessed by Laser Power could adversely affect its business. See "Risk
Factors -- Dependence on Patents and Proprietary Rights."

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The Company's academic collaborators have certain rights to publish data
and information in which the Company has rights. There is considerable pressure
on academic institutions to publish discoveries in the high technology and
physics fields. There can be no assurance that such publication would not
adversely affect the Company's ability to obtain patent protection for certain
technologies in which it may have a commercial interest.

COMPETITION

The industries in which the Company sells its products are highly
competitive. Laser Power's competitive position depends upon a number of
factors, including the price and performance of its products, the level of
customer service, the quality of its manufacturing processes, the compatibility
of its products with existing laser systems and Laser Power's ability to
participate in the growth of emerging technologies, such as microlasers and
their application to industries already served by gas and solid state lasers. In
the optics market, Laser Power primarily competes with II-VI, Coherent and
Sumitomo. In the combined industrial and medical laser optics market, the
Company estimates that it had a 27% market share in 1996, compared to a 50%
share held by II-VI for the same period. In addition, II-VI produces its own
supply of zinc selenide. The Company uses zinc selenide as the substrate for 40%
to 50% of the CO(2) laser optics sold by the Company and purchases this raw
material from Morton.

With regard to the Company's microlaser based products under development,
the Company faces competition from gas, solid-state and DFB laser manufacturers
who already service this market as well as from lamp manufacturers who are
developing lamps with extended lives for projection display. Competitive factors
in the market for microlaser applications include price, product performance and
reliability, strong customer support and service, customer relationships and the
breadth of product line. In this market, the Company faces competition from
companies that have substantially greater financial, engineering, research,
development, manufacturing, marketing, service and support resources, greater
name recognition than the Company and long-standing customer relationships.
Specifically, the Company believes that its main competitors regarding its
products under development will be Spectra Physics, Coherent, Uniphase,
Lightwave Electronics, Liconix, Omnichrome and Edinburgh Instruments. With
respect to CATV 1550 nm microlaser transmitters for supply to OEMs, the Company
believes its competitors will be Harmonic Lightwave, Ortel, Synchronous
Communications, Uniphase, SDL, ATx-Scientific Atlanta, Fujitsu, Lucent and
Nortel. Other CATV equipment suppliers as well as other laser companies who may
develop microlaser based products which compete directly with the Company's
microlaser based products may also enter this market.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

The Company uses or generates certain hazardous substances in its research
and manufacturing facilities. The Company believes that its handling and
disposal of such substances is in material compliance with applicable local,
state and federal environmental, safety and health regulations at each operating
location. The Company invests substantially in proper protective equipment,
process controls and specialized training to minimize risks to employees,
surrounding communities and the environment due to the presence and handling of
such hazardous substances. The Company conducts monthly workplace monitoring
regarding such substances. When exposure problems or potential problems have
been indicated, corrective actions have been implemented and re-occurrence has
been minimal or non-existent. The Company does not carry environmental
impairment insurance.

The Company uses a low-level radioactive material called thorium fluoride
to manufacture low absorption thin film coatings. The use, storage and disposal
of this material is governed by the State of California which recently inspected
and licensed the Company's facilities and procedures. All thorium fluoride
bearing by-products are collected and stored on site at the Company until
California develops low-level radioactive waste storage capability. The
Company's non-radioactive coating under development, MP-5, will provide superior
performance to certain thorium fluoride coated optics and lessen the
environmental hazards associated with the special use, storage and handling of
the low-level radioactive substance. See "-- Research and Development."

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<PAGE> 35

The generation, use, collection, storage and disposal of all other
hazardous by-products resulting from the Company's manufacturing of its products
and research and development of new products, such as suspended solids
containing heavy metals or airborne particulates, are believed by the Company to
be in material compliance with local, state and federal regulations. The Company
believes that it possesses all of the permits and licenses required for
operation. Although the Company is not aware of any material environmental,
safety and health problems in its properties or processes, there can be no
assurance that problems will not develop in the future which would have a
materially adverse effect on the Company.

BACKLOG

With the exception of military contracts, most customer orders for optics
are from stock or for deliveries within one to two months. As a result, backlog
of optics orders is typically two to three times monthly sales and was $3.6
million at February 28, 1997, as compared with $3.0 million at February 29,
1996. Backlog of research contracts fluctuates based on the timing of contract
awards and was $3.9 million at February 28, 1997, as compared with $3.6 million
at February 29, 1996. Backlog of microlaser orders is expected to reflect the
longer-term commitments of OEM customers. At February 29, 1997, microlaser
backlog was $871,000, consisting of development funding and the purchase of
several prototype lasers.

EMPLOYEES

As of February 28, 1997, the Company had 189 full time and 4 part time
employees in the U.S. and 37 full time employees in its foreign subsidiaries. Of
the Company's U.S. employees, 14 were engaged in marketing, sales and related
customer-support services, 50 in research and development and 129 in operations,
administration and finance. See "Risk Factors -- Dependence Upon Key Personnel."
None of the Company's employees is represented by a labor union or covered by a
collective bargaining agreement. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.

FACILITIES

The Company's main facilities and headquarters are located in San Diego,
California. These facilities are leased through December 31, 2001. The Company
leases approximately 44,000 square feet of space used for manufacturing,
research and administrative purposes. The Company also leases facilities in
Plymouth, Michigan, Tijuana, Mexico and Ghent, Belgium, consisting of
approximately 1,000, 6,000 and 3,900 square feet, respectively. The lease on the
Michigan facility is month to month and the leases on the Mexico and Belgium
facilities expire in September 1998 and December 1999, respectively. The Company
believes that, upon expansion of its manufacturing, research and office space,
the Company's facilities will be adequate for its current and projected needs
and that additional space will be available as needed.

LEGAL MATTERS

The Company is not a party to any litigation.

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<PAGE> 36

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers of the Company and directors of the Company
continuing after the offering and their ages are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Glenn H. Sherman, Ph.D........... 54 Chairman of the Board and Chief Executive Officer
President, Laser Power Research Division and
Douglas H. Tanimoto, Ph.D........ 57 Director
Richard P. Scherer............... 58 President, Laser Power Optics Division
Dean Hodges, Ph.D................ 53 President, Laser Power Microlasers Division
Arthur P. Minich................. 54 President, Laser Power Display Division
Paul P. Wickman, Jr.............. 47 Senior Vice President and Chief Financial Officer
William G. Fredrick(1)........... 56 Director
Robert G. Klimasewski............ 53 Director
Richard C. Laird(2).............. 50 Director
Kenneth E. Olson(1)(2)........... 60 Director
John C. Stiska(1)(2)............. 55 Director
</TABLE>

- ---------------
(1) Member of the Compensation Committee

(2) Member of the Audit Committee

Glenn H. Sherman, Ph.D., the founder of the Company, has served as Chairman
of the Board and Chief Executive Officer and a director of the Company since
1979. From 1972 to 1979, Dr. Sherman served as a director and Vice President of
II-VI, Inc., an electro-optical component manufacturer. Dr. Sherman received a
B.S., M.S. and Ph.D. in Electrical Engineering from the University of Illinois
at Urbana.

Douglas H. Tanimoto, Ph.D. has served as the President of the Laser Power
Research Division since 1986 and has served as a director of the Company since
1984. Dr. Tanimoto served as the President of the Laser Power Optics Division
from 1986 to 1988. Dr. Tanimoto received a B.A. from the University of
California, Berkeley and an M.S. and Ph.D in Physics from the University of
Oregon.

Richard P. Scherer has served as President, Laser Power Optics Division,
since March 1996. Mr. Scherer served as Senior Vice President, Marketing and
Business Development of the Company from 1992 to March 1996. Mr. Scherer
received a B.S. in Electrical Engineering from Marquette University.

Dean T. Hodges, Ph.D. has served as the President of the Laser Power
Microlasers Division since March 1996. Dr. Hodges served as President of the
Laser Power Optics Division from March 1994 to March 1996. From 1984 to March
1994, Dr. Hodges served as Senior Vice President of Newport Corporation, a
manufacturer of instruments for the laser and optics industries. Dr. Hodges
received a B.S. in mathematics and physics from Humboldt State College and a
Ph.D. in Applied Physics from Cornell University.

Arthur P. Minich, a consultant of the Company, has served as President of
the Laser Power Display Division since December 1996. Mr. Minich has agreed to
become an employee of the Company upon the closing of this offering. From 1992
to November 1996, Mr. Minich served as Chief Technical Officer and Vice
President, Research and Development of Proxima Corporation, a manufacturer of
computer display projectors. From 1990 to 1992, Mr. Minich founded and served as
Chairman of the Board of Directors of PIVOTAL Corp., a developer of object
oriented business process engineering software. From 1988 to 1990, Mr. Minich
served as the Business Unit/Group General Manager of Eastman Kodak Company's
digital imaging systems business. Mr. Minich received a B.S. in Electrical
Engineering

35
<PAGE> 37

from Iowa State University and an M.S. in Electrical Engineering/Computer
Science from the Hewlett-Packard Honors Cooperative Program.

Paul P. Wickman, Jr. has served as Senior Vice President and Chief
Financial Officer of the Company since September 1992. From 1983 to 1992, he
served as Group Vice President, Finance and Controller of The Titan Corporation,
a diversified high technology company. Mr. Wickman received a B.S. in Accounting
from San Diego State University and is a Certified Public Accountant.

William G. Fredrick has served as a director of the Company since 1980. Mr.
Fredrick is the founder and President of Laser Mechanisms, Inc., a laser device
and accessory manufacturer, since 1980 and Oxid Corporation a laser device and
accessory manufacturer, since 1986. Mr. Fredrick received a B.S. in Engineering
Physics from the University of Michigan.

Robert G. Klimasewski has served as a director of the Company since 1980.
Mr. Klimasewski has been the President and Chief Executive Officer of
Transmation, Inc., an electronic instrumentation manufacturer since 1994. In
1972, Mr. Klimasewski founded Burleigh Instruments, Inc., a scientific
instrument and laser manufacturer, and has been Vice Chairman of Burleigh
Instruments since 1972. Mr. Klimasewski is also a director of Transmation and
Burleigh Instruments. Mr. Klimasewski received a B.S. and M.S. in Optical
Engineering from the University of Rochester.

Richard C. Laird has served as a director of the Company since 1987. Mr.
Laird joined Union Miniere Inc. in 1980 and currently serves as Executive Vice
President and director. Mr. Laird received a B.S. in Metallurgical Engineering
from Michigan Technological University.

Kenneth E. Olson has served as a director of the Company since October
1994. Mr. Olson is Chairman of Board and acting President and Chief Executive
Officer of Proxima. Mr. Olson previously served as President and Chief Executive
Officer of Proxima from December 1990 to January 1996. Mr. Olson is a director
of Proxima, Lidak Pharmaceuticals and Applied Digital Access, Inc. Mr. Olson
received an M.B.A. from Pepperdine University.

John C. Stiska has served as a director of the Company since April 1987.
Mr. Stiska served as outside legal counsel to the Company from 1983 to 1990. In
February 1996, Mr. Stiska joined QUALCOMM Incorporated as Corporate Senior Vice
President and has served as General Manager of the Technology Applications
Division since January 1997. From 1990 to January 1996, Mr. Stiska served as
President and Chief Executive Officer of Triton Group Ltd., an operating-holding
company that emerged in 1993 from the Chapter 11 bankruptcy proceedings of
Triton Group Ltd. and Intermark, Inc. Mr. Stiska received a B.B.A. and J.D. from
the University of Wisconsin.

DIRECTORS NOT CONTINUING AFTER OFFERING

Alain Godefroid, 48, has served as a director of the Company since November
1987 representing Union Miniere, s.a., one of the Company's investors. Mr.
Godefroid joined Union Miniere, s.a. as General Counsel in 1978 and currently
serves as Corporate Vice President, Legal and Environmental Affairs. Mr.
Godefroid received an L.L.M. from the University of Texas and a J.D. from the
Universite Libre de Bruxelles, Belgium.

Siegfried Meder, 68, has served as a director of the Company since February
1980. From 1976 until his retirement in 1996, Mr. Meder served as President of
American Schack, Inc., a subsidiary of the Schack Corporation, an engineering
firm specializing in improving the energy efficiency of industrial processes.
Mr. Meder received a Diplom Ingenieur in Chemical Engineering from the Technical
University of Aachen, Germany.

Marc Van Sande, Ph.D., 45, has served as a director of the Company since
July 1993. Since 1993, Dr. Van Sande has served as Business Unit Manager,
Electro Optic Materials, Union Miniere, s.a. From 1989 to 1993, Mr. Van Sande
served as Marketing and Research and Development Manager of the Business Unit
Germanium. Dr. Van Sande received a Ph.D. in Solid State Physics from the
University of Antwerp, Belgium and an Executive Master in Business
Administration from the Institute of Commerce in Antwerp.

36
<PAGE> 38

OTHER KEY EMPLOYEES

J. Bryan Blasutta, 44, has served as Vice President of North American Sales
of the Laser Power Optics Division since 1995. Prior to 1995, Mr. Blasutta
served in a number of managerial positions at the Company. Mr. Blasutta received
a B.A. in Communications from Ohio State University and an A.A.S. in Laser
Electro Optics from Texas State Technical Institute.

Dirk Claeys, 46, has served as Commercial Director of Radius Engineering
N.V., a wholly owned subsidiary of the Company since 1993. From 1990 to 1993,
Mr. Claeys served as Sales Manager of Oerlikon Precision Laser, a Swiss
manufacturer of industrial lasers. Mr. Claeys received a degree in electronics
engineering from the S.T.S. Institute in Ghent, Belgium.

Edward J. Danielewicz, Ph.D. 47, has served as Vice President of
International Sales of the Laser Power Optics Division since 1993. Dr.
Danielewicz has since served in a number of managerial positions since joining
the Company in 1981. From 1978 to 1981, Dr. Danielewicz served as Section Leader
of the Lasers and Optics Department of the Aerospace Corporation. Dr.
Danielewicz received a B.S. in Electrical Engineering from the University of
Pennsylvania and a Ph.D. in Electrical Engineering from the University of
Illinois at Urbana.

David Erickson, 47, has served as Vice President of Engineering and
Manufacturing Technology of the Laser Power Optics Division since May 1996. From
1986 to 1996, Mr. Erickson served as Director of Manufacturing of Optical
Corporation of America.

Graham Flint, 59, has served as the Company's Chief Technical Officer and
Vice President, of the Laser Power Research Division since 1988. From 1977 to
1988, Mr. Flint served as Director of the Air Force Developmental Optics
Facility at Martin Marietta Corporation. Mr. Flint received a B.S. in Physics
from the University of Birmingham, United Kingdom.

David E. Hargis, 32, has served as Vice President, Microlaser Technology in
the Laser Power Research Division since 1994. Mr. Hargis joined the Company in
1990 as a senior scientist. From 1988 to 1990, Mr. Hargis served as Research
Physicist at Energy Compression Research Corporation. Mr. Hargis received a B.S.
and M.S. in Physics from the University of California, San Diego.

Pedram Leilabady, Ph.D., 37, has served as Vice President,
Telecommunications Products in the Laser Power Microlasers Division since March
1997. From 1995 to 1997, he served as Market Operations Manager for Lucent
Technologies Inc. From 1988 to 1995, Dr. Leilabady held a variety of managerial
positions at ATx Telecom Systems, Inc., including Director of Product
Management. Dr. Leilabady received a Ph.D. in Physics from the University of
Kent, United Kingdom.

James D. McFarland, 41, has served as Vice President, General Counsel and
Secretary since August 1996. From 1995 to August 1996, Mr. McFarland practiced
with the law firm of Baker, Maxham, Jester & Meador in San Diego and, from 1991
to 1995, with the firm of Blakely, Sokoloff, Taylor & Zafman in Sunnyvale,
California. Mr. McFarland received a B.A. in Economics from the University of
Florida, a B.S. in Electrical Engineering from the University of California, San
Diego and a J.D. from the University of Florida School of Law.

Peter Muys, 44, has served as the General Manager of Radius Engineering
N.V. since 1990. From 1988 to 1990, Mr. Muys served as Manager of Research and
Development at Eurolaser Technology. Mr. Muys received a University Engineer
degree in Computer Science from the University of Leuven, Belgium and a
University Engineer degree in Physics from the University of Ghent, Belgium.

COMMITTEES OF THE BOARD OF DIRECTORS

The Audit Committee consists of Messrs. Laird, Olson and Stiska. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's audit and control functions.

37
<PAGE> 39

The Compensation Committee consists of Messrs. Frederick, Olson and Stiska.
The Compensation Committee makes recommendations regarding the Company's 1997
Plan and Employee Stock Purchase Plan as well as decisions concerning salaries
and incentive compensation for employees and consultants of the Company.

DIRECTOR COMPENSATION

The Company's outside directors receive $1,000 per meeting and $500 per
committee meeting as payment for their services as a member of the Board of
Directors and are reimbursed for certain expenses in connection with attendance
at Board and committee meetings. In January 1995, the Company issued a warrant
to purchase 16,666 shares of the Company's Common Stock at an exercise price of
$4.50 per share to Kenneth E. Olson. The warrant may be exercised in whole or in
part at any time by the holder as long as the holder remains a member of the
Board of Directors. The warrant expires in January 2005. In December 1996, the
Company issued warrants to purchase up to 20,000 shares of the Company's Common
Stock to Union Miniere Inc. and warrants to purchase up to 6,666 shares of the
Company's Common Stock to each of John Stiska, Kenneth Olson, Siegfried Meder,
Robert Klimasewski and William Fredrick at an exercise price of $4.50 per share.
The warrants expire in December 2006. Union Miniere Inc.'s warrant may be
exercised in whole or in part at any time by the holder as long as at least one
representative of the holder remains a member of the Board of Directors.
Following the completion of this offering, non-employee directors will be
eligible to participate in the 1997 Plan. In addition, entities affiliated with
certain of the directors have, from time to time, entered into transactions with
the Company. See "-- Stock Option Plans" and "Certain Transactions."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Compensation Committee of the Company was at any time an
officer or an employee of the Company or serves as a member of the Board of
Directors or Compensation Committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee other than Mr. Olson who is a director of Proxima.

38
<PAGE> 40

EXECUTIVE COMPENSATION

The following table sets forth the compensation awarded or paid to, or
earned by, the Company's Chief Executive Officer and the four other most highly
compensated executive officers of the Company who earned in excess of $100,000
in salary and bonus (collectively, the "Named Executive Officers") for services
rendered to the Company during the year ended August 31, 1996:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION($)(2)
- ------------------------------------------ ----------- ------- -------- ------------------
<S> <C> <C> <C> <C>
Glenn H. Sherman, Ph.D.................... 1996 170,600 25,000 12,200
Chairman of the Board and Chief
Executive Officer

Douglas H. Tanimoto, Ph.D................. 1996 145,500 14,500 8,300
President, Laser Power Research Division
and Director

Dean T. Hodges, Ph.D...................... 1996 140,500 24,000 4,200
President, Laser Power Microlasers
Division

Richard P. Scherer........................ 1996 139,000 18,000 2,100
President, Laser Power Optics Division

Paul P. Wickman........................... 1996 110,400 16,000 5,300
Senior Vice President and Chief
Financial Officer
</TABLE>

- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits received by the Named
Executive Officers which are available generally to all salaried employees
of the Company and certain perquisites and other personal benefits received
by the Named Executive Officers which do not exceed the lesser of $50,000 or
10% of any such officer's salary and bonus disclosed in this table. There
were no long-term compensation awards granted to the Named Executive
Officers during the fiscal year ended August 31, 1996.

(2) Includes the value of underlying term life insurance for split dollar life
insurance policies that are owned by Named Executive Officers. The policy
owners have assigned to the Company the proceeds from termination of the
policies or from payment of death benefits in an amount equal to the lesser
of the cash surrender value or the cumulative payments made by the Company
on their behalf. The insurance premium payments in fiscal 1996 amounted to
$10,000, $5,900, $3,800, $2,100 and $3,000 for Messrs. Sherman, Tanimoto,
Hodges, Scherer and Wickman, respectively. Also includes 401(k) Plan
employer matching contributions of $2,200, $2,400, $400, $0 and $2,300 for
Messrs. Sherman, Tanimoto, Hodges, Scherer and Wickman, respectively.

STOCK OPTION PLANS

1997 Equity Incentive Plan

In March 1997, the Company adopted the 1997 Plan. The 1997 Plan provides
for incentive stock options for employees (including officers and employee
directors), and nonstatutory stock options, stock bonuses, rights to purchase
restricted stock and stock appreciation rights (either independent of or
appurtenant to an option) for employees (including officers and employee
directors) and non-employee directors and consultants. The 1997 Plan is
administered by the Board of Directors, or a Committee appointed by the Board,
which determines the option awards to be granted, including exercise prices,
number of shares subject to the

39
<PAGE> 41

awards and the exercisability thereof, provided that such terms comply with the
provisions of the plan under which the option award is granted. The Company has
reserved 1,000,000 shares under the 1997 Plan.

The term of the stock options granted under the 1997 Plan may not exceed 10
years. The exercise price of options granted under the 1997 Plan is determined
by the Board of Directors, but in the case of an incentive stock option, cannot
be less than 100% of the fair market value of the Common Stock on the date of
grant, and, in the case of a nonstatutory stock option, cannot be less than 85%
of the fair market value of the Common Stock on the date of grant. Options
granted under the plans vest at the rate specified in the option agreement. No
stock option may be transferred by the optionee other than by will or the laws
of descent or distribution or, in certain limited instances, pursuant to a
domestic relations order, provided that an optionee may designate a beneficiary
who may exercise the option following the optionee's death and provided further
that a nonstatutory option may be transferred to the extent provided in the
nonstatutory option agreement. An optionee whose relationship with the Company
or any related corporation ceases for any reason (other than by death or
permanent and total disability) may exercise options in the three-month period
following such cessation (unless such options terminate sooner or later by their
terms). Options may be exercised for up to twelve months after an optionee's
relationship with the Company and related corporations ceases due to death or
disability (unless such options terminate sooner or later by their terms).

No incentive stock option or award to purchase restricted stock may be
granted to any person who, at the time of the grant, owns (or is deemed to own)
stock representing more than 10% of the total combined voting power of the
Company or any affiliate of the Company, unless the option exercise price is at
least 110% of the fair market value of the stock subject to the option (100% of
the fair market value in the case of restricted stock) on the date of the grant,
and the term of the option does not exceed five years from the date of the
grant. The aggregate fair market value, determined at the time of the grant, of
the shares of Common Stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year (under
all such plans of the Company and its affiliates) may not exceed $100,000. No
optionee shall be eligible for option grants or stock appreciation rights under
the 1997 Plan covering more than 300,000 shares at such time as Section
162(m) of the Internal Revenue Code of 1986 as amended (the "Code") becomes
applicable to the 1997 Plan.

Pursuant to the 1997 Plan, shares subject to stock awards that have expired
or otherwise terminated without having been exercised in full again become
available for the grant, but shares subject to exercised stock appreciation
rights will not again become available for the grant. The Board of Directors has
the authority to reprice outstanding options and stock appreciation rights and
to offer optionees and holders of stock appreciation rights the opportunity to
replace outstanding options and stock appreciation rights with new options or
stock appreciation rights for the same or a different number of shares.

Restricted stock purchase awards granted under the plan may be granted
pursuant to a repurchase option in favor of the Company in accordance with a
vesting schedule and at a price determined by the Board of Directors. Restricted
stock purchases must be at a price equal to at least 85% of the stock's fair
market value on the award date, but stock bonuses may be awarded in
consideration of past services without a purchase payment. Rights under a stock
bonus or restricted stock bonus agreement may not be transferred other than by
will, the laws of descent and distribution or a domestic relations order while
the stock awarded pursuant to such an agreement remains subject to the
agreement. Stock appreciation rights granted under the 1997 Plan may be tandem
rights, concurrent rights or independent rights.

Upon certain changes in control of the Company, all outstanding awards
under the 1997 Plan must either be assumed or substituted by the surviving
entity. If the surviving entity determines not to assume or substitute such
awards, then with respect to persons then performing services as employees,
directors or consultants, the time during which such awards may be exercised
shall be accelerated and the awards terminated if not exercised prior to such
change in control. All other awards shall be terminated if not exercised prior
to such event.

As of April 1, 1997, no options were outstanding under the 1997 Plan. The
1997 Plan will become effective upon the effectiveness of the initial public
offering of the Company's Common Stock. The 1997 Plan will terminate in March
2007 unless sooner terminated by the Board of Directors.

40
<PAGE> 42

1981 Stock Option Plan

The Company's Second Amended and Restated 1981 Stock Option Plan (the "1981
Plan") was adopted by the Board of Directors in September 1980, and was
subsequently amended in April 1986 and October 1990. The Board has authorized
and reserved an aggregate of 666,666 shares of Common Stock for issuance under
the 1981 Plan. The 1981 Plan provided for the grant of incentive stock options
under the Code and nonstatutory stock options to employees of the Company.

As of February 28, 1997, the Company had outstanding options to purchase
404,324 shares of Common Stock at a weighted average exercise price of $3.00
under the 1981 Plan. The 1981 Plan has been terminated by the Board of
Directors, and no additional options will be granted thereunder, but outstanding
options remain exercisable and continue to vest until they terminate in
accordance with their terms.

1993 Stock Option Plan

The Company's 1993 Stock Option Plan (the "1993 Plan") was adopted by the
Board of Directors in September, 1993. The Board has authorized and reserved an
aggregate of 666,666 shares of Common Stock for issuance under the 1993 Plan.
The 1993 Plan provided for the grant of incentive stock options to employees and
nonstatutory stock options to employees, directors and consultants of the
Company and its affiliates.

As of February 28, 1997, the Company had granted options to purchase
545,966 shares of Common Stock at a weighted average exercise price of $4.49
under the 1993 Plan. The 1993 Plan has been terminated by the Board of
Directors, and no additional options will be granted thereunder, but outstanding
options remain exercisable and continue to vest until they terminate in
accordance with their terms.

AGGREGATED FISCAL YEAR-END OPTION VALUES

The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options and warrants held
by the Named Executive Officers at August 31, 1996.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
AUGUST 31, 1996 (#) AUGUST 31, 1996 ($)(1)
------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Glenn H. Sherman, Ph.D............... 66,666 10,000 300,000 30,000
Douglas H. Tanimoto, Ph.D............ 200,000 6,666 900,000 20,000
Richard P. Scherer................... 120,000 86,666 540,000 380,000
Dean T. Hodges, Ph.D................. 80,000 126,666 240,000 380,000
Paul P. Wickman...................... 26,666 46,664 110,000 160,000
</TABLE>

- ---------------
(1) Based on the difference between the assumed initial public offering price of
$7.50 per share and the exercise price.

EMPLOYEE STOCK PURCHASE PLAN

In March 1997 the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 250,000 shares of Common Stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the commencement of the Purchase Plan. The offering period
for any offering may be no more than 27 months. The initial offering under the
Purchase Plan shall commence on the closing of the Company's initial public
offering date of the IPO date and terminate on February 28, 1998. Sequential
six-month offerings will occur thereafter.

Employees are eligible to participate if they are employed by the Company
or a subsidiary of the Company designated by the Board for at least 20 hours per
week and are customarily employed by the Company or a subsidiary of the Company
designated by the Board for at least five months per calendar year.

41
<PAGE> 43

Employees who participate in an offering have up to 15% of their earnings
withheld pursuant to the Purchase Plan. The amount withheld is then used to
purchase shares of the Common Stock on specified dates determined by the Board.
The price of Common Stock purchased under the Purchase Plan will be equal to 85%
of the lower of the fair market value of the Common Stock at the commencement
date of each offering period or the last day of the offering. Employees may end
their participation in the offering at any time during the offering period
except as otherwise provided in the offering. Participation ends automatically
on termination of employment with the Company.

In the event of a merger, reorganization, consolidation or liquidation
involving the Company, the Board has discretion to provide that each right to
purchase Common Stock will be assumed or an equivalent right substituted by the
successor corporation, or the Board may shorten the offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The Purchase Plan will
terminate in March 2007. The Board has the authority to amend or terminate the
Purchase Plan, provided, however, that no such action may adversely affect any
outstanding rights to purchase Common Stock.

401(K) PLAN

In September 1988, the Board adopted a tax qualified employee savings and
retirement plan covering the Company's employees, as amended and restated
effective January 1, 1997 (the "401(k) Plan"). Pursuant to the 401(k) Plan,
eligible employees may elect to reduce their current compensation by up to the
lesser of 16% of such compensation or the statutorily prescribed annual limit
($9,500 in 1997) and have the amount of such reduction contributed to the 401(k)
Plan. The 401(k) Plan provides for Company matching and profit sharing
contributions of 50% of the employee's contributions to a maximum of 6% of the
employee's compensation. Employees become 20% vested in the Company's matching
contributions after two years of service, and increase their vested percentages
by an additional 20% for each year of service thereafter. The 401(k) Plan is
intended to qualify under Section 401 of the Code, so that contributions to the
401(k) Plan, and income earned on the 401(k) Plan contributions, are not taxable
to employees until withdrawn from the 401(k) Plan, and so that contributions by
the Company will be deductible by the Company when made. The trustee under the
401(k) Plan, at the discretion of each participant, invests the 401(k) Plan
employee salary deferrals and Company contributions in selected investment
options.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements, dated April 1, 1997,
with the following executive officers: (1) Glenn Sherman, Ph.D., Chairman of the
Board and Chief Executive Officer, (2) Dean Hodges, Ph.D., President, Laser
Power Microlasers Division, (3) Richard Scherer, President, Laser Power Optics
Division, (4) Douglas Tanimoto, Ph.D., President, Laser Power Research Division,
and (5) Paul Wickman, Jr., Senior Vice President, Treasurer and Chief Financial
Officer. Pursuant to such employment agreements, Messrs. Sherman, Hodges,
Scherer, Tanimoto and Wickman receive annual salaries of $185,000, $145,000,
$147,000, $150,000 and $120,000, respectively. In addition, the Company will
enter into an employment agreement with Arthur Minich, President, Laser Power
Display Division, upon the closing of this offering at an annual salary of
$150,000. Annual bonuses are determined by the Board of Directors. The term of
each employment agreement is three years and may be extended by mutual written
consent of the parties. Each employment agreement also provides that if
employment is terminated for cause or the employee voluntarily resigns, the
employee shall receive only the salary payments earned prior to the date of
termination. If employment is terminated without cause, the employee will
receive consulting fees equal to his base salary times the number of months
equal to the number of years he would have been employed at the next anniversary
date of his employment. As consideration for the consulting fees, the employee
will provide consulting services on an as needed basis. In addition, during the
term of employment and for as long as the employee is receiving consulting fees,
he will not, subject to certain limitations, compete with the Company.

42
<PAGE> 44

LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent not prohibited by Delaware law as in effect from
time to time. The Company is also empowered under its Bylaws to enter into
indemnification contracts with its directors and officers and to purchase
insurance on behalf of any person it is required or permitted to indemnify.
Pursuant to this provision, the Company has entered into indemnification
agreements with each of its directors and executive officers.

In addition, the Company's Restated Certificate of Incorporation (the
"Restated Certificate") provides that directors of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
any breach of fiduciary duty as a director, except for liability (i) for any
breach of the directors' duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derives any improper personal benefit. The
Restated Certificate also provides that if the Delaware General Corporation Law
is amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of the Company's directors
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.

43
<PAGE> 45

CERTAIN TRANSACTIONS

In November 1987, Union Miniere, s.a. purchased the Debentures in the
aggregate principal amount of $1,660,000 from the Company. The Debentures are
currently held by Union Miniere Inc. The Debentures bear interest at a rate
which is equal to Wells Fargo Bank's prime rate plus 1%; provided, however, that
the rate of interest shall in no event be less than 5 1/2% per annum nor higher
than the lesser of 11 1/2% per annum or the maximum rate then permitted by law.
The Company has paid interest on the Debentures semi-annually. The Debentures
were originally due and payable on October 30, 1992, which was extended to
October 30, 1997. In December 1996, the Company issued warrants to purchase
20,000 shares of Common Stock at an exercise price of $4.50 per share to Union
Miniere Inc. in connection with the service of certain directors of the Company.
In March 1997, the Company entered into a letter agreement with Union Miniere
Inc. to extend the maturity date of the Debentures to November 2, 2000 and to
adjust the conversion price to $5.25 per share. In the event the per share price
of this offering is less than $6.75, the conversion price will be adjusted
downward so that for every cent the offering price is below $6.75 per share, the
conversion price will be reduced by one-half of one cent; provided however, that
in no event will the conversion price be reduced below $4.50 per share. As a
result, the maximum number of shares of Common Stock issuable upon conversion of
the Debentures is 368,888. In addition, Union Miniere Inc. was granted certain
registration rights covering all shares of Common Stock now owned by it or
acquired by it upon conversion of the Debentures or exercise of its warrants,
including the right to request that the Company register the resale of such
shares no earlier than one year after the closing of this offering. See
"Management -- Director Compensation," "Description of Capital
Stock -- Convertible Subordinated Debentures" and "Shares Eligible for Future
Sale."

In May 1993, Proxima purchased 83,333 shares of Common Stock from the
Company for $250,000. In January 1994, the Company entered into a Stock Purchase
Agreement with Proxima, pursuant to which Proxima has purchased shares of Series
A Preferred Stock for an aggregate purchase price of $6.4 million. In July 1996,
Proxima stated that it had written down a majority of its investment in the
Company because the microlaser technology developed by the Company will
initially be suited for the higher cost specialty projector markets that will
not be served by Proxima's products. In March 1997, the Company entered into a
letter agreement with Proxima, pursuant to which Proxima will exchange the
Series A Preferred Stock for 1,193,252 shares of Common Stock (an effective
conversion price of $5.40 per share) immediately prior to the completion of the
offering. In addition, Proxima was granted certain registration rights covering
all shares of Common Stock now owned by it or acquired by it in exchange for the
Series A Preferred Stock, including the right to request that the Company
register the resale of such shares no earlier than one year after the closing of
this offering. See "Shares Eligible for Future Sale."

In January 1994, the Company entered into a Cooperative Development and
License Agreement with Proxima which provides Proxima with certain rights to
display technology developed by the Company so long as Proxima continues to
provide funding to the Company or aggressively markets products using such
technology. Proxima has a right of first refusal regarding certain other
technologies developed by the Company relating to the video display market.

In June 1994, Proxima Corporation extended to the Company a $500,000 line
of credit to finance the purchase of equipment to support microlaser
development. In May 1995, the outstanding balance under the line of credit was
converted into a term note due and payable May 30, 1999. As of February 28,
1997, $218,000 principal amount was outstanding on the note. The note bears
interest at Imperial Bank's prime rate plus 1 1/2%. Principal and interest
payments under the note are due monthly. The amount owing under the note has
been guaranteed by Glenn H. Sherman, the Company's Chairman of the Board and
Chief Executive Officer. The Company intends to repay the outstanding principal
balance and any outstanding accrued interest upon the closing of this offering.

44
<PAGE> 46

The Company purchases a number of products for resale from Laser
Mechanisms, Inc. ("LMI"). William G. Fredrick, Jr., a director of the Company,
is the founder and president of LMI. In addition, LMI purchases laser optics
from the Company. The Company believes that such transactions between the
Company and LMI are on terms as favorable to the Company as such terms would
have been if negotiated between the Company and unaffiliated persons.

In December 1996, the Company issued an option to purchase 200,000 shares
of the Company's Common Stock at an exercise price of $4.50 per share to Arthur
P. Minich. The option vests over five years and may be exercised at any time
until its expiration in December 2006.

In addition, the Company has entered into indemnification agreements with
each of its directors and executive officers. See "Management -- Limitation of
Liability and Indemnification Matters."

45
<PAGE> 47

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of February 28, 1997, and as
adjusted to reflect the sale of this offering, by (i) each person who is known
by the Company to own beneficially more that 5% of the Company's outstanding
Common Stock, (ii) each Named Executive Officer, (iii) each of the Company's
directors, (iv) all current directors and executive officers as a group, and (v)
each Selling Stockholder. Except as indicated in the footnotes to this table,
the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
DIRECTORS, OFFERING(1) OFFERING(1)
EXECUTIVE OFFICERS ------------------- SHARES -------------------
AND 5% STOCKHOLDERS NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- --------------------------------------------- ---------- ------- -------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Proxima Corporation.......................... 1,276,585 30.4% -- 1,276,585 20.6%
9440 Carroll Park
San Diego, CA 92121-2298
Union Miniere Inc.(2)........................ 924,683 19.9 -- 924,683 13.9
13847 West Virginia Dr.
Lakewood, CO 80228
Glenn H. Sherman, Ph.D.(3)................... 629,082 14.7 -- 629,082 10.0
Laser Power Corporation
12777 High Bluff Road
San Diego, CA 92130
William G. Fredrick, Jr.(4).................. 372,122 8.8 -- 372,122 6.0
Laser Mechanisms, Inc.
P.O. Box 2064
Southfield, MI 48037
Douglas H. Tanimoto, Ph.D.(5)................ 283,933 6.4 -- 283,933 4.4
Laser Power Corporation
12777 High Bluff Road
San Diego, CA 92130
Dean T. Hodges, Ph.D.(6)..................... 121,333 2.8 -- 121,333 1.9
Richard P. Scherer(7)........................ 161,333 3.7 -- 161,333 2.5
Arthur P. Minich............................. -- -- -- -- --
Paul P. Wickman, Jr.(8)...................... 46,676 1.1 -- 46,676 *
James D. McFarland........................... -- -- -- -- --
Robert G. Klimasewski(9)..................... 69,491 1.6 -- 69,491 1.1
Richard C. Laird............................. 4,465 * -- 4,465 *
Kenneth E. Olson(10)......................... 25,798 * -- 25,798 *
John C. Stiska(11)........................... 126,564 3.0 -- 126,564 2.0
Alain Godefroid(12).......................... -- -- -- -- --
Siegfried Meder(13).......................... 93,469 2.2 -- 93,469 1.5
Marc Van Sande, Ph.D......................... -- -- -- -- --
All directors and executive officers as a
group (14 persons)(14)..................... 4,135,534 77.3 -- 4,135,534 56.3
SELLING STOCKHOLDERS
Milton M.T. & Rosalind Pao Chang............. 197,594 4.7 66,666 130,928 2.1
Tony & Lily Hsu Family Trust dated 11/8/89... 81,350 1.9 24,666 56,684 *
Other selling stockholders(15)............... 371,361 8.8 284,002 87,359 1.4
</TABLE>

- ---------------
* Represents beneficial ownership of less than 1%.

46
<PAGE> 48

(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Percentage of beneficial ownership is
based on 4,202,354 shares of Common Stock outstanding as of February 28,
1997 assuming the issuance of 1,193,252 shares of Common Stock in exchange
for the outstanding Series A Preferred Stock and 6,202,354 shares of Common
Stock outstanding after completion of this offering.

(2) Includes 368,888 shares subject to convertible debentures and 70,000 shares
subject to warrants exercisable within 60 days of February 28, 1997.

(3) Includes 82 shares held by Inamaria Sherman, wife of Mr. Sherman and 68,666
shares subject to options exercisable within 60 days of February 28, 1997.

(4) Includes 10,666 shares held of record by Laser Mechanisms, Inc., of which
Mr. Fredrick is the President, and 23,332 shares subject to warrants
exercisable within 60 days of February 28, 1997.

(5) Includes 201,333 shares subject to options exercisable within 60 days of
February 28, 1997.

(6) Includes 121,333 shares subject to options exercisable within 60 days of
February 28, 1997.

(7) Includes 1,333 shares subject to options exercisable within 60 days of
February 28, 1997 and 160,000 shares subject to a warrant exercisable
within 60 days of February 28, 1997.

(8) Includes 41,332 shares subject to options exercisable within 60 days of
February 28, 1997.

(9) Includes 23,332 shares subject to warrants exercisable within 60 days of
February 28, 1997.

(10) Includes 23,332 shares subject to warrants exercisable within 60 days of
February 28, 1997. Excludes 1,157,260 shares held by Proxima Corporation,
of which Mr. Olson is Chairman of the Board and acting Chief Executive
Officer.

(11) Includes 23,332 shares subject to warrants exercisable within 60 days of
February 28, 1997.

(12) Excludes 924,683 shares held of record by Union Miniere Inc., of which Mr.
Godefroid is the Corporate Vice President, Legal and Environmental Affairs.

(13) Includes 23,332 shares subject to warrants exercisable within 60 days of
February 28, 1997.

(14) Includes 433,970 shares issuable upon exercise of options exercisable
within 60 days of February 28, 1997, and 276,660 shares issuable upon
exercise of warrants exercisable within 60 days of February 28, 1997.

(15) Includes 3,333 shares of Common Stock issuable pursuant to options
exercisable within 60 days of February 28, 1997. Includes stockholders each
of whom owned less than 1% of the Company's Common Stock prior to the
offering and will own less than 1% of the Company's Common Stock following
the offering. Such stockholders (and the number of shares to be sold by
such stockholders in the offering) include: Sodero R. Arcia (735 shares);
Scott Arrington (6,660 shares); Allan R. Beach, Trustee UDT Floyd Earl Roe
Family Trust (502 shares); Andreas Caine (2,666 shares); Angela G. Caine
(1,660 shares); John C. and Isolde M. Caine, (3,333 shares); Hilary K.H.
and Marie Louise Chan, (1,960 shares); The Chicago Corporation (2,666
shares); Daniel Combs (666 shares); Verne R. Costich (4,000 shares); H.
Eugene Davis (33 shares); Jacques DeFrenne (416 shares); 1480 Associates
(34,960 shares); Stephen Fry (10,000 shares); Fulton Street Travel (13
shares); James R. Goode (8,000 shares); Sally A. Goode (6,962 shares);
Harris Bank Winnetka (16,329 shares); Alan D. Hiura (10,586 shares); Hiura
and Hiura DDS Inc. (Pension Trust) (10,000 shares); Ronald Hiura (1,000
shares); Thomas W. and Sharon E. James (4,834 shares); Claude D. Jones
(2,696 shares); Anthony L. and Rita J. Kendziorski (666 shares); Dennis
Kendziorski (3,410 shares); Ervin Kendziorski, (7,943 shares); Richard
Keyzer (8,456 shares); Clifford Kidney (84 shares); James A. King (216
shares); Allan Koljonen, Trustee of the Allan Koljonen Trust (4,300
shares); Roland N. Kumagai DDS Target Benefit Plan (5,751 shares); Ronald
MacFarlane (266 shares); Karen Matic Trustee, Gregory P. Matic Gift Trust
U/A 7/29/82 FBO Claire Matic (2,666 shares); Karen Matic Trustee, Gregory
P. Matic Gift Trust U/A 7/29/82 FBO Lauren Matic (2,000 shares); Karen
Matic Trustee, Gregory P. Matic Gift Trust U/A 7/29/82 FBO Steven Matic
(2,000 shares); John W. Matthews (3,333 shares); William G. May (7,119
shares); Maura Robbins, Trustee of the Maura Robbins Living Trust dated
December 31, 1982 (333 shares); Phillip E. Rollhaus (16,104 shares); L.E.
and Denise Rund (438 shares); Horst Sasse (5,000 shares); Michael A.
Schneider (666 shares); Nikom Shomglin (222 shares); Walter K. Silbert
(2,794 shares); George R. and Janet Lee Snyder (1,860 shares); Robert
Spiegler (33 shares); Bruce Sunderland (1,000 shares); Lee Sutter (2,000
shares); Gary Takessian (2,666 shares); Nora Jean and George Thorwood (333
shares); W. Peter Williams (533 shares); Clifford L. Willis (3,333 shares);
Thomas S. Wilson (40,201 shares); C. Paige Wilson Gift Trust u/a/d 3/18/87,
Arlinton Guenther, Trustee (8,666 shares); Kathryn J. Wilson Gift Trust
u/a/d 3/18/87, Arlington Guenther, Trustee (8,666 shares); and Gary L. Wirt
(10,266 shares).

47
<PAGE> 49

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock, $0.001 par value, and 3,000,000 shares of Preferred Stock.

COMMON STOCK

As of February 28, 1997, there were 3,009,102 shares of Common Stock
outstanding held of record by approximately 182 stockholders. The holders of
Common Stock are entitled to one vote per share on all matters to be voted on by
the stockholders. Subject to preferences that may be applicable to outstanding
shares of Preferred Stock, if any, the holders of Common Stock are entitled to
receive ratably such dividends as may be declared from time to time by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior liquidation rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive, conversion, subscription
or other such rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be sold in this
offering will be fully paid and non-assessable.

PREFERRED STOCK

Immediately prior to the closing of this offering, all outstanding shares
of Series A Preferred Stock will be exchanged for 1,193,252 shares of Common
Stock. See Note 5 of Notes to Consolidated Financial Statements for a
description of the outstanding Series A Preferred Stock.

Under the Restated Certificate, the Board of Directors has the authority to
issue up to 3,000,000 shares of Preferred Stock in one or more series and to fix
the rights, preferences, privileges, and restrictions granted to or imposed upon
such Preferred Stock, including dividend rights, conversion rights, terms of
redemption, liquidation preference, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by the stockholders. The Board of Directors, without stockholder
approval, can issue additional Preferred Stock with voting and conversion rights
which could adversely affect the voting power of the holders of Common Stock.
The issuance of Preferred Stock could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any shares of Preferred Stock.

DEBENTURES

Union Miniere Inc. is the holder of the Debentures in the aggregate
principal amount of $1,660,000 from the Company. The Debentures bear interest at
a rate which is equal to Wells Fargo Bank's prime rate plus 1%; provided,
however, that the rate of interest shall in no event be less than 5 1/2% per
annum nor higher than the lesser of 11 1/2% per annum or the maximum rate then
permitted by law. The Debentures are subordinate to all bank debt, limit the
aggregate amount of debt the Company can incur, require that the Company
maintain minimum tangible net worth levels (which vary with the number of
outstanding shares) and require that the Company maintain an average annual cash
flow coverage ratio of 1:1. The Debentures also provide that the Company may
declare dividends only if it meets a minimum average cash flow coverage ratio of
2-to-1. The Debentures were originally due and payable on October 30, 1992,
which maturity date was extended to October 30, 1997. In March 1997, the Company
entered into a letter agreement with Union Miniere Inc. to extend the maturity
date of the Debentures to November 2, 2000 and to adjust the conversion price to
$5.25 per share. In the event the per share price of this offering is less than
$6.75, the conversion price will be adjusted downward so that for every cent the
offering price is below $6.75 per share, the conversion price will be reduced by
one-half of one cent; provided however, that in no event will such conversion
price be reduced below $4.50 per share. As a result, the maximum number of
shares of Common Stock issuable upon conversion of the Debentures is 368,888.

48
<PAGE> 50

WARRANTS

As of February 28, 1997, there were warrants outstanding to purchase an
aggregate of 386,660 shares of Common Stock at a weighted average exercise price
of $3.21 per share.

REPRESENTATIVES' WARRANTS

The Company has also agreed to sell to the Representatives warrants to
purchase up to 200,000 shares of Common Stock at a price of $.001 per warrant.
The Representatives' Warrants will be exercisable for a period of four years,
commencing one year after the date of this prospectus, at an initial per share
exercise price equal to 130% of the price to the public set forth on the cover
page of this prospectus. The Representatives' Warrants are not redeemable by the
Company under any circumstances. Neither the Representatives' Warrants nor the
shares of Common Stock issuable upon exercise thereof may be transferred,
assigned or hypothecated until one year from the date of this prospectus, except
that they may be assigned, in whole or in part, to any successor, officer,
director, member or partner of the Representatives.

The holders of the Representatives' Warrants will have no voting, dividend
or other rights as stockholders of the Company unless and until the exercise of
the Representatives' Warrants. The number of securities deliverable upon any
exercise of the Representatives' Warrants or its underlying securities and the
exercise price of the Representatives' Warrants are subject to adjustment to
protect against any dilution upon the occurrence of certain events, including
issuance of stock dividends, stock splits, subdivision or combination of
outstanding stock and reclassification of stock.

The Company has agreed with the Representatives that if, during the
four-year period commencing one year following the date of this prospectus, the
Company registers any of its Common Stock for sale pursuant to a registration
statement (with the exception of Form S-4, Form S-8 or other inappropriate
form), it will use its best efforts, upon request of any of the holders of the
Representatives' Warrants and/or the underlying shares, to include such
securities as a part of the registration statement. The Company will bear all
the costs, except underwriting discounts and the Representatives' legal fees,
for one "piggy-back" registration.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is governed by the provisions of Section 203 of the Delaware
Law. In general, Section 203 prohibits a public Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within the preceding three years, did own) 15% or more of
the corporation's voting stock. The statute could have the effect of delaying,
deferring or preventing a change in control of the Company.

The Restated Certificate and Bylaws also require that, effective upon the
closing of this offering, any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or special
meeting of the stockholders and may not be effected by a consent in writing in
lieu of meeting. In addition, special meetings of the stockholders of the
Company may be called only by the Board of Directors, the Chairman of the Board
or the Chief Executive Officer of the Company. The Restated Certificate also
specifies that the authorized number of directors may be changed only by
resolution of the Board of Directors. These provisions may have the effect of
deterring hostile takeovers or delaying changes in control or management of the
Company.

TRANSFER AGENT AND REGISTRAR

American Securities Transfer & Trust Company has been appointed as the
transfer agent and registrar for the Company's Common Stock.

49
<PAGE> 51

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.

Upon completion of this offering, the Company will have outstanding
6,202,354 shares of Common Stock. Of these shares, the 2,450,000 shares sold in
the offering will generally be freely tradeable without restriction or further
registration under the Securities Act. The remaining approximately 3,750,000
shares of Common Stock may be sold in the public market as follows: (i)
approximately 230,000 shares will be eligible for immediate sale on the date of
this Prospectus; and (ii) upon expiration of lock-up agreements 180 days after
the Effective Date, approximately 475,000 additional shares will be eligible for
sale without restriction pursuant to Rule 144(k) and approximately 3,045,000
shares will be eligible for sale subject to the volume and other restrictions of
Rule 144. In addition, upon the expiration of a lock-up agreement 180 days after
the Effective Date, Union Miniere will be entitled to sell up to approximately
370,000 shares of Common Stock issuable to it upon conversion of the Debentures
subject to the volume and other restrictions of Rule 144. In addition, holders
of vested options to purchase approximately 64,000 shares of Common Stock as of
the date of this Prospectus will be entitled to sell all of such shares upon the
earlier of 90 days after the Effective Date or the filing of a Form S-8
registration statement with respect to such shares. Holders of additional vested
options and warrants to purchase an aggregate of approximately 992,000 shares of
Common Stock as of the date of this Prospectus will be entitled to sell all of
such shares upon expiration of lock-up agreements 180 days after the Effective
Date. Commencing one year after the completion of this offering, Proxima and
Union Miniere, which beneficially own an aggregate of approximately 2,200,000
shares of Common Stock, will be entitled to certain registration rights with
respect to such shares. The exercise of such rights by either Proxima or Union
Miniere could result in a large number of shares being sold in the public market
after one year from its closing of this offering. Future sales of shares by
existing stockholders could have an adverse effect on the market price of the
Common Stock or otherwise impair the Company's ability to raise additional
capital. See "Description of Capital Stock".

The Company's officers, directors and certain stockholders have agreed that
they will not, without the prior written consent of Cruttenden Roth
Incorporated, directly or indirectly offer, sell, contract to sell or otherwise
dispose of approximately 3,521,286 shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock during the
180-day period commencing on the Effective Date. The Company has agreed that it
will not, without the prior written consent of Cruttenden Roth Incorporated,
directly or indirectly offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock during such 180-day period except for the sale of
the shares of Common Stock in this offering, the issuance of options and shares
of Common Stock pursuant to employee benefit plans set forth in this Prospectus,
and the issuance of shares of Common Stock upon exercise of warrants or options
presently outstanding. Any shares subject to the lock-up agreements may be
released at any time without notice by Cruttenden Roth Incorporated.

In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date, an Affiliate of the Company, or person (or persons whose
shares are aggregated) who has beneficially owned Restricted Shares for at least
one year will be entitled to sell in any three-month period a number of shares
that does not exceed greater of (i) one percent of the then outstanding shares
of the Company's Common Stock or (ii) the average weekly trading volume of the
Company's Common Stock in the Nasdaq National Market during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject
to certain requirements relating to manner of sale, notice, and the availability
of current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an Affiliate of the
Company at any time during the 90

50
<PAGE> 52

days immediately preceding the sale and who has beneficially owned Restricted
Shares for at least two years is entitled to sell such shares under Rule 144(k)
without regard to the limitations described above.

An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144.

The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
Stock Plans and Purchase Plan. Based on the number of options outstanding and
options and shares reserved for issuance at February 28, 1997, such registration
statement would cover approximately 2,474,953 shares. Such registration
statement is expected to be filed and to become effective as soon as practicable
after the date hereof. Shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to Affiliates, be available
for sale in the open market, unless such shares are subject to vesting
restrictions with the Company or the lock up agreements described above. See
"Management."

51
<PAGE> 53

UNDERWRITING

Cruttenden Roth Incorporated and L.H. Friend, Weinress, Frankson & Presson,
Inc. are acting as the representatives (the "Representatives") of each of the
underwriters named below (the "Underwriters"). Subject to the terms and
conditions set forth in an underwriting agreement dated as of the date hereof
(the "Underwriting Agreement"), the Underwriters named below have severally
agreed to purchase, and the Company and the Selling Stockholders have agreed to
sell to them, the aggregate number of shares of Common Stock set forth opposite
their respective names:

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Cruttenden Roth Incorporated.........................................
L.H. Friend, Weinress, Frankson & Presson, Inc.......................
---------
Total...................................................... 2,450,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by counsel and
various other conditions. The nature of the Underwriters' obligations is such
that they are committed to purchase all of the above shares if any are
purchased. The Underwriters propose to offer the shares of Common Stock directly
to the public at the initial public offering price set forth on the cover page
of this prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other
dealers. After the offering, the offering price and other selling terms may be
changed by the Representatives.

Prior to consummation of the offering, there has been no public market for
the Common Stock of the Company. Accordingly, the initial public offering price
has been determined by negotiation between the Company and the Representatives.
Among the factors considered in determining the initial public offering price
were the Company's results of operations, the Company's current financing
condition, its future prospects, the market for its products and services, the
experience of its management, the economics of the industry in general, the
general condition of the equity securities market, the market capitalization and
stages of development of other companies which the Company and the
Representatives believed to be comparable to the Company and other relevant
factors. There can be no assurance that any active trading market will develop
for the Common Stock or as to the price at which the Common Stock may trade in
the public market from time to time subsequent to the offering made hereby.

The Company has granted to the Underwriters an option, expiring 45 days
from the date of this Prospectus, to purchase up to 367,500 additional shares of
Common Stock on the same terms as set forth on the cover page of this
Prospectus, solely to cover over-allotments, if any, incurred in the sale of the
shares of Common Stock offered hereby. If the Underwriters exercise the option,
each Underwriter will have a firm commitment, subject to certain conditions, to
purchase such number of additional shares of Common Stock as is proportionate to
such Underwriter's initial commitment to purchase shares from the Company.

In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with the Securities Exchange Act of 1934 pursuant to which such persons may bid
for or purchase Common Stock for the purpose of stabilizing its market price.
The Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and the Selling Stockholders,
and in such case may purchase Common Stock in the open market following
completion of the Offering to convert all or a portion of such shares of Common
Stock or may exercise the Underwriter's over-allotment option referred to above.
In addition, the Representative, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter (or dealer participating in the Offering), for
the account of the other Underwriters, the selling concession with respect to
Common Stock that is distributed in the Offering but subsequently purchased for
the account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a

52
<PAGE> 54

level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph are required, and, if they are
undertaken, they may be discontinued at any time.

The Company, its executive officers, directors and principal stockholders
and option holders have agreed that for a period of 180 days after the date of
this prospectus they will not, directly or indirectly, offer, sell, contract to
sell, grant any option to sell, or otherwise dispose of shares of Common Stock
or other securities which are substantially similar to the Common Stock or
securities convertible into or exercisable or exchangeable for or any rights to
purchase or acquire Common Stock or securities which are substantially similar
to the Common Stock without the prior written consent of Cruttenden Roth
Incorporated.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

The Company has also agreed to pay to the Representatives a non-accountable
expense equal to 2% of the aggregate offering price to the public for due
diligence and other out-of-pocket expenses.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by its counsel, Cooley Godward LLP, San Diego, California.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Gray Cary Ware & Freidenrich, San Diego, California.

EXPERTS

The Consolidated Financial Statements of Laser Power Corporation at August
31, 1995 and 1996, and for each of the three years in the period ended August
31, 1996 appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors and are included herein in
reliance upon such report given the authority of said firm as experts in
accounting and auditing.

53
<PAGE> 55

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement on Form SB-2 under the Act, with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and the exhibits
and schedules filed as part thereof. Statements contained in this Prospectus as
to the contents of any contract or document filed as an exhibit to the
Registration Statement is qualified by reference to such exhibit as filed. A
copy of the Registration Statement, and the exhibits and schedules thereto, may
be inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
SEC's regional offices located at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the Registration Statement may be obtained from such offices upon the payment of
the fees prescribed by the SEC. The SEC maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
SEC's World Wide Web site is http://www.sec.gov.

54
<PAGE> 56

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors......................................................... F-2
Consolidated Balance Sheets at August 31, 1995 and 1996 and at February 28, 1997
(unaudited).......................................................................... F-3
Consolidated Statements of Operations for the years ended August 31, 1994, 1995 and
1996 and the six months ended February 29, 1996 (unaudited) and February 28, 1997
(unaudited).......................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended August 31, 1994,
1995 and 1996 and the six months February 28, 1997 (unaudited)....................... F-5
Consolidated Statements of Cash Flows for the years ended August 31, 1994, 1995 and
1996 and the six months ended February 29, 1996 (unaudited) and February 28, 1997
(unaudited).......................................................................... F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE> 57

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Laser Power Corporation

We have audited the accompanying consolidated balance sheets of Laser Power
Corporation at August 31, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended August 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Laser Power
Corporation at August 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1996, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

San Diego, California
October 9, 1996,
except for Note 5 ("Changes in Capitalization"), as to which the date is
March 25, 1997

F-2
<PAGE> 58

LASER POWER CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
AUGUST 31, STOCKHOLDERS'
--------------------------- FEBRUARY 28, EQUITY AT
1995 1996 1997 FEBRUARY 28,
----------- ----------- ------------ 1997
(UNAUDITED) ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 257,309 $ 298,160 $ 128,375
Accounts receivable, net of
allowance for doubtful accounts
of $98,000 in 1995, $107,847 in
1996 and $151,452 in 1997........ 2,453,603 2,992,556 3,211,247
Inventories, net.................... 2,148,621 2,729,865 2,918,771
Other current assets................ 151,867 166,445 288,048
----------- ----------- -----------
Total current assets........ 5,011,400 6,187,026 6,546,441
Property and equipment, net........... 4,408,689 4,187,387 5,194,707
Intangibles and other assets (net of
accumulated amortization)........... 787,351 819,286 986,920
----------- ----------- -----------
Total assets................ $10,207,440 $11,193,699 $ 12,728,068
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank................ $ -- $ -- $ 773,998
Accounts payable.................... 1,269,876 1,339,596 1,927,285
Accrued compensation and related
expenses......................... 424,359 739,385 756,915
Other current liabilities........... 566,942 781,936 692,395
Current portion of long-term debt... 438,687 488,083 403,969
----------- ----------- -----------
Total current liabilities... 2,699,864 3,349,000 4,554,562
Deferred rent......................... 375,699 305,247 270,021
Long-term debt........................ 801,520 558,975 686,822
Subordinated convertible debentures... 1,660,000 1,660,000 1,660,000
Stockholders' equity:
Convertible preferred stock, $.125
par value ($.001 par value pro
forma):
Authorized -- 3,000,000 shares
Issued and
outstanding -- 1,143,196 shares
in 1995, and 1,610,891 shares
in 1996 and 1997 (none pro
forma)......................... 142,899 201,361 201,361 $ --
----------- ----------- -----------
Common stock, par value $.001:
Authorized -- 15,000,000 shares
Issued and
outstanding -- 3,000,475 shares
in 1995, 3,000,106 shares in
1996 and 3,009,102 shares in
1997 (4,202,354 shares pro
forma)......................... 3,001 3,000 3,009 4,202
Additional paid-in capital.......... 8,411,237 10,223,305 10,263,869 10,464,037
----------- ----------- -----------
Foreign currency translation
adjustment....................... 112,690 123,222 5,891 5,891
Accumulated deficit................. (3,999,470) (5,230,411) (4,917,467) (4,917,467)
----------- ----------- ----------- -----------
Total stockholders'
equity.................... 4,670,357 5,320,477 5,556,663 $ 5,556,663
----------- ----------- ----------- ===========
Total liabilities and
stockholders' equity...... $10,207,440 $11,193,699 $ 12,728,068
=========== =========== ===========
</TABLE>

See accompanying notes.

F-3
<PAGE> 59

LASER POWER CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
YEARS ENDED AUGUST 31, FEBRUARY FEBRUARY
--------------------------------------- 29, 28,
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales................. $10,157,944 $11,858,713 $15,194,472 $ 6,880,416 $ 7,995,334
Contract research and
development................ 1,727,069 2,714,208 3,712,967 1,682,110 3,128,526
----------- ----------- ----------- ----------- -----------
Total revenues........ 11,885,013 14,572,921 18,907,439 8,562,526 11,123,860
Costs and expenses:
Cost of product sales......... 6,550,060 7,994,255 9,887,809 4,600,566 5,474,848
Contract research and
development................ 1,307,872 2,058,873 2,941,947 1,262,414 2,502,224
Internal research and
development................ 1,567,851 2,857,452 2,689,182 1,460,823 389,409
Selling, general and
administrative............. 3,204,720 3,582,773 4,306,329 2,083,441 2,277,688
----------- ----------- ----------- ----------- -----------
Total costs and
expenses............ 12,630,503 16,493,353 19,825,267 9,407,244 10,644,169
----------- ----------- ----------- ----------- -----------
Income (loss) from operations... (745,490) (1,920,432) (917,828) (844,718) 479,691
Interest expense, net........... 267,849 325,928 299,832 152,626 144,507
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes......................... (1,013,339) (2,246,360) (1,217,660) (997,344) 335,184
Income taxes.................... -- 22,523 13,281 6,993 22,240
----------- ----------- ----------- ----------- -----------
Net income (loss)............... $(1,013,339) $(2,268,883) $(1,230,941) $(1,004,337) $ 312,944
=========== =========== =========== =========== ===========
Pro forma net income (loss) per
share......................... $ (0.29) $ 0.06
=========== ===========
Shares used in per share
computations.................. 4,311,000 4,887,000
=========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE> 60

LASER POWER CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
CONVERTIBLE FOREIGN
PREFERRED STOCK COMMON STOCK ADDITIONAL CURRENCY
-------------------- -------------------- PAID-IN TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT TOTAL
--------- -------- --------- -------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31,
1993...................... -- $ -- 2,987,153 $ 2,988 $ 3,963,166 $ (14,469) $ (717,248) $ 3,234,437
Issuance of preferred
stock warrants.......... -- -- -- -- 5,000 -- -- 5,000
Issuance of preferred
stock, net of issuance
cost of $26,773......... 382,172 47,771 -- -- 1,454,148 -- -- 1,501,919
Foreign currency
translation
adjustment.............. -- -- -- -- -- 58,726 -- 58,726
Net loss.................. -- -- -- -- -- -- (1,013,339) (1,013,339)
--------- -------- --------- ------ ----------- --------- ----------- -----------
Balance at August 31,
1994...................... 382,172 47,771 2,987,153 2,988 5,422,314 44,257 (1,730,587) 3,786,743
Issuance of preferred
stock................... 761,024 95,128 -- -- 2,948,968 -- -- 3,044,096
Issuance of common
stock................... -- -- 13,322 13 39,955 -- -- 39,968
Foreign currency
translation
adjustment.............. -- -- -- -- -- 68,433 -- 68,433
Net loss.................. -- -- -- -- -- -- (2,268,883) (2,268,883)
--------- -------- --------- ------ ----------- --------- ----------- -----------
Balance at August 31,
1995...................... 1,143,196 142,899 3,000,475 3,001 8,411,237 112,690 (3,999,470) 4,670,357
Issuance of preferred
stock................... 467,695 58,462 -- -- 1,812,318 -- -- 1,870,780
Repurchase of common
stock................... -- -- (369) (1) (250) -- -- (251)
Foreign currency
translation
adjustment.............. -- -- -- -- -- 10,532 -- 10,532
Net loss.................. -- -- -- -- -- -- (1,230,941) (1,230,941)
--------- -------- --------- ------ ----------- --------- ----------- -----------
Balance at August 31,
1996...................... 1,610,891 201,361 3,000,106 3,000 10,223,305 123,222 (5,230,411) 5,320,477
Issuance of common
stock................... -- -- 8,996 9 40,564 -- -- 40,573
Foreign currency
translation
adjustment.............. -- -- -- -- -- (117,331) -- (117,331)
Net income................ -- -- -- -- -- -- 312,944 312,944
--------- -------- --------- ------ ----------- --------- ----------- -----------
Balance at February 28, 1997
(Unaudited)............... 1,610,891 $201,361 3,009,102 $ 3,009 $10,263,869 $ 5,891 $ (4,917,467) $ 5,556,663
========= ======== ========= ====== =========== ========= =========== ===========
</TABLE>

See accompanying notes.

F-5
<PAGE> 61

LASER POWER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED AUGUST 31, ---------------------------
--------------------------------------- FEBRUARY 29, FEBRUARY 28,
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) from operations......... $(1,013,339) $(2,268,883) $(1,230,941) $ (1,004,337) $ 312,944
Adjustments to reconcile net income (loss)
to net cash used for operating
activities:
Depreciation and amortization........... 845,762 997,168 1,037,941 493,539 528,862
Loss on disposal of property and
equipment............................. -- -- 84,936 -- --
Deferred rent........................... (70,452) (70,452) (70,452) (35,226) (35,226)
Provision for losses on accounts
receivable............................ 20,000 6,000 9,847 4,510 43,605
Changes in operating assets and
liabilities:
Accounts receivable................... (81,547) (358,550) (548,800) (316,715) (262,296)
Inventories........................... (620,776) (518,900) (581,244) 20,486 (188,906)
Other current assets.................. 32,557 (52,414) (14,578) (19,143) (121,603)
Accounts payable...................... 537,029 294,144 69,720 259,275 587,689
Accrued compensation and related
expenses............................ 105,338 17,526 315,026 (47,323) 17,530
Other current liabilities............. 228,652 135,445 214,994 186,558 (89,541)
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
operating activities........... (16,776) (1,818,916) (713,551) (458,376) 793,058
INVESTING ACTIVITIES
Additions to property and equipment....... (1,306,478) (917,125) (813,089) (305,621) (1,616,161)
(Increase) decrease in intangibles and
other assets............................ (90,438) 11,648 (109,889) (71,476) (153,383)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities..................... (1,396,916) (905,477) (922,978) (377,097) (1,769,544)
FINANCING ACTIVITIES
Deferred public offering costs............ -- -- -- -- (51,603)
Proceeds from borrowings.................. 2,329,221 -- 251,046 447,933 1,019,950
Payments on borrowings.................... (2,136,975) (496,622) (444,195) (197,715) (202,219)
Net proceeds from issuance and repurchase
of stock................................ 1,506,919 3,084,064 1,870,529 580,000 40,573
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities..................... 1,699,165 2,587,442 1,677,380 830,218 806,701
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................. 285,473 (136,951) 40,851 (5,255) (169,785)
Cash and cash equivalents at beginning of
the period.............................. 108,787 394,260 257,309 257,309 298,160
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of the
period................................ $ 394,260 $ 257,309 $ 298,160 $ 252,054 $ 128,375
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for
interest................................ $ 255,000 $ 305,000 $ 313,000 $ 156,000 $ 150,000
=========== =========== =========== =========== ===========
Capital lease obligations................. $ 243,277 $ -- $ 78,880 $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 62

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION SUBSEQUENT TO AUGUST 31, 1996 AND PERTAINING TO FEBRUARY 28, 1997
AND THE
SIX-MONTH PERIODS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1997 IS UNAUDITED)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Presentation

Laser Power Corporation ("Laser Power" or the "Company") operates in one
business segment and designs, manufactures and markets high performance laser
optics for industrial, medical and military lasers and laser systems. Laser
optics are precision reflectors and mirrors used to reflect, collect and focus
laser beams. The Company's products are sold to laser system OEMs and end users
as original and replacement components in high power CO(2) and other lasers. The
Company's core competencies lie in its surface finishings and thin film
coatings, which are key elements involved in all high-performance laser optic
components. Such lasers are used in a variety of industrial processing
applications, such as sheet metal cutting, automobile body welding,
surface-hardening for engine cylinder walls, scribing and drilling delicate
ceramic circuits. The Company also sells high performance laser optics to
medical equipment OEMs for lower power CO(2) lasers used in certain therapeutic
and cosmetic procedures, including heart surgery and skin wrinkle removal. In
addition, the Company has developed very low absorption thin film coatings for
optics for anti-missile laser systems. The Company also conducts contract
research in the development and applications of advanced solid state lasers.
Substantially all of the Company's product revenues to date are attributable to
the sale of laser optics products for the industrial processing and medical
industries.

The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of Laser Power Corporation (the
"Company") and its wholly-owned subsidiaries Laser Power Optics de Mexico S.A.
de C.V. ("Laser Power Mexico") and Radius Engineering N.V. ("Radius"). The
Company operates through three divisions: Laser Power Optics, which manufactures
and sells optics components for lasers; Laser Power Research, which performs
funded contract research for commercial applications and for various agencies
and laboratories of the U.S. federal government; and Laser Power Microlasers,
which performs funded contract research for commercial applications and will be
the entity responsible for manufacturing and marketing the Company's new
microlaser technology. Laser Power Mexico performs a portion of the
manufacturing of Laser Power Optics division and does not sell products to
unaffiliated customers. All significant intercompany accounts and transactions
have been eliminated in consolidation.

Interim Financial Information (Unaudited)

The financial statements at August 31, 1996 and for the six-month periods
ended February 29, 1996 and February 28, 1997 include all adjustments
(consisting only of normal recurring adjustments) which management considers
necessary for a fair statement of the financial position at such dates and the
operating results and cash flows for those periods. Results for interim periods
are not necessarily indicative of results for the entire year or any future
periods.

Revenues

Product sales are recorded upon shipment. No one customer accounted for
more than 10% of revenues in 1994, 1995, 1996 or 1997. Export sales amounted to
43%, 45%, 44%, 43%, and 48% of total revenue in 1994, 1995, 1996 and for the
six-month periods ended February 29, 1996 and February 28, 1997, respectively.

Revenues from contract research and development involve both commercial and
governmental contracts and are recognized using the percentage-of-completion
method based on the ratio of costs incurred to date to total estimated costs.
Total revenues from government contracts were $1,454,000, $2,254,000,
$3,397,000, $1,531,000 and $1,748,000 in 1994, 1995 and 1996 and the six months
ended February 29, 1996 and

F-7
<PAGE> 63

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

February 28, 1997, respectively. Revenue in excess of billings of $326,000 and
$523,000 have been included in accounts receivable at August 31, 1996 and
February 28 1997, respectively. Net billings in excess of revenue of $149,000
have been included as other current liabilities in the accompanying balance
sheet at August 31, 1995. Provisions are made to recognize any anticipated
losses on contracts when losses become evident.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid investments
with maturities of three months or less when purchased.

Inventories

Inventories are stated at lower of cost (first-in, first-out) or market.
Market is based upon estimated net realizable value.

Depreciation and Amortization

Machinery, equipment and office furniture are depreciated over their
estimated useful lives (3 to 15 years) on the straight-line method and leasehold
improvements are amortized over the useful life of the asset or the lease term,
whichever is less.

Intangible assets consist primarily of goodwill, patents and licenses.
Goodwill is amortized over 20 years and patents and licenses (which are
primarily related to the microlaser technology) are amortized over the shorter
of the estimated useful life or the legal life. Amortization of patents is
initiated when the related technology is ready for commercial release.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of resources and expenses during the
reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk

The Company primarily sells its products to commercial, military and
medical companies. The Company performs periodic credit evaluations of its
customers and has not experienced significant losses with respect to its
accounts receivable.

Impairment of Long-Lived Assets

In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ("SFAS 121"), effective for fiscal years beginning
after December 15, 1995. SFAS 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. SFAS 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. Effective September
1, 1996, the Company adopted SFAS 121. The adoption of SFAS 121 did not have a
material effect on the Company's financial position or results of operations.

F-8
<PAGE> 64

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock Options

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation("SFAS 123"), effective for fiscal
years beginning after December 15, 1995. SFAS 123 established the fair
value-based method of accounting for stock-based compensation arrangements under
which compensation cost is determined using the fair value of the stock option
at the grant date and the number of options vested, and is recognized over the
periods in which the related services are rendered. The Company has elected to
continue with the current intrinsic value-based method, as allowed by SFAS 123,
and will disclose the pro forma effect of adopting the fair value-based method
in future fiscal years beginning with the fiscal year ending August 31, 1997.

Net Income (Loss) Per Share

Historical net income (loss) per share is computed using the weighted
average number of common shares and common stock equivalents outstanding during
the periods presented. Common equivalent shares result from stock options and
warrants. For loss periods, common equivalent shares are excluded from the
computation as their effect would be antidilutive, except that the Securities
and Exchange Commission requires common and common share equivalents issued
during the twelve-month period prior to the initial filing of a proposed public
offering, to be included in the calculation as if they were outstanding for all
periods presented (using the treasury stock method and the assumed initial
public offering price).

Historical net income (loss) per share information is as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED AUGUST 31, -----------------------------
---------------------------- FEBRUARY 29, FEBRUARY 28,
1994 1995 1996 1996 1997
------ ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net income (loss) per share............. $(0.31) $(0.68) $(0.37) $(0.30) $ 0.08
====== ====== ====== ====== ======
Shares used in historical per share
computations (in thousands)........... 3,318 3,325 3,331 3,331 3,817
====== ====== ====== ====== ======
</TABLE>

Supplemental net income (loss) per share has been computed as described
above and also gives effect to the repayment of a portion of the Company's
outstanding debt, and resulting reduction of interest expense, as if the
proceeds, in an amount equal to the outstanding balance under the credit
facility, anticipated by this initial public offering had been received at the
original date of issuance of the credit facility and the number of shares of
common stock whose proceeds are to be used to retire the debt were outstanding
from that same date (see Note 3).

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
AUGUST 31, FEBRUARY 28,
1996 1997
---------- ------------
<S> <C> <C>
Supplemental net income (loss) per share........................... $(0.35) $ 0.09
====== ======
Shares used in computing supplemental net income (loss) per share
(in thousands)................................................... 3,405 3,974
====== ======
</TABLE>

Pro Forma Net Income (Loss) Per Share and Unaudited Pro Forma Stockholders'
Equity

Pro forma net income (loss) per share has been computed as described above
and also gives effect to the conversion of the convertible preferred stock,
which will convert to common stock upon completion of the Company's initial
public offering, using the as if-converted method from the original dates of
issuance.

If the offering contemplated by this Prospectus is consummated, all of
convertible preferred stock outstanding as of the closing date will be converted
into 1,193,252 shares of common stock. Unaudited pro

F-9
<PAGE> 65

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

forma stockholders' equity at February 28, 1997, as adjusted for the conversion
of the convertible preferred stock, is presented in the accompanying balance
sheet.

2. SELECTED BALANCE SHEET DETAILS

<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY
--------------------------- 28,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Inventories:
Raw materials..................................... $ 547,405 $ 909,563 $ 1,095,197
Work in progress.................................. 945,413 1,148,439 1,300,343
Finished goods.................................... 655,803 671,863 523,231
---------- ----------- -----------
$ 2,148,621 $ 2,729,865 $ 2,918,771
========== =========== ===========
Property and equipment, at cost:
Machinery and equipment........................... $ 8,298,670 $ 8,375,250 $ 9,741,675
Leasehold improvements............................ 964,188 1,012,629 1,021,712
Office furniture and equipment.................... 685,975 861,952 880,603
---------- ----------- -----------
9,948,833 10,249,831 11,643,990
Less accumulated depreciation and amortization...... (5,540,144) (6,062,444) (6,449,283)
---------- ----------- -----------
$ 4,408,689 $ 4,187,387 $ 5,194,707
========== =========== ===========
Intangible and other assets:
Goodwill in foreign subsidiary.................... $ 549,100 $ 549,100 $ 549,100
Patents and licenses.............................. 190,915 302,513 457,221
Other............................................. 275,757 274,048 324,326
---------- ----------- -----------
1,015,772 1,125,661 1,330,647
Less accumulated amortization....................... (228,421) (306,375) (343,727)
---------- ----------- -----------
$ 787,351 $ 819,286 $ 986,920
========== =========== ===========
Accrued compensation and related expenses:
Accrued bonuses................................... $ -- $ 240,000 $ 175,938
Other............................................. 424,359 499,385 580,977
---------- ----------- -----------
$ 424,359 $ 739,385 $ 756,915
========== =========== ===========
Other current liabilities:
Customer advances................................. $ 58,597 $ 326,562 $ 222,187
Other............................................. 508,345 455,374 470,208
---------- ----------- -----------
$ 566,942 $ 781,936 $ 692,395
========== =========== ===========
</TABLE>

F-10
<PAGE> 66

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. LONG-TERM DEBT AND OTHER FINANCING AGREEMENTS

In January 1997, the Company renewed a line of credit with a bank, subject
to maximum advances of $2,000,000 and at 1% above the bank's prime rate (9.25%
at February 28, 1997). The line of credit expires on March 1, 1998 and there was
$773,998 outstanding under the line of credit at February 28, 1997.

Long-term debt consists of the following:

<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY
------------------------- 28,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Promissory note........................................ $ 104,205 $ 90,203 $ 84,020
Term note payable to bank.............................. 500,000 277,779 185,187
Equipment line of credit from bank..................... -- 172,166 418,118
Equipment financing from Proxima....................... 386,161 273,936 217,824
Other equipment financing.............................. 215,541 225,534 179,628
Other.................................................. 34,300 7,440 6,014
---------- ---------- ----------
1,240,207 1,047,058 1,090,791
Less current portion................................... 438,687 488,083 403,969
---------- ---------- ----------
$ 801,520 $ 558,975 $ 686,822
========== ========== ==========
</TABLE>

The promissory note is payable in monthly installments of principal and
interest of $1,840 through September 2001. Borrowings under the promissory note
are secured by equipment and bear interest at 8.25%.

The term note payable to the bank is due in monthly principal payments of
$18,519 plus interest, with the final installment consisting of all remaining
unpaid principal due and payable in full no later than December 31, 1997. The
term note bears interest at 2% above the bank's prime rate (10.25% at February
28, 1997).

In January 1997, the Company renewed an equipment line of credit with a
bank, subject to maximum advances of $1,500,000 at 1.25% above the bank's prime
rate (9.50% at February 28, 1997). Any advances, which will be used to purchase
new machinery, will be converted on August 1, 1997 to a five-year term loan so
long as the Company is in compliance with all the terms of the note. In the
event of noncompliance, the amount outstanding will be payable in full. There
were $418,118 in borrowings under the equipment line of credit at February 28,
1997.

All bank borrowings are secured by accounts receivable, inventory,
intangibles, and property and equipment, and contain restrictive covenants.
Restrictive covenants include the maintenance of minimum tangible net worth,
debt to equity and cash flow ratios, as well as restrictions on capital and
lease expenditures, investment levels in the Company's European subsidiary,
additional borrowings and payment of dividends.

Other equipment financing agreements are payable in monthly installments of
principal and interest through March 2001. Borrowings under this financing
agreements are secured by specific equipment and bear interest at rates ranging
from 9.0% to 10.7% at February 28, 1997.

The Company entered into an equipment line of credit agreement with Proxima
Corporation on June 30, 1994, which provided for maximum borrowings of $500,000.
In May 1995, the outstanding borrowings were converted to a four-year term loan
bearing interest at 1.5% above the bank's prime rate (9.75% at February 28,
1997). The amount owed under the note has been guaranteed by the Company's Chief
Executive Officer.

In November 1987, the Company obtained debt and equity financing from Union
Miniere ("Union"). The Company issued 483,333 shares of common stock for
$1,053,000 cash (net of stock issuance costs of $107,000) and subordinated
convertible debentures amounting to $1,340,000. In December 1988, the

F-11
<PAGE> 67

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company issued an additional $320,000 of subordinated convertible debentures to
Union. In March 1997, the maturity date of the debentures was extended to
November 2, 2000 and the conversion rate for which the debentures are
convertible into common stock was set at $5.25 per share but in no event will be
less than $4.50 per share. The debentures are subordinated to all bank
borrowings and interest is payable semi-annually at 1% above a bank's prime rate
(9.25% at February 28, 1997) subject to a minimum rate of 5 1/2% and a maximum
rate of the lesser of 11.5% or the maximum rate permitted by law. The debentures
provide for restrictive covenants similar to those of the bank borrowings.

Principal maturities on the subordinated convertible debentures and
long-term debt for each of the years ending subsequent to period ended February
28, 1997 are as follows:

4. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax liabilities and assets are as follows:

<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax liability-depreciation............................... $ (574,000) $ (535,000)
Deferred tax assets:
Tax basis operating loss and credit carryforwards............... 2,091,000 2,504,000
Other........................................................... 148,000 273,000
----------- -----------
Total deferred tax assets......................................... 2,239,000 2,777,000
----------- -----------
Net deferred tax assets........................................... 1,665,000 2,242,000
Valuation allowance............................................... (1,665,000) (2,242,000)
----------- -----------
Net deferred tax accounts......................................... $ -- $ --
=========== ===========
</TABLE>

At August 31, 1996, the Company has net operating loss carryforwards for
federal and California income tax purposes of approximately $5,810,000 and
$2,844,000, respectively, which may be applied against future taxable income.
These carryforwards will begin to expire in 2001 and 1998, respectively, unless
previously utilized.

The Company also has investment tax credit, research and development
credit, and targeted jobs tax credit carryforwards at August 31, 1996
aggregating approximately $300,000. These tax credit carryforwards will expire
in 1997 through 2004 unless previously utilized.

Other than alternative minimum taxes, no income taxes have been provided
for the six-month period ended February 28, 1997 because of the utilization of
tax loss carryforwards.

If the offering contemplated by this Prospectus is consummated, a change in
ownership of more than 50% within a three-year period will have occurred;
however, management believes that the Company's ability to use the net operating
loss and tax credit carryforwards will not be materially impaired.

F-12
<PAGE> 68

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. STOCKHOLDERS' EQUITY

Preferred Stock and Proxima Corporation

In January 1994, the Company executed a Stock Purchase Agreement with
Proxima Corporation ("Proxima"). Under the terms of the agreement, Proxima could
invest in the Company through purchases of Series A Preferred Stock. The Company
and Proxima also entered into an agreement providing for technology licenses and
cooperative development of new technologies (see Note 8). During 1994, 1995 and
1996, Proxima purchased 382,172, 761,024 and 467,695 shares of Series A
Preferred Stock, respectively.

The preferred shares have voting rights and are convertible into the
Company's common shares on a 1 for 1.35 basis, subject to antidilution
adjustments under certain circumstances. The preferred shares may be converted
with the approval of the preferred shareholders. Proceeds on liquidation of the
Company are distributed to holders of the Series A Preferred Stock and common
stock pro rata, on an as-converted basis, except in certain liquidations
involving bankruptcy cases, where the Series A Preferred stockholders will have
preferences. Series A Preferred stockholders are entitled to receive annual
dividends of $0.32 per share, when and if declared by the Company's Board of
Directors, prior to and in preference to any dividends being declared or paid on
the Common Stock. Such dividends are non-cumulative.

Common Stock Warrants

Periodically the Company will issue warrants to purchase common stock to
outside directors and affiliates in lieu of stock options. During the three year
period ended August 31, 1996, and the six months ended February 28, 1997, 83,330
and 53,330 warrants were issued to outside directors, respectively. The warrants
vest over periods of up to five years. Warrants to purchase 333,330 and 386,660
shares of common stock at $3.00 to $4.50 per share are outstanding at December
31, 1996 and February 28, 1997, respectively. The warrants begin to expire from
September 2002 to December 2006.

Stock Option Plans

The Company's 1981 Stock Option Plan was approved by the Board of Directors
and stockholders in 1981, as amended (the "1981 Plan"). The Company's 1993 Stock
Option Plan (the "1993 Plan") was approved by the Board of Directors and
stockholders in September 1993. The exercise price of options granted will be at
fair market value of the stock on the date of grant and the options granted vest
over a five-year period commencing on the date of grant in increments of twenty
percent and are exercisable for a period of ten years after the date of grant.
Options to purchase 249,679 and 120,700 shares of common stock remain eligible
for future grant at August 31, 1996 and February 28, 1997, respectively. (See
"Changes in Capitalization" below).

The Company has 266,665 and 474,663 non-qualified options outstanding as of
August 31, 1996 and February 28, 1997, respectively. These options were issued
to certain employees and an officer and at those dates, 66,665 and 274,663
options were issued outside the Company's option plans. The Company issued stock
options to purchase shares of the Company's common stock at $3.00 to $4.50 per
share. These options will begin to expire on December 2001 to February 2007.

F-13
<PAGE> 69

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes stock option and warrant activity:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
--------- -------------- ---------
<S> <C> <C> <C>
Outstanding at August 31, 1993......................... 966,000 $3.00 -- $4.50 $3.16
Granted.............................................. 241,667 4.50 -- 6.00 4.76
Exercised............................................ -- -- --
Canceled............................................. (8,333) 3.00 -- 4.50 3.00
--------- ----------- -----
Outstanding at August 31, 1994......................... 1,199,334 3.00 -- 6.00 3.48
Granted.............................................. 127,333 4.50 4.50
Exercised............................................ -- -- --
Canceled............................................. (148,358) 3.00 -- 6.00 4.85
--------- ----------- -----
Outstanding at August 31, 1995......................... 1,178,309 3.00 -- 4.50 3.40
Granted.............................................. 131,325 4.50 4.50
Exercised............................................ (6) 4.50 4.50
Canceled............................................. (81,656) 3.00 -- 4.50 3.46
--------- ----------- -----
Outstanding at August 31, 1996......................... 1,227,972 3.00 -- 4.50 3.51
Granted.............................................. 390,307 3.00 -- 4.50 4.49
Exercised............................................ -- -- --
Canceled............................................. (6,666) 3.00 3.00
--------- ----------- -----
Outstanding at February 28, 1997....................... 1,611,613 $3.00 -- $4.50 $3.75
========= =========== =====
</TABLE>

At February 28, 1997, the weighted-average exercise price of outstanding
stock options and warrants is $3.92 and $3.21, respectively, and 912,647
combined options and warrants are exercisable.

In March 1997, the Company recorded $100,000 of deferred compensation for
66,666 options granted in March. This amount represents the difference between
the option exercise price and the deemed fair market value for financial
statement presentation purposes. The deferred compensation will be amortized
over the vesting period.

Shares Reserved for Future Issuance

The following shares of common stock are reserved for future issuance:

<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1996 1997
---------- ------------
<S> <C> <C>
Subordinated convertible debentures.......................... 553,333 368,888
Stock options:
Granted and outstanding.................................... 894,642 1,224,953
Reserved for future grants................................. 249,679 120,700
Warrants..................................................... 333,330 386,660
--------- ---------
2,030,984 2,101,201
========= =========
</TABLE>

Changes in Capitalization

On March 25, 1997, the Company's Board of Directors authorized a 1 for 1.5
reverse stock split of all outstanding common stock. In addition, the Board also
approved a change in the par value of the

F-14
<PAGE> 70

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

common stock from $0.125 to $0.001. All share and per share amounts and stock
option and warrants data have been restated to retroactively reflect these
changes in capitalization.

On March 25, 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan"). The 1997 Plan provides for incentive stock options and stock
appreciation rights appurtenant thereto for employees (including officers and
employee directors), and nonstatutory stock options, stock appreciation rights
appurtenant thereto, stock bonuses and rights to purchase restricted stock for
employees (including officers and employee directors) and non-employee directors
and consultants. The 1997 Plan is administered by the Board of Directors, or a
Committee appointed by the Board, which determines the option awards to be
granted, including exercise prices, number of shares subject to the awards and
the exercisability thereof, provided that such terms comply with the provisions
of the plan under which the option award is granted. Non-employee directors are
eligible only for nonstatutory grants. The term of the stock options granted
under the 1997 Plan may not exceed 10 years. The exercise price of options
granted under the 1997 Plan is determined by the Board of Directors, but in the
case of an incentive stock option, cannot be less than 100% of the fair market
value of the common stock on the date of grant and in the case of a
non-statutory stock option, cannot be less than 85% of the fair market value of
the common stock on the date of grant. Options granted under the plans vest at
the rate specified in the option agreement. The Board has authorized and secured
an aggregate of 1,000,000 shares of common stock for issuance under the Plan.
The Board also terminated the 1981 and 1993 Plans and no additional options will
be granted thereunder, but outstanding options remain exercisable and continue
to vest until they terminate in accordance with their terms.

On March 25, 1997 the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 250,000 shares of common stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the commencement of the Purchase Plan. The initial offering
under the Purchase Plan shall commence on the closing of the Company's initial
public offering contemplated by this Prospectus and terminate on February 28,
1998. Sequential six-month offerings will occur thereafter.

6. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases its operating, office and other facilities as well as
certain vehicles and equipment under noncancellable operating leases. The
operating and office facilities lease contains escalation clauses and an option
for renewal and extends through December 2001. The operating and office
facilities lease also provides for deferred payment terms; however, for
financial reporting purposes, rent expense is recorded evenly over the term of
the lease.

Deferred rent, as reflected in the accompanying consolidated balance sheet,
represents the difference between rent expense accrued and amounts paid under
the terms of the lease agreement. Future minimum rental payments (excluding
common area maintenance charges) required under the operating leases for each of
the remaining fiscal years ending subsequent to February 28, 1997 are as
follows:

<TABLE>
<S> <C>
1997............................................................. $ 403,000
1998............................................................. 788,000
1999............................................................. 714,000
2000............................................................. 688,000
2001............................................................. 684,000
Thereafter....................................................... 228,000
----------
$3,505,000
==========
</TABLE>

F-15
<PAGE> 71

LASER POWER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Rent expense was $849,000, $844,000, $914,000, $508,000, and $540,000 for
the years ended August 31, 1994, 1995, 1996 and the six months ended February
29, 1996 and February 28, 1997, respectively.

Contingency

The Company has a license to certain technology used in its blue
microlaser. During 1996, the Company received a letter from a third party
claiming that the Company's license was granted improperly by the licensor.
While the Company believes that such license was properly granted, there can be
no assurance that the Company's license would not be voided if subjected to a
legal challenge. In such an event, there can be no assurance that the Company
would be able to obtain a replacement license on favorable terms, if at all.
Failure to obtain such a license would result in a material adverse effect to
the Company's business, financial condition and results of operations.

7. EMPLOYEE BENEFIT PLAN

The Company has a defined contribution plan (the "Plan") covering
substantially all employees that have been employed for at least one year and
meet certain age requirements. Employees may contribute up to 16% of their
compensation per year (subject to a maximum limit by federal tax law). The
Company is obligated to make matching contributions equal to 50% of the
employee's contribution up to a maximum of 6% of the employee's compensation. At
the discretion of the Board of Directors, the Company may make additional
contributions. The Company's contributions charged to operations were $42,000,
$57,000, $79,000, $36,000 and $56,000 for the years ended August 31, 1994, 1995,
1996 and the six months ended February 29, 1996 and February 28, 1997,
respectively.

8. AGREEMENT WITH PROXIMA CORPORATION

The Company and Proxima Corporation, a major shareholder, have entered into
a Cooperative Development and License Agreement (the "Agreement") which provides
for licensing of existing technology and technologies being developed under the
terms of the agreement.

Included in internal research and development expenses in the accompanying
statements of operations are $779,000, $2,107,000, $1,630,000 and $981,000 spent
in accordance with the Agreement in 1994, 1995, 1996 and the six months ended
February 29, 1996, respectively. No amounts were spent during the six month
period ended February 28, 1997 and at February 28, 1997, the Company has
committed to spend an additional $131,000.

F-16
<PAGE> 72
================================================================================

NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
The Company........................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Consolidated Financial
Information......................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 23
Management............................ 35
Certain Transactions.................. 44
Principal and Selling Stockholders.... 46
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 50
Underwriting.......................... 52
Legal Matters......................... 53
Experts............................... 53
Additional Information................ 54
Index to Consolidated Financial
Statements.......................... F-1

------------------------

UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

================================================================================

2,450,000 SHARES

[LOGO]

COMMON STOCK

--------------------

PROSPECTUS

--------------------

CRUTTENDEN ROTH
INCORPORATED

L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.

, 1997

================================================================================
<PAGE> 73

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its Directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").

The Registrant's Amended and Restated Certificate of Incorporation and
Bylaws include provisions to (i) eliminate the personal liability of its
directors for monetary damages resulting from breaches of their fiduciary duty
to the extent permitted by Section 102(b)(7) of the General Corporation Law of
Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify its
Directors and officers to the fullest extent permitted by Section 145 of the
Delaware Law, including circumstances in which indemnification is otherwise
discretionary. Pursuant to Section 145 of the Delaware Law, a corporation
generally has the power to indemnify its present and former directors, officers,
employees and agents against expenses incurred by them in connection with any
suit to which they are or are threatened to be made, a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
they reasonably believed to be in or not opposed to, the best interests of the
corporation and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as Directors
and officers. These provisions do not eliminate the Directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each Director will continue to be subject to liability for breach of
the Director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the Director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the Director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the Director's duty to the Registrant or its
stockholders when the Director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the Director's duty to the Registrant or its stockholders, for improper
transactions between the Director and the Registrant and for improper
distributions to stockholders and loans to Directors and officers. The provision
also does not affect a Director's responsibilities under any other law, such as
the federal securities law or state or federal environmental laws.

The Registrant has entered into indemnity agreements with each of its
Directors and executive officers that require the Registrant to indemnify such
persons against expenses, judgments, fines, settlements and other amounts
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which any such person may be made a
party by reason of the fact that such person is or was a Director or an
executive officer of the Registrant or any of its affiliated enterprises,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful. The indemnification agreements also set
forth certain procedures that will apply in the event of a claim for
indemnification thereunder. The Registrant has entered into similar indemnity
agreements with certain of its key employees.

At present, there is no pending litigation or proceeding involving a
Director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or Director.

The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.

II-1
<PAGE> 74

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee and the NASD filing fee.

<TABLE>
<S> <C>
Registration fee................................................. $ 7,257
NASD filing fee.................................................. 3,091
Nasdaq Stock Market Listing Application fee...................... 32,750
Printing and engraving expenses.................................. 125,000
Underwriters non-accountable expense allowance(1)................ 365,573
Legal fees and expenses.......................................... 250,000
Accounting fees and expenses..................................... 115,000
Transfer agent and registrar fees................................ 10,000
Miscellaneous.................................................... 1,902
----------
Total(2)............................................... $ 912,500
==========
</TABLE>

- ---------------

(1) The expense allowance will be $422,625 if the over-allotment option is
exercised.

(2) The total expenses will be $969,552 if the over-allotment option is
exercised.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

Since April 1, 1994, the Registrant has sold and issued the following
unregistered securities:

(a) From April 1, 1994 to April 1, 1997, the Company issued an
aggregate of 404,324 options to purchase shares of Common Stock under its
1993 Stock Option Plan, and 6 shares of Common Stock through the exercise
of an option granted under such plan. The Registrant relied on the
exemption provided by Rule 701 under the Security Act. See
"Management -- Stock Option Plans."

(b) In January 1995, the Registrant issued and sold an aggregate of
8,879 shares of Common Stock, for an aggregate purchase price of $39,957 to
certain members of the board of directors in lieu of payment of board fees.
The Registrant relied on the exemption provided by Section 4(2) under the
Securities Act.

(c) On January 31, 1995, the Company issued a warrant to purchase
16,666 shares of Common Stock to Kenneth E. Olson, a director. The
Registrant relied on the exemption provided by Section 4(2) under the
Securities Act.

(d) On December 7, 1996, the Company issued warrants to purchase an
aggregate of 53,330 shares of Common Stock to the outside directors of the
Company. The Registrant relied on the exemption provided by Section 4(2)
under the Securities Act.

(e) On December 7, 1996, the Registrant issued an option to purchase
200,000 Shares of Common Stock at an exercise price of $4.50 per share to
Arthur P. Minich, an executive officer of the Company. The Registrant
relied on the exemption provided by Rule 4(2) under the Securities Act.

(f) From January 1994 to December 1996, the Registrant issued and
sold, from time to time, 1,073,927 shares of Series A Preferred Stock at an
aggregate purchase price of $6.4 million to Proxima Corporation. The
Registrant relied on the exemption provided by Section 4(2) under the
Securities Act.

(g) In January 1997, the Registrant issued and sold an aggregate of
6,012 shares of its Common Stock, for an aggregate purchase price of
$27,057, to certain the members of the board of directors in lieu of
payment of board fees. The Registrant relied on the exemption provided by
Section 4(2) under the Securities Act.

(h) In December 1996, the Company issued an option to purchase 66,666
shares of the Company's Common Stock at an exercise price of $4.50 per
share to Pedram Leilabady. The option vests over five years and may be
exercised at any time until its expiration in December 2006. The Registrant
relied on the exemption provided by Rule 701 under the Security Act.

II-2
<PAGE> 75

The recipients of the above-described securities represented their
intention to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock certificates
issued in such transactions. All recipients had adequate access, through
employment or other relationships, to information about the Registrant.

ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ---------------------------------------------------------------------------------
<C> <C> <S>
1.1** -- Form of Underwriting Agreement.
3.1* -- Registrant's Amended and Restated Certificate of Incorporation.
3.2* -- Registrant's Amended and Restated Bylaws.
3.3 -- Registrant's Amended and Restated Certificate of Incorporation, to be effective
upon the closing of this offering.
3.4 -- Registrant's Amended and Restated Bylaws, to be effective upon the closing of
this offering.
4.1* -- Series A Convertible Subordinated Debenture issued by Registrant in favor of
Union Mines, Inc. (currently held by Union Miniere Inc.) dated December 29, 1988.
4.2* -- Series A Convertible Subordinated Debenture issued by Registrant in favor of
Union Mines, Inc. (currently held by Union Miniere Inc.) dated June 18, 1990.
5.1** -- Opinion of Cooley Godward LLP.
10.1* -- Form of Indemnity Agreement entered into between Registrant and its directors and
executive officers.
10.2* -- Registrant's Second Amended and Restated 1981 Stock Option Plan (the "1981
Plan").
10.3* -- Incentive Stock Option Agreement Under Registrant's 1981 Plan.
10.4* -- Registrant's 1993 Stock Option Plan (the "1993 Plan").
10.5* -- Form of Incentive Stock Option Agreement under the 1993 Plan.
10.6* -- Form of Nonstatutory Stock Option Agreement under the 1993 Plan.
10.7* -- Registrant's 1997 Equity Incentive Plan (the "1997 Plan").
10.8* -- Form of Incentive Stock Option Agreement under the 1997 Plan.
10.9* -- Form of Nonstatutory Stock Option Agreement under the 1997 Plan.
10.10* -- Registrant's Employee Stock Purchase Plan.
10.11** -- Form of Warrant issued by Registrant in favor of Cruttenden Roth Incorporated and
L. H. Friend, Weinress, Frankson & Pressor, Inc.
10.12* -- Form of Warrant issued by Registrant in favor of certain directors of Registrant
and attached schedule.
10.13+ -- Cooperative Development and License Agreement between Proxima Corporation and
Registrant dated January 11, 1994.
10.14** -- Registration Rights Agreement between Registrant, Union Miniere Inc. and Proxima
Corporation dated April , 1997.
10.15+* -- Assignment Agreement between Registrant and ATx Telecom Systems, Inc. dated
September 30, 1996.
10.16* -- Credit Agreement between Registrant and Wells Fargo dated January 29, 1997.
10.17* -- Form of Employment Agreement and attached schedule.
10.18* -- Consulting Agreement dated December 1, 1996 between Registrant and Arthur P.
Minich.
</TABLE>

II-3
<PAGE> 76

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ---------------------------------------------------------------------------------
<C> <C> <S>
10.19* -- Lease dated August 30, 1984 between the Registrant and Highlands Park Partnership
and amendments thereto.
10.20+ -- Development and Manufacturing Agreement for RGB -- Lasers between Registrant and
LDT GmbH & Co. dated July 1, 1996.
11.1* -- Statement re: computation of per share earnings.
21.1* -- Subsidiaries of the Registrant.
23.1* -- Consent of Ernst & Young LLP, Independent Auditors.
23.2 -- Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1* -- Power of Attorney. Reference is made to page II-5.
27.1* -- Financial Data Schedule.
</TABLE>

- ---------------

* Previously filed.

** To be filed by Amendment.

+ Confidential Treatment will be requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.

(b) Schedules

All schedules are omitted because they are not required, are not applicable
or the information is included in the consolidated financial statements or notes
thereto.

ITEM 28. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 15 or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes:

(1) That, for purposes of determining any liability under the Act,
each filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Exchange Act (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to
the securities offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

(2) That, for purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(3) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 77

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned,
in the City of San Diego, County of San Diego, State of California, on the 22nd
day of April, 1997.

By: /s/ GLENN H. SHERMAN
------------------------------------
Glenn H. Sherman
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------- ---------------

<S> <C> <C>
/s/ GLENN H. SHERMAN, PH.D. Chairman of the Board and Chief April 22, 1997
- ------------------------------------- Executive Officer (Principal
Glenn H. Sherman, Ph.D. Executive Officer)

*/s/ PAUL P. WICKMAN, JR. Senior Vice President, Chief April 22, 1997
- ------------------------------------- Financial Officer and Secretary
Paul P. Wickman, Jr. (Principal Financial and
Accounting Officer)

*/s/ DOUGLAS H. TANIMOTO, PH.D. Director April 22, 1997
- -------------------------------------
Douglas H. Tanimoto, Ph.D.
*/s/ WILLIAM G. FREDRICK Director April 22, 1997
- -------------------------------------
William G. Fredrick

*/s/ ALAIN GODEFROID Director April 22, 1997
- -------------------------------------
Alain Godefroid

*/s/ ROBERT G. KLIMASEWSKI Director April 22, 1997
- -------------------------------------
Robert G. Klimasewski

*/s/ RICHARD C. LAIRD Director April 22, 1997
- -------------------------------------
Richard C. Laird

*/s/ SIEGFRIED MEDER Director April 22, 1997
- -------------------------------------
Siegfried Meder
</TABLE>

II-5
<PAGE> 78

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------- ---------------

*/s/ KENNETH E. OLSON Director April 22, 1997
- -------------------------------------
Kenneth E. Olson

*/s/ JOHN C. STISKA Director April 22, 1997
- -------------------------------------
John C. Stiska

*/s/ MARC VAN SANDE Director April 22, 1997
- -------------------------------------
Marc Van Sande

*By:/s/ GLENN H. SHERMAN
--------------------------------
Glenn H. Sherman
Attorney-in-fact
</TABLE>

II-6
<PAGE> 79

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGES
- ------ ------------------------------------------------------------------------ ------------
<C> <C> <S> <C>
1.1** -- Form of Underwriting Agreement..........................................
3.1* -- Registrant's Amended and Restated Certificate of Incorporation..........
3.2* -- Registrant's Amended and Restated Bylaws................................
3.3 -- Registrant's Amended and Restated Certificate of Incorporation, to be
effective upon the closing of this offering.............................
3.4 -- Registrant's Amended and Restated Bylaws, to be effective upon the
closing of this offering................................................
4.1* -- Series A Convertible Subordinated Debenture issued by Registrant in
favor of Union Mines, Inc. (currently held by Union Miniere Inc.) dated
December 29, 1988.......................................................
4.2* -- Series A Convertible Subordinated Debenture issued by Registrant in
favor of Union Mines, Inc. (currently held by Union Miniere Inc.) dated
June 18, 1990...........................................................
5.1** -- Opinion of Cooley Godward LLP...........................................
10.1* -- Form of Indemnity Agreement entered into between Registrant and its
directors and executive officers........................................
10.2* -- Registrant's Second Amended and Restated 1981 Stock Option Plan (the
"1981 Plan")............................................................
10.3* -- Incentive Stock Option Agreement Under Registrant's 1981 Plan...........
10.4* -- Registrant's 1993 Stock Option Plan (the "1993 Plan")...................
10.5* -- Form of Incentive Stock Option Agreement under the 1993 Plan............
10.6* -- Form of Nonstatutory Stock Option Agreement under the 1993 Plan.........
10.7* -- Registrant's 1997 Equity Incentive Plan (the "1997 Plan")...............
10.8* -- Form of Incentive Stock Option Agreement under the 1997 Plan............
10.9* -- Form of Nonstatutory Stock Option Agreement under the 1997 Plan.........
10.10* -- Registrant's Employee Stock Purchase Plan...............................
10.11** -- Form of Warrant issued by Registrant in favor of Cruttenden Roth
Incorporated and L. H. Friend, Weinress, Frankson & Pressor, Inc........
10.12* -- Form of Warrant issued by Registrant in favor of certain directors of
Registrant and attached schedule........................................
10.13+ -- Cooperative Development and License Agreement between Proxima
Corporation and Registrant dated January 11, 1994.......................
10.14** -- Registration Rights Agreement between Registrant, Union Miniere Inc. and
Proxima Corporation dated April , 1997................................
10.15+* -- Assignment Agreement between Registrant and ATx Telecom Systems, Inc.
dated September 30, 1996................................................
10.16* -- Credit Agreement between Registrant and Wells Fargo dated January 29,
1997....................................................................
10.17* -- Form of Employment Agreement and attached schedule......................
10.18* -- Consulting Agreement dated December 1, 1996 between Registrant and
Arthur P. Minich........................................................
10.19* -- Lease dated August 30, 1984 between the Registrant and Highlands Park
Partnership and amendments thereto......................................
</TABLE>

<PAGE> 80

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGES
- ------ ------------------------------------------------------------------------ ------------
<C> <C> <S> <C>
10.20+ -- Development and Manufacturing Agreement for RGB -- Lasers between
Registrant and LDT GmbH & Co. dated July 1, 1996........................
11.1* -- Statement re: computation of per share earnings.........................
21.1* -- Subsidiaries of the Registrant..........................................
23.1* -- Consent of Ernst & Young LLP, Independent Auditors.
23.2 -- Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.........
24.1* -- Power of Attorney. Reference is made to page II-5.......................
27.1* -- Financial Data Schedule.................................................
</TABLE>

- ---------------

* Previously filed.

** To be filed by Amendment.

+ Confidential Treatment will be requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.

<PAGE> 1

EXIBHIT 3.3

RESTATED CERTIFICATE OF INCORPORATION
OF
LASER POWER CORPORATION

Laser Power Corporation, a corporation organized and existing under
the laws of the General Corporation Law of the State of Delaware, hereby
certifies as follows:

1. The name of the corporation is Laser Power
Corporation. The corporation was originally incorporated under the same name,
and the original Certificate of Incorporation of the corporation was filed with
the Secretary of State of the State of Delaware on July 11, 1983 and has been
subsequently amended from time to time.

2. Pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware, this Restated Certificate of
Incorporation restates and integrates and further amends the provisions of the
Certificate of Incorporation.

3. This Restated Certificate of Incorporation set forth
below was approved by the corporation's Board of Directors and stockholders and
was duly adopted in accordance with the provisions of Section 228, 242 and 245
of the General Corporation Law of the State of Delaware.

4. The text of the Certificate of Incorporation is
hereby restated and further amended to read in its entirety as follows:

The name of this corporation is Laser Power Corporation.

II.

The address of the registered office of the corporation in the State
of Delaware is 15 North Street, City of Dover, County of Kent, and the name of
the registered agent of the corporation in the State of Delaware at such
address is the Incorporating Services, Ltd. whose address is the same as above.

III.

The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.

IV.

A. CLASSES OF STOCK. This Corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total

1.
<PAGE> 2
number of shares which the Corporation is authorized to issue is Eighteen
Million (18,000,000) shares, par value $.001 per share. Fifteen Million
(15,000,000) shares shall be Common Stock and Three Million (3,000,000) shares
shall be Preferred Stock.

B. The Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is authorized to fix the number of shares
of any series of Preferred Stock and to determine the designation of any such
series. The Board of Directors is also authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and, within the limits and
restrictions stated in any resolution or resolutions constituting any series,
to increase or decrease (but not below the number of shares of any such series
then outstanding) the number of shares of any series subsequent to the issue to
shares of that series.

For the management of the business and for the conduct of the affairs
of the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any
class thereof, as the case may be, it is further provided that:

A. 1. The management of the business and the conduct of the
affairs of the corporation shall be vested in its Board of Directors. The
number of directors which shall constitute the whole Board of Directors shall
be fixed exclusively by one or more resolutions adopted by the Board of
Directors.

2. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
directors shall be elected at each annual meeting of stockholders for a term of
one year. Each director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.

2.
<PAGE> 3
3. A. Prior to the date on which the corporation is
no longer subject to Section 2115 of the California Corporations Code (the
"Qualifying Record Date") and subject to the rights of the holders of any
series of Preferred Stock, the Board of Directors or any individual director
may be removed from office at any time (i) with cause by the affirmative vote
of the holders of a majority of the voting power of all the then-outstanding
shares of voting stock of the corporation, entitled to vote at an election of
directors (the "Voting Stock") or (ii) without cause by the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
voting power of all the then-outstanding shares of the Voting Stock.

B. After the Qualifying Record Date and subject
to any limitations imposed by law, Section A(3)(a) above shall no longer apply
and subject to the rights of the holders of any series of Preferred Stock, no
director shall be removed without cause. Subject to any limitations imposed by
law, the Board of Directors or any individual director may be removed from
office at any time with cause by the affirmative vote of the holders of a
majority of the Voting Stock.

4. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance
with the preceding sentence shall hold office for the remainder of the full
term of the director for which the vacancy was created or occurred and until
such director's successor shall have been elected and qualified.

B. 1. Subject to paragraph (h) of Section 43 of the Bylaws,
the Bylaws may be altered or amended or new Bylaws adopted by the affirmative
vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power
of all of the then-outstanding shares of the Voting Stock. The Board of
Directors shall also have the power to adopt, amend, or repeal Bylaws.

2. The directors of the corporation need not be elected
by written ballot unless the Bylaws so provide.

3. No action shall be taken by the stockholders of the
corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws or by written consent of stockholders in accordance
with the Bylaws prior to the closing of the Initial Public Offering. Following
the closing of the Initial Public Offering no action shall be taken by the
stockholders by written consent.

3.
<PAGE> 4
4. Advance notice of stockholder nominations for the
election of directors and of business to be brought by stockholders before any
meeting of the stockholders of the corporation shall be given in the manner
provided in the Bylaws of the corporation.

VI.

A. A director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit. If the Delaware General Corporation Law is amended
after approval by the stockholders of this Article to authorize corporate
action further eliminating or limiting the personal liability of directors,
then the liability of a director shall be eliminated or limited to the fullest
extent permitted by the Delaware General corporation Law, as so amended.

B. Any repeal or modification of this Article VII shall be
prospective and shall not affect the rights under this Article VII in effect at
the time of the alleged occurrence of any act or omission to act giving rise to
liability or indemnification.

VII.

A. The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, except as provided in paragraph
B. of this Article VIII, and all rights conferred upon the stockholders herein
are granted subject to this reservation.

B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this
Certificate of Incorporation or any Preferred Stock Designation, the
affirmative vote of the holders of at least sixty-six and two-thirds percent

4.
<PAGE> 5
(66-2/3%) of the voting power of all of the then-outstanding shares of the
Voting Stock, voting together as a single class, shall be required to alter,
amend or repeal Articles V, VI, VII and VIII.

IN WITNESS WHEREOF, Laser Power Corporation has caused this Second
Restated Certificate of Incorporation to be signed and attested by its duly
elected officers this ___ day of _______________, 1997.

LASER POWER CORPORATION

By:___________________________________
Glenn H. Sherman,
Chief Executive Officer

ATTEST:

___________________________________________________
Paul P. Wickman, Jr.,
Secretary

<PAGE> 1
EXHIBIT 3.4

AMENDED AND RESTATED

BYLAWS

LASER POWER CORPORATION

(A DELAWARE CORPORATION)

<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I. OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Other Offices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE II. CORPORATE SEAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 3. Corporate Seal.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE III. STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Section 4. Place Of Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 5. Annual Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 6. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 7. Notice Of Meetings.. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 8. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 9. Adjournment And Notice Of Adjourned Meetings . . . . . . . . . . . . . 5
Section 10. Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 11. Joint Owners Of Stock. . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 12. List Of Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 13. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 14. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

ARTICLE IV. DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Section 15. Number And Term Of Office. . . . . . . . . . . . . . . . . . . . . . . 8
Section 16. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 18. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 19. Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 20. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 21. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 22. Quorum And Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 23. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 24. Fees And Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 25. Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 26. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

ARTICLE V. OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Section 27. Officers Designated. . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 28. Tenure And Duties Of Officers. . . . . . . . . . . . . . . . . . . . . 13
Section 29. Delegation Of Authority. . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>

i.
<PAGE> 3
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 30. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 31. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

ARTICLE VI. EXECUTION OF CORPORATE INSTRUMENTS AND VOTING . . . . . . . . . . . . . . .
OF SECURITIES OWNED BY THE CORPORATION . . . . . . . . . . . . . . . . . . . 15

Section 32. Execution Of Corporate Instruments . . . . . . . . . . . . . . . . 15
Section 33. Voting Of Securities Owned By The Corporation . . . . . . . . . . . 16

ARTICLE VII. SHARES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Section 34. Form And Execution Of Certificates . . . . . . . . . . . . . . . . 16
Section 35. Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 36. Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 37. Fixing Record Dates . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 38. Registered Stockholders . . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE VIII. OTHER SECURITIES OF THE CORPORATION . . . . . . . . . . . . . . . . . . . 19

Section 39. Execution Of Other Securities . . . . . . . . . . . . . . . . . . . 19

ARTICLE IX. DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Section 40. Declaration Of Dividends . . . . . . . . . . . . . . . . . . . . . 20
Section 41. Dividend Reserve . . . . . . . . . . . . . . . . . . . . . . . . . 20

ARTICLE X. FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Section 42. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

ARTICLE XI. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Section 43. Indemnification Of Directors, Executive Officers,
Other Officers, Employees And Other Agents . . . . . . . . . . . . 20

(a) Directors And Executive Officers . . . . . . . . . . . . . . . . . 20
(b) Other Officers, Employees and Other Agents . . . . . . . . . . . . 21
(c) Expenses . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(d) Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

ARTICLE XII. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Section 44. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

ARTICLE XIII. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Section 45. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>

ii.
<PAGE> 4
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE XIV. LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Section 46. Loans To Officers . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>

iii.

<PAGE> 5

AMENDED AND RESTATED

BYLAWS

LASER POWER CORPORATION

(A DELAWARE CORPORATION)

ARTICLE I

OFFICES

SECTION 1. REGISTERED OFFICE. The registered office of the
corporation in the State of Delaware shall be in the City of Dover, County of
Kent.

SECTION 2. OTHER OFFICES. The corporation shall also have and
maintain an office or principal place of business at such place as may be fixed
by the Board of Directors, and may also have offices at such other places, both
within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.

ARTICLE II

CORPORATE SEAL

SECTION 3. CORPORATE SEAL. The corporate seal shall consist of
a die bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to
be impressed or affixed or reproduced or otherwise.

ARTICLE III

STOCKHOLDERS' MEETINGS

SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of
the corporation shall be held at such place, either within or without the State
of Delaware, as may be designated from time to time by the Board of Directors,
or, if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.

SECTION 5. ANNUAL MEETINGS.

(A) The annual meeting of the stockholders of the
corporation, for the purpose of election of directors and for such other
business as may lawfully come before

1.
<PAGE> 6
it, shall be held on such date and at such time as may be designated from time
to time by the Board of Directors.

(B) At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be:
(A) specified in the notice of meeting (or any supplement thereto) given by or
at the direction of the Board of Directors, (B) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or (C)
otherwise properly brought before the meeting by a stockholder. For business
to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary
of the corporation. To be timely, a stockholder's notice must be delivered to
or mailed and received at the principal executive offices of the corporation
not later than the close of business on the one hundred and twentieth (120th)
day prior to the first anniversary of the preceding year's annual meeting;
provided, however, that in the event that no annual meeting was held in the
previous year or the date of the annual meeting has been changed by more than
thirty (30) days from the date contemplated at the time of the previous year's
proxy statement, notice by the stockholder to be timely must be so received not
earlier than the close of business on the ninetieth (90th) day prior to such
annual meeting and not later than the close of business on the later of the
sixtieth (60th) day prior to such annual meeting or, in the event public
announcement of the date of such annual meeting is first made by the
corporation fewer than seventy (70) days prior to the date of such annual
meeting, the close of business on the tenth (10th) day following the day on
which public announcement of the date of such meeting is first made by the
corporation. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting: (i) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting,
(ii) the name and address, as they appear on the corporation's books, of the
stockholder proposing such business, (iii) the class and number of shares of
the corporation which are beneficially owned by the stockholder, (iv) any
material interest of the stockholder in such business and (v) any other
information that is required to be provided by the stockholder pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934
Act"), in his capacity as a proponent to a stockholder proposal.
Notwithstanding the foregoing, in order to include information with respect to
a stockholder proposal in the proxy statement and form of proxy for a
stockholder's meeting, stockholders must provide notice as required by the
regulations promulgated under the 1934 Act. Notwithstanding anything in these
Bylaws to the contrary, no business shall be conducted at any annual meeting
except in accordance with the procedures set forth in this paragraph (b). The
chairman of the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought before the
meeting and in accordance with the

2.
<PAGE> 7
provisions of this paragraph (b), and, if he should so determine, he shall so
declare at the meeting that any such business not properly brought before the
meeting shall not be transacted.

(C) Only persons who are nominated in accordance with the
procedures set forth in this paragraph (c) shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of
the corporation may be made at a meeting of stockholders by or at the direction
of the Board of Directors or by any stockholder of the corporation entitled to
vote in the election of directors at the meeting who complies with the notice
procedures set forth in this paragraph (c). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant
to timely notice in writing to the Secretary of the corporation in accordance
with the provisions of paragraph (b) of this Section 5. Such stockholder's
notice shall set forth (i) as to each person, if any, whom the stockholder
proposes to nominate for election or re-election as a director: (A) the name,
age, business address and residence address of such person, (B) the principal
occupation or employment of such person, (C) the class and number of shares of
the corporation which are beneficially owned by such person, (D) a description
of all arrangements or understandings between the stockholder and each nominee
and any other person or persons (naming such person or persons) pursuant to
which the nominations are to be made by the stockholder, and (E) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the 1934 Act (including without
limitation such person's written consent to being named in the proxy statement,
if any, as a nominee and to serving as a director if elected); and (ii) as to
such stockholder giving notice, the information required to be provided
pursuant to paragraph (b) of this Section 5. At the request of the Board of
Directors, any person nominated by a stockholder for election as a director
shall furnish to the Secretary of the corporation that information required to
be set forth in the stockholder's notice of nomination which pertains to the
nominee. No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the procedures set forth in
this paragraph (c). The chairman of the meeting shall, if the facts warrant,
determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if he should so
determine, he shall so declare at the meeting, and the defective nomination
shall be disregarded.

(D) For purposes of this Section 5, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a document
publicly filed by the corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.

3.
<PAGE> 8

SECTION 6. SPECIAL MEETINGS.

(A) Special meetings of the stockholders of the
corporation may be called, for any purpose or purposes, by (i) the Chairman of
the Board of Directors, (ii) the Chief Executive Officer, (iii) the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board of Directors for adoption), or (iv) by the holders of shares entitled to
cast not less than ten percent (10%) of the votes at such meeting, and shall
be held at such place, on such date, and at such time as the Board of Directors,
shall fix.

(B) If a special meeting is called by any person or
persons other than the Board of Directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board of Directors, the
Chief Executive Officer, or the Secretary of the corporation. No business may
be transacted at such special meeting otherwise than specified in such notice.
The Board of Directors shall determine the time and place of such special
meeting, which shall be held not less than thirty-five (35) nor more than one
hundred twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within sixty (60) days after the receipt of the request, the person
or persons requesting the meeting may set the time and place of the meeting and
give the notice. Nothing contained in this paragraph (b) shall be construed as
limiting, fixing, or affecting the time when a meeting of stockholders called
by action of the Board of Directors may be held.

SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by
law or the Certificate of Incorporation, written notice of each meeting of
stockholders shall be given not less than ten (10) nor more than sixty (60)
days before the date of the meeting to each stockholder entitled to vote at
such meeting, such notice to specify the place, date and hour and purpose or
purposes of the meeting. Notice of the time, place and purpose of any meeting
of stockholders may be waived in writing, signed by the person entitled to
notice thereof, either before or after such meeting, and will be waived by any
stockholder by his attendance thereat in person or by proxy, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Any stockholder so waiving notice
of such meeting shall be bound by the proceedings of any such meeting in all
respects as if due notice thereof had been given.

4.
<PAGE> 9
SECTION 8. QUORUM. At all meetings of stockholders, except
where otherwise provided by statute or by the Certificate of Incorporation, or
by these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a
quorum, any meeting of stockholders may be adjourned, from time to time, either
by the chairman of the meeting or by vote of the holders of a majority of the
shares represented thereat, but no other business shall be transacted at such
meeting. The stockholders present at a duly called or convened meeting, at
which a quorum is present, may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. Except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws, all action taken by the holders of a majority of the vote
cast, excluding abstentions, at any meeting at which a quorum is present shall
be valid and binding upon the corporation; provided, however, that directors
shall be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors. Where a separate vote by a class or classes or series is required,
except where otherwise provided by the statute or by the Certificate of
Incorporation or these Bylaws, a majority of the outstanding shares of such
class or classes or series, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and, except where otherwise provided by the statute or by the
Certificate of Incorporation or these Bylaws, the affirmative vote of the
majority (plurality, in the case of the election of directors) of the votes
cast, including abstentions, by the holders of shares of such class or classes
or series shall be the act of such class or classes or series.

SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any
meeting of stockholders, whether annual or special, may be adjourned from time
to time either by the chairman of the meeting or by the vote of a majority of
the shares casting votes, excluding abstentions. When a meeting is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, the corporation may transact
any business which might have been transacted at the original meeting. If the
adjournment is for more than thirty (30) days or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.

SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the
stock records of the corporation on the record date, as provided in Section 12
of these Bylaws, shall be entitled to vote at any meeting of stockholders.
Every person entitled to vote shall have the right to do so either in person or
by an agent or agents authorized by a proxy granted in accordance with

5.
<PAGE> 10
Delaware law. An agent so appointed need not be a stockholder. No proxy shall
be voted after three (3) years from its date of creation unless the proxy
provides for a longer period.

SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities
having voting power stand of record in the names of two (2) or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in
common, tenants by the entirety, or otherwise, or if two (2) or more persons
have the same fiduciary relationship respecting the same shares, unless the
Secretary is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1)
votes, the act of the majority so voting binds all; (c) if more than one (1)
votes, but the vote is evenly split on any particular matter, each faction may
vote the securities in question proportionally, or may apply to the Delaware
Court of Chancery for relief as provided in the General Corporation Law of
Delaware, Section 217(b). If the instrument filed with the Secretary shows
that any such tenancy is held in unequal interests, a majority or even-split
for the purpose of subsection (c) shall be a majority or even-split in
interest.

SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare
and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at said meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time
thereof and may be inspected by any stockholder who is present.

SECTION 13. ACTION WITHOUT MEETING.

(a) Unless otherwise provided in the Certificate of
Incorporation, any action required by statute to be taken at any annual or
special meeting of the stockholders, or any action which may be taken at any
annual or special meeting of the stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.

6.
<PAGE> 11
(b) Every written consent shall bear the date of
signature of each stockholder who signs the consent, and no written consent
shall be effective to take the corporate action referred to therein unless,
within sixty (60) days of the earliest dated consent delivered to the
corporation in the manner herein required, written consents signed by a
sufficient number of stockholders to take action are delivered to the
corporation by delivery to its registered office in the State of Delaware, its
principal place of business or an officer or agent of the corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to a corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested.

(c) Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to
those stockholders who have not consented in writing. If the action which is
consented to is such as would have required the filing of a certificate under
any section of the General Corporation Law of the State of Delaware if such
action had been voted on by stockholders at a meeting thereof, then the
certificate filed under such section shall state, in lieu of any statement
required by such section concerning any vote of stockholders, that written
notice and written consent have been given as provided in Section 228 of the
General Corporation Law of Delaware.

(d) Notwithstanding the foregoing, no such action by
written consent may be taken following the closing of the initial public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common
Stock of the corporation (the "Initial Public Offering").

SECTION 14. ORGANIZATION.

(a) At every meeting of stockholders, the Chairman of the
Board of Directors, or, if a Chairman has not been appointed or is absent, the
President, or, if the President is absent, a chairman of the meeting chosen by
a majority in interest of the stockholders entitled to vote, present in person
or by proxy, shall act as chairman. The Secretary, or, in his absence, an
Assistant Secretary directed to do so by the President, shall act as secretary
of the meeting.

(b) The Board of Directors of the corporation shall be
entitled to make such rules or regulations for the conduct of meetings of
stockholders as it shall deem necessary, appropriate or convenient. Subject to
such rules and regulations of the Board of Directors, if any, the chairman of
the meeting shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
chairman, are necessary, appropriate or convenient for the proper conduct of
the meeting, including, without limitation, establishing an agenda or order of

7.
<PAGE> 12
business for the meeting, rules and procedures for maintaining order at the
meeting and the safety of those present, limitations on participation in such
meeting to stockholders of record of the corporation and their duly authorized
and constituted proxies and such other persons as the chairman shall permit,
restrictions on entry to the meeting after the time fixed for the commencement
thereof, limitations on the time allotted to questions or comments by
participants and regulation of the opening and closing of the polls for
balloting on matters which are to be voted on by ballot. Unless and to the
extent determined by the Board of Directors or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with
rules of parliamentary procedure.

ARTICLE IV

DIRECTORS

SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation shall be fixed in accordance with the Certificate
of Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.

SECTION 16. POWERS. The powers of the corporation shall be
exercised, its business conducted and its property controlled by the Board of
Directors, except as may be otherwise provided by statute or by the Certificate
of Incorporation.

SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the
holders of any series of Preferred Stock to elect additional directors under
specified circumstances, directors shall be elected at each annual meeting of
stockholders for a term of one year. Each director shall serve until his
successor is duly elected and qualified or until his death, resignation or
removal. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.

SECTION 18. VACANCIES. Unless otherwise provided in the
Certificate of Incorporation, any vacancies on the Board of Directors resulting
from death, resignation, disqualification, removal or other causes and any
newly created directorships resulting from any increase in the number of
directors, shall unless the Board of Directors determines by resolution that
any such vacancies or newly created directorships shall be filled by
stockholders, be filled only by the affirmative vote of a majority of the
directors then in office, even though less than a quorum of the Board of
Directors. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the director for which
the vacancy was created or occurred and until such

8.
<PAGE> 13
director's successor shall have been elected and qualified. A vacancy in the
Board of Directors shall be deemed to exist under this Bylaw in the case of the
death, removal or resignation of any director.

SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to
specify whether it will be effective at a particular time, upon receipt by the
Secretary or at the pleasure of the Board of Directors. If no such
specification is made, it shall be deemed effective at the pleasure of the
Board of Directors. When one or more directors shall resign from the Board of
Directors, effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each Director so chosen shall hold
office for the unexpired portion of the term of the Director whose place shall
be vacated and until his successor shall have been duly elected and qualified.

SECTION 20. REMOVAL.

(a) Following the date on which the corporation is no
longer subject to Section 2115 of the California Corporations Code (the
"Qualifying Record Date") and subject to the rights of the holders of any
series of Preferred Stock, the Board of Directors or any individual director
may be removed from office at any time (i) with cause by the affirmative vote
of the holders of a majority of the voting power of all the then-outstanding
shares of voting stock of the corporation, entitled to vote at an election of
directors (the "Voting Stock") or (ii) without cause by the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
voting power of all the then-outstanding shares of the Voting Stock.

(b) After the Qualifying Record Date and subject to any
limitations imposed by law, Section 20(a) above shall no longer apply and
subject to the rights of the holders of any series of Preferred Stock, no
director shall be removed without cause. Subject to any limitations imposed by
law, the Board of Directors or any individual director may be removed from
office at any time with cause by the affirmative vote of the holders of a
majority of the Voting Stock.

SECTION 21. MEETINGS.

(a) ANNUAL MEETINGS. The annual meeting of the Board of
Directors shall be held immediately before or after the annual meeting of
stockholders and at the place where such meeting is held. No notice of an
annual meeting of the Board of Directors shall be necessary and such meeting
shall be held for the purpose of electing officers and transacting such other
business as may lawfully come before it.

9.
<PAGE> 14
(b) REGULAR MEETINGS. Except as hereinafter otherwise
provided, regular meetings of the Board of Directors shall be held in the
office of the corporation required to be maintained pursuant to Section 2
hereof. Unless otherwise restricted by the Certificate of Incorporation,
regular meetings of the Board of Directors may also be held at any place within
or without the State of Delaware which has been designated by resolution of the
Board of Directors or the written consent of all directors.

(c) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the President or any two of the directors

(d) TELEPHONE MEETINGS. Any member of the Board of
Directors, or of any committee thereof, may participate in a meeting by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and participation
in a meeting by such means shall constitute presence in person at such meeting.

(e) NOTICE OF MEETINGS. Notice of the time and place of
all special meetings of the Board of Directors shall be orally or in writing,
by telephone, facsimile, telegraph or telex, during normal business hours, at
least twenty-four (24) hours before the date and time of the meeting, or sent
in writing to each director by first class mail, charges prepaid, at least
three (3) days before the date of the meeting. Notice of any meeting may be
waived in writing at any time before or after the meeting and will be waived by
any director by attendance thereat, except when the director attends the
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called
or convened.

(f) WAIVER OF NOTICE. The transaction of all business at
any meeting of the Board of Directors, or any committee thereof, however called
or noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either
before or after the meeting, each of the directors not present shall sign a
written waiver of notice. All such waivers shall be filed with the corporate
records or made a part of the minutes of the meeting.

SECTION 22. QUORUM AND VOTING.

(a) Unless the Certificate of Incorporation requires a
greater number and except with respect to indemnification questions arising
under Section 43 hereof, for which a quorum shall be one-third of the exact
number of directors fixed from time to

10.
<PAGE> 15
time in accordance with the Certificate of Incorporation, a quorum of the Board
of Directors shall consist of a majority of the exact number of directors fixed
from time to time by the Board of Directors in accordance with the Certificate
of Incorporation; provided, however, at any meeting whether a quorum be present
or otherwise, a majority of the directors present may adjourn from time to time
until the time fixed for the next regular meeting of the Board of Directors,
without notice other than by announcement at the meeting.

(b) At each meeting of the Board of Directors at which a
quorum is present, all questions and business shall be determined by the
affirmative vote of a majority of the directors present, unless a different
vote be required by law, the Certificate of Incorporation or these Bylaws.

SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted
by the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board
of Directors or committee, as the case may be, consent thereto in writing, and
such writing or writings are filed with the minutes of proceedings of the Board
of Directors or committee.

SECTION 24. FEES AND COMPENSATION. Directors shall be entitled
to such compensation for their services as may be approved by the Board of
Directors, including, if so approved, by resolution of the Board of Directors,
a fixed sum and expenses of attendance, if any, for attendance at each regular
or special meeting of the Board of Directors and at any meeting of a committee
of the Board of Directors. Nothing herein contained shall be construed to
preclude any director from serving the corporation in any other capacity as an
officer, agent, employee, or otherwise and receiving compensation therefor.

SECTION 25. COMMITTEES.

(a) EXECUTIVE COMMITTEE. The Board of Directors may by
resolution passed by a majority of the whole Board of Directors appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and
provided in the resolution of the Board of Directors shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, including without
limitation the power or authority to declare a dividend, to authorize the
issuance of stock and to adopt a certificate of ownership and merger, and may
authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in
reference to amending the Certificate of Incorporation (except that a committee
may, to the extent authorized in the resolution or resolutions providing for
the issuance of shares of stock adopted by the Board of Directors fix the
designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution,

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any distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the bylaws of the corporation.

(b) OTHER COMMITTEES. The Board of Directors may, by
resolution passed by a majority of the whole Board of Directors, from time to
time appoint such other committees as may be permitted by law. Such other
committees appointed by the Board of Directors shall consist of one (1) or more
members of the Board of Directors and shall have such powers and perform such
duties as may be prescribed by the resolution or resolutions creating such
committees, but in no event shall such committee have the powers denied to the
Executive Committee in these Bylaws.

(c) TERM. Each member of a committee of the Board of
Directors shall serve a term on the committee coexistent with such member's
term on the Board of Directors. The Board of Directors, subject to the
provisions of subsections (a) or (b) of this Bylaw may at any time increase or
decrease the number of members of a committee or terminate the existence of a
committee. The membership of a committee member shall terminate on the date of
his death or voluntary resignation from the committee or from the Board of
Directors. The Board of Directors may at any time for any reason remove any
individual committee member and the Board of Directors may fill any committee
vacancy created by death, resignation, removal or increase in the number of
members of the committee. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee, and, in addition, in the
absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member.

(d) MEETINGS. Unless the Board of Directors shall
otherwise provide, regular meetings of the Executive Committee or any other
committee appointed pursuant to this Section 25 shall be held at such times and
places as are determined by the Board of Directors, or by any such committee,
and when notice thereof has been given to each member of such committee, no
further notice of such regular meetings need be given thereafter. Special
meetings of any such committee may be held at any place which has been
determined from time to time by such committee, and may be called by any
director who is a member of such committee, upon written notice to the members
of such

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<PAGE> 17
committee of the time and place of such special meeting given in the manner
provided for the giving of written notice to members of the Board of Directors
of the time and place of special meetings of the Board of Directors. Notice of
any special meeting of any committee may be waived in writing at any time
before or after the meeting and will be waived by any director by attendance
thereat, except when the director attends such special meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of
any business because the meeting is not lawfully called or convened. A
majority of the authorized number of members of any such committee shall
constitute a quorum for the transaction of business, and the act of a majority
of those present at any meeting at which a quorum is present shall be the act
of such committee.

SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, shall preside over the meeting.
The Secretary, or in his absence, an Assistant Secretary directed to do so by
the President, shall act as secretary of the meeting.

ARTICLE V

OFFICERS

SECTION 27. OFFICERS DESIGNATED. The officers of the corporation
shall include, if and when designated by the Board of Directors, the Chairman
of the Board of Directors, the Chief Executive Officer, the President, one or
more Vice Presidents and Division Presidents, the Secretary, the Chief
Financial Officer, the Treasurer, the Controller, all of whom shall be elected
at the annual organizational meeting of the Board of Directors. The Board of
Directors may also appoint one or more Assistant Secretaries, Assistant
Treasurers, Assistant Controllers and such other officers and agents with such
powers and duties as it shall deem necessary. The Board of Directors may
assign such additional titles to one or more of the officers as it shall deem
appropriate. Any one person may hold any number of offices of the corporation
at any one time unless specifically prohibited therefrom by law. The salaries
and other compensation of the officers of the corporation shall be fixed by or
in the manner designated by the Board of Directors.

SECTION 28. TENURE AND DUTIES OF OFFICERS.

(a) GENERAL. All officers shall hold office at the
pleasure of the Board of Directors and until their successors shall have been
duly elected and qualified, unless sooner removed. Any officer elected or
appointed by the Board of Directors may be

13.
<PAGE> 18
removed at any time by the Board of Directors. If the office of any officer
becomes vacant for any reason, the vacancy may be filled by the Board of
Directors.

(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The
Chairman of the Board of Directors, when present, shall preside at all meetings
of the stockholders and the Board of Directors. The Chairman of the Board of
Directors shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time. If there is no President, then
the Chairman of the Board of Directors shall also serve as the Chief Executive
Officer of the corporation and shall have the powers and duties prescribed in
paragraph (c) of this Section 28.

(c) DUTIES OF PRESIDENT. The President shall preside at
all meetings of the stockholders and at all meetings of the Board of Directors,
unless the Chairman of the Board of Directors has been appointed and is
present. Unless some other officer has been elected Chief Executive Officer of
the corporation, the President shall be the chief executive officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. The President shall perform other duties commonly incident to his
office and shall also perform such other duties and have such other powers as
the Board of Directors shall designate from time to time.

(d) DUTIES OF VICE PRESIDENTS AND DIVISION PRESIDENTS.
The Vice Presidents and Division Presidents may assume and perform the duties
of the President in the absence or disability of the President or whenever the
office of President is vacant. The Vice Presidents and Division Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.

(e) DUTIES OF SECRETARY. The Secretary shall attend all
meetings of the stockholders and of the Board of Directors and shall record all
acts and proceedings thereof in the minute book of the corporation. The
Secretary shall give notice in conformity with these Bylaws of all meetings of
the stockholders and of all meetings of the Board of Directors and any
committee thereof requiring notice. The Secretary shall perform all other
duties given him in these Bylaws and other duties commonly incident to his
office and shall also perform such other duties and have such other powers as
the Board of Directors shall designate from time to time. The President may
direct any Assistant Secretary to assume and perform the duties of the
Secretary in the absence or disability of the Secretary, and each Assistant
Secretary shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors or the President shall designate from time to time.

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<PAGE> 19
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief
Financial Officer shall keep or cause to be kept the books of account of the
corporation in a thorough and proper manner and shall render statements of the
financial affairs of the corporation in such form and as often as required by
the Board of Directors or the President. The Chief Financial Officer, subject
to the order of the Board of Directors, shall have the custody of all funds and
securities of the corporation. The Chief Financial Officer shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time. The President may direct the Treasurer or any
Assistant Treasurer, or the Controller or any Assistant Controller to assume
and perform the duties of the Chief Financial Officer in the absence or
disability of the Chief Financial Officer, and each Treasurer and Assistant
Treasurer and each Controller and Assistant Controller shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time.

SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may
from time to time delegate the powers or duties of any officer to any other
officer or agent, notwithstanding any provision hereof.

SECTION 30. RESIGNATIONS. Any officer may resign at any time by
giving written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.

SECTION 31. REMOVAL. Any officer may be removed from office at
any time, either with or without cause, by the affirmative vote of a majority
of the directors in office at the time, or by the unanimous written consent of
the directors in office at the time, or by any committee or superior officers
upon whom such power of removal may have been conferred by the Board of
Directors.

ARTICLE VI

EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE
CORPORATION

SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of
Directors may, in its discretion, determine the method and designate the
signatory officer or

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<PAGE> 20
officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.

Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and
other evidences of indebtedness of the corporation, and other corporate
instruments or documents requiring the corporate seal, and certificates of
shares of stock owned by the corporation, shall be executed, signed or endorsed
by the Chairman of the Board of Directors, or the President or any Vice
President, and by the Secretary or Treasurer or any Assistant Secretary or
Assistant Treasurer. All other instruments and documents requiring the
corporate signature, but not requiring the corporate seal, may be executed as
aforesaid or in such other manner as may be directed by the Board of Directors.

All checks and drafts drawn on banks or other depositories on funds to
the credit of the corporation or in special accounts of the corporation shall
be signed by such person or persons as the Board of Directors shall authorize
so to do.

Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.

SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All
stock and other securities of other corporations owned or held by the
corporation for itself, or for other parties in any capacity, shall be voted,
and all proxies with respect thereto shall be executed, by the person
authorized so to do by resolution of the Board of Directors, or, in the absence
of such authorization, by the Chairman of the Board of Directors, the Chief
Executive Officer, the President, or any Vice President.

ARTICLE VII

SHARES OF STOCK

SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for
the shares of stock of the corporation shall be in such form as is consistent
with the Certificate of Incorporation and applicable law. Every holder of
stock in the corporation shall be entitled to have a certificate signed by or
in the name of the corporation by the Chairman of the Board of Directors, or
the President or any Vice President and by the Treasurer or Assistant Treasurer
or the Secretary or Assistant Secretary, certifying the number of

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<PAGE> 21
shares owned by him in the corporation. Any or all of the signatures on the
certificate may be facsimiles. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued with the same effect as if
he were such officer, transfer agent, or registrar at the date of issue. Each
certificate shall state upon the face or back thereof, in full or in summary,
all of the powers, designations, preferences, and rights, and the limitations
or restrictions of the shares authorized to be issued or shall, except as
otherwise required by law, set forth on the face or back a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative, participating, optional, or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Within a reasonable time after the issuance or transfer of uncertificated
stock, the corporation shall send to the registered owner thereof a written
notice containing the information required to be set forth or stated on
certificates pursuant to this section or otherwise required by law or with
respect to this section a statement that the corporation will furnish without
charge to each stockholder who so requests the powers, designations,
preferences and relative participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Except as otherwise expressly
provided by law, the rights and obligations of the holders of certificates
representing stock of the same class and series shall be identical.

SECTION 35. LOST CERTIFICATES. A new certificate or certificates
shall be issued in place of any certificate or certificates theretofore issued
by the corporation alleged to have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen, or destroyed. The corporation may require, as a
condition precedent to the issuance of a new certificate or certificates, the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
or to give the corporation a surety bond in such form and amount as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen, or
destroyed.

SECTION 36. TRANSFERS.

(a) Transfers of record of shares of stock of the
corporation shall be made only upon its books by the holders thereof, in person
or by attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.

(b) The corporation shall have power to enter into and
perform any agreement with any number of stockholders of any one or more
classes of stock of the

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<PAGE> 22
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.

SECTION 37. FIXING RECORD DATES.

(a) In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix, in advance, a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting. If no record date is fixed by the Board of Directors,
the record date for determining stockholders entitled to notice of or to vote
at a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.

(b) Prior to the Initial Public Offering, in order that
the corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than 10 days after the date upon which the resolution fixing
the record date is adopted by the Board of Directors. Any stockholder of
record seeking to have the stockholders authorize or take corporate action by
written consent shall, by written notice to the Secretary, request the Board of
Directors to fix a record date. The Board of Directors shall promptly, but in
all events within 10 days after the date on which such a request is received,
adopt a resolution fixing the record date. If no record date has been fixed by
the Board of Directors within 10 days of the date on which such a request is
received, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the
Board of Directors is required by applicable law, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent
of the corporation having custody of the book in which proceedings of meetings
of stockholders are recorded. Delivery made to the corporation's registered
office shall be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the Board of Directors and
prior action by the Board of Directors is required by law, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of

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business on the day on which the Board of Directors adopts the resolution
taking such prior action.

(c) In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose
of any other lawful action, the Board of Directors may fix, in advance, a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted, and which record date shall be
not more than sixty (60) days prior to such action. If no record date is
fixed, the record date for determining stockholders for any such purpose shall
be at the close of business on the day on which the Board of Directors adopts
the resolution relating thereto.

SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends, and to vote as such owner, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of Delaware.

ARTICLE VIII

OTHER SECURITIES OF THE CORPORATION

SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures
and other corporate securities of the corporation, other than stock
certificates (covered in Section 34), may be signed by the Chairman of the
Board of Directors, the President or any Vice President, or such other person
as may be authorized by the Board of Directors, and the corporate seal
impressed thereon or a facsimile of such seal imprinted thereon and attested by
the signature of the Secretary or an Assistant Secretary, or the Chief
Financial Officer or Treasurer or an Assistant Treasurer; provided, however,
that where any such bond, debenture or other corporate security shall be
authenticated by the manual signature, or where permissible facsimile
signature, of a trustee under an indenture pursuant to which such bond,
debenture or other corporate security shall be issued, the signatures of the
persons signing and attesting the corporate seal on such bond, debenture or
other corporate security may be the imprinted facsimile of the signatures of
such persons. Interest coupons appertaining to any such bond, debenture or
other corporate security, authenticated by a trustee as aforesaid, shall be
signed by the Treasurer or an Assistant Treasurer of the corporation or such
other person as may be authorized by the Board of Directors, or bear imprinted
thereon the facsimile signature of such person. In case any officer who shall
have signed or attested any bond, debenture or other corporate security, or
whose facsimile signature shall appear thereon or on any such interest

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<PAGE> 24
coupon, shall have ceased to be such officer before the bond, debenture or
other corporate security so signed or attested shall have been delivered, such
bond, debenture or other corporate security nevertheless may be adopted by the
corporation and issued and delivered as though the person who signed the same
or whose facsimile signature shall have been used thereon had not ceased to be
such officer of the corporation.

ARTICLE IX

DIVIDENDS

SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital
stock of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to
law at any regular or special meeting. Dividends may be paid in cash, in
property, or in shares of the capital stock, subject to the provisions of the
Certificate of Incorporation.

SECTION 41. DIVIDEND RESERVE. Before payment of any dividend,
there may be set aside out of any funds of the corporation available for
dividends such sum or sums as the Board of Directors from time to time, in
their absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the corporation, or for such other purpose as the Board of
Directors shall think conducive to the interests of the corporation, and the
Board of Directors may modify or abolish any such reserve in the manner in
which it was created.

ARTICLE X

FISCAL YEAR

SECTION 42. FISCAL YEAR. The fiscal year of the corporation
shall be fixed by resolution of the Board of Directors.

ARTICLE XI

INDEMNIFICATION

SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS,
OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS.

(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation
shall indemnify its directors and executive officers (for the purposes of this
Article XI, "executive officers shall have the meaning defined in Rule 3b-7
promulgated under the 1934 Act)] to the fullest extent not prohibited by the
Delaware General Corporation Law; provided, however, that the corporation may
modify the extent of such indemnification by

20.
<PAGE> 25
individual contracts with its directors and executive officers; and, provided,
further, that the corporation shall not be required to indemnify any director
or executive officer in connection with any proceeding (or part thereof)
initiated by such person unless (i) such indemnification is expressly required
to be made by law, (ii) the proceeding was authorized by the Board of Directors
of the corporation, (iii) such indemnification is provided by the corporation,
in its sole discretion, pursuant to the powers vested in the corporation under
the Delaware General Corporation Law or (iv) such indemnification is required
to be made under subsection (d).

(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The
corporation shall have power to indemnify its other officers, employees and
other agents as set forth in the Delaware General Corporation Law.

(c) EXPENSES. The corporation shall advance to any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director or executive officer, of the corporation, or is or was serving
at the request of the corporation as a director or executive officer of another
corporation, partnership, joint venture, trust or other enterprise, prior to
the final disposition of the proceeding, promptly following request therefor,
all expenses incurred by any director or executive officer in connection with
such proceeding upon receipt of an undertaking by or on behalf of such person
to repay said amounts if it should be determined ultimately that such person is
not entitled to be indemnified under this Bylaw or otherwise.

Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation to an
executive officer of the corporation (except by reason of the fact that such
executive officer is or was a director of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such person acted in bad faith
or in a manner that such person did not believe to be in or not opposed to the
best interests of the corporation.

(d) ENFORCEMENT. Without the necessity of entering into
an express contract, all rights to indemnification and advances to directors
and executive officers under this Bylaw shall be deemed to be contractual
rights and be effective to the same extent and as if provided for in a contract
between the corporation and the director or

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executive officer. Any right to indemnification or advances granted by this
Bylaw to a director or executive officer shall be enforceable by or on behalf
of the person holding such right in any court of competent jurisdiction if (i)
the claim for indemnification or advances is denied, in whole or in part, or
(ii) no disposition of such claim is made within ninety (90) days of request
therefor. The claimant in such enforcement action, if successful in whole or
in part, shall be entitled to be paid also the expense of prosecuting his
claim. In connection with any claim for indemnification, the corporation shall
be entitled to raise as a defense to any such action that the claimant has not
met the standards of conduct that make it permissible under the Delaware
General Corporation Law for the corporation to indemnify the claimant for the
amount claimed. In connection with any claim by an executive officer of the
corporation (except in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such executive
officer is or was a director of the corporation) for advances, the corporation
shall be entitled to raise a defense as to any such action clear and convincing
evidence that such person acted in bad faith or in a manner that such person
did not believe to be in or not opposed to the best interests of the
corporation, or with respect to any criminal action or proceeding that such
person acted without reasonable cause to believe that his conduct was lawful.
Neither the failure of the corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant
is proper in the circumstances because he has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its Board of Directors, independent
legal counsel or its stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that claimant has not met the applicable standard of conduct.
Following the Qualifying Record Date, in any suit brought by a director or
executive officer to enforce a right to indemnification or to an advancement of
expenses hereunder, the burden of proving that the director or executive
officer is not entitled to be indemnified, or to such advancement of expenses,
under this Article XI or otherwise shall be on the corporation.

(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on
any person by this Bylaw shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding office. The
corporation is specifically authorized to enter into individual contracts with
any or all of its directors, officers, employees or agents respecting
indemnification and advances, to the fullest extent not prohibited by the
Delaware General Corporation Law.

(f) SURVIVAL OF RIGHTS. The rights conferred on any
person by this Bylaw shall continue as to a person who has ceased to be a
director, officer, employee or

22.
<PAGE> 27
other agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.

(g) INSURANCE. To the fullest extent permitted by the
Delaware General Corporation Law, the corporation, upon approval by the Board
of Directors, may purchase insurance on behalf of any person required or
permitted to be indemnified pursuant to this Bylaw.

(h) AMENDMENTS. Any repeal or modification of this Bylaw
shall only be prospective and shall not affect the rights under this Bylaw in
effect at the time of the alleged occurrence of any action or omission to act
that is the cause of any proceeding against any agent of the corporation.

(i) SAVING CLAUSE. If this Bylaw or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each director and officer to the
full extent not prohibited by any applicable portion of this Bylaw that shall
not have been invalidated, or by any other applicable law.

(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw,
the following definitions shall apply:

(1) The term "proceeding" shall be broadly
construed and shall include, without limitation, the investigation,
preparation, prosecution, defense, settlement, arbitration and appeal of, and
the giving of testimony in, any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative.

(2) The term "expenses" shall be broadly
construed and shall include, without limitation, court costs, attorneys' fees,
witness fees, fines, amounts paid in settlement or judgment and any other costs
and expenses of any nature or kind incurred in connection with any proceeding.

(3) The term the "corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Bylaw with respect to the resulting or
surviving corporation as he

23.
<PAGE> 28
would have with respect to such constituent corporation if its separate
existence had continued.

(4) References to a "director," "officer,"
"officer," "employee," or "agent" of the corporation shall include, without
limitation, situations where such person is serving at the request of the
corporation as, respectively, a director, officer, officer, employee, trustee
or agent of another corporation, partnership, joint venture, trust or other
enterprise.

(5) References to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee,
or agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this Bylaw.

ARTICLE XII

NOTICES

SECTION 44. NOTICES.

(a) NOTICE TO STOCKHOLDERS. Whenever, under any
provisions of these Bylaws, notice is required to be given to any stockholder,
it shall be given in writing, timely and duly deposited in the United States
mail, postage prepaid, and addressed to his last known post office address as
shown by the stock record of the corporation or its transfer agent.

(b) NOTICE TO DIRECTORS. Any notice required to be given
to any director may be given by the method stated in subsection (a), or by
facsimile, telex or telegram, except that such notice other than one which is
delivered personally shall be sent to such address as such director shall have
filed in writing with the Secretary, or, in the absence of such filing, to the
last known post office address of such director.

(c) AFFIDAVIT OF MAILING. An affidavit of mailing,
executed by a duly authorized and competent employee of the corporation or its
transfer agent appointed with respect to the class of stock affected,
specifying the name and address or the names and addresses of the stockholder
or stockholders, or director or directors, to whom any such

24.
<PAGE> 29
notice or notices was or were given, and the time and method of giving the
same, shall in the absence of fraud, be prima facie evidence of the facts
therein contained.

(d) TIME NOTICES DEEMED GIVEN. All notices given by
mail, as above provided, shall be deemed to have been given as at the time of
mailing, and all notices given by facsimile, telex or telegram shall be deemed
to have been given as of the sending time recorded at time of transmission.

(e) METHODS OF NOTICE. It shall not be necessary that
the same method of giving notice be employed in respect of all directors, but
one permissible method may be employed in respect of any one or more, and any
other permissible method or methods may be employed in respect of any other or
others.

(f) FAILURE TO RECEIVE NOTICE. The period or limitation
of time within which any stockholder may exercise any option or right, or enjoy
any privilege or benefit, or be required to act, or within which any director
may exercise any power or right, or enjoy any privilege, pursuant to any notice
sent him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.

(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by
the corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.

(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS.
Whenever notice is required to be given, under any provision of law or the
Certificate of Incorporation or Bylaws of the corporation, to any stockholder
to whom (i) notice of two consecutive annual meetings, and all notices of
meetings or of the taking of action by written consent without a meeting to
such person during the period between such two consecutive annual meetings, or
(ii) all, and at least two, payments (if sent by first class mail) of dividends
or interest on securities during a twelve-month period, have been mailed
addressed to such person at his address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required. Any action

25.
<PAGE> 30
or meeting which shall be taken or held without notice to such person shall
have the same force and effect as if such notice had been duly given. If any
such person shall deliver to the corporation a written notice setting forth his
then current address, the requirement that notice be given to such person shall
be reinstated. In the event that the action taken by the corporation is such
as to require the filing of a certificate under any provision of the Delaware
General Corporation Law, the certificate need not state that notice was not
given to persons to whom notice was not required to be given pursuant to this
paragraph.

ARTICLE XIII

AMENDMENTS

SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43
of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by
the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of
the voting power of all of the then-outstanding shares of the Voting Stock.
The Board of Directors shall also have the power to adopt, amend, or repeal
Bylaws.

ARTICLE XIV

LOANS TO OFFICERS

SECTION 46. LOANS TO OFFICERS. The corporation may lend money
to, or guarantee any obligation of, or otherwise assist any officer or other
employee of the corporation or of its subsidiaries, including any officer or
employee who is a Director of the corporation or its subsidiaries, whenever, in
the judgment of the Board of Directors, such loan, guarantee or assistance may
reasonably be expected to benefit the corporation. The loan, guarantee or
other assistance may be with or without interest and may be unsecured, or
secured in such manner as the Board of Directors shall approve, including,
without limitation, a pledge of shares of stock of the corporation. Nothing in
these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty
or warranty of the corporation at common law or under any statute.

26.

<PAGE> 1
CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4), 200.83
AND 230.406. * INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL
TREATMENT REQUEST THAT IS FILED SEPARATELY WITH THE COMMISSION.

Exhibit 10.13

COOPERATIVE DEVELOPMENT

AND

LICENSE AGREEMENT

BETWEEN

PROXIMA CORPORATION
AND

LASER POWER CORPORATION
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
SECTION 1 - DEFINITIONS
<S> <C>
1.1 Affiliate 1
1.2 Products 2
1.3 Proxima Components 2
1.4 LPC Components 2
1.5 Joint Components 2
1.6 Proxima Technology 2
1.7 LPC Technology 2
1.8 Joint Technology 2
1.9 Field 3
1.10 Multimedia 3
1.11 Development Program 3
1.12 Stock Purchase Agreement 3
1.13 Net Revenues 3
1.14 LPC Competitive Product 3
1.15 Proxima Competitive Product 3
1.16 Aggressive Marketing 3
1.17 Designated Product 3

SECTION 2 - DEVELOPMENT PROGRAM 4

2.1 General 4
2.2 Budget 4
2.3 Steering Committee 4
2.3.1 Establishment of Committee 4
2.3.2 Responsibilities of Committee 4
2.3.3 Meetings 5
2.3.4 Product Planning 5
2.3.5 Reports and Information 5
2.4 Funding of Development Program by LPC 5
2.4.1 Accounting for LPC Expenditures 5
2.4.2 Accounting for Funding in Excess of Initial Budget 6
2.4.3 Allocation of Funding in Excess of Warrant Shares 6
2.4.4 Excess Funding For Equity Investment 6
2.4.5 Pass-Through Funding 6
</TABLE>

-i-
<PAGE> 3
<TABLE>
<S> <C>
SECTION 3 MARKETING AND DISTRIBUTION RIGHTS 7

3.1 General 7
3.2 Grant of Rights 7
3.3 Meeting Room and Classroom Products 7
3.4 Right of First Refusal 7
3.5 Special Projection and Display Products 8
3.6 Mutual Representations 9
3.7 Aggressive Marketing 9
3.7.1 Marketing and Sales 9
3.7.2 Staffing and Training 9
3.7.3 Sales Emphasis 9
3.7.4 Print and Promotional Materials 9
3.7.5 Trade Shows and Exhibitions 9
3.7.6 Dispute Resolution 9

SECTION 4 - MANUFACTURING AND ROYALTIES 10

4.1 Manufacturing of Components and Subsystems 10
4.2 Manufacturing Licenses 10
4.3 Royalties 11
4.3.1 Royalties on Distribution 11
4.3.2 Royalties on Sublicense 11
4.4 Accounting and Payment 12
4.5 Penalty for Late Payment of Royalties 12
4.6 Manufacturing Escrow 12
4.6.1 Escrow 12
4.6.2 Technical Assistance 13
4.6.3 Access 13
4.6.4 Release of Escrow Materials 13
4.6.5 Licenses 14

SECTION 5 - MOST FAVORED CUSTOMER 14

SECTION 6 - INTELLECTUAL PROPERTY RIGHTS 15

6.1 Separate Ownership 15
6.1.1 LPC Ownership 15
6.1.2 Proxima Ownership 15
</TABLE>

-ii-
<PAGE> 4
<TABLE>
<S> <C>
6.1.3 Patents 15
6.1.4 Abandonment of Separately Owned Patents 15
6.1.5 Enforcement of Separately Owned Rights 16
6.2 Joint Ownership 16
6.2.1 Notification 17
6.2.2 Protection of Joint Technology 17
6.2.3 Trade Secret Protection 17
6.2.4 No Protection 18
6.2.5 Abandonment of Jointly Owned Patents 18
6.2.6 Enforcement of Rights 18

SECTION 7 - INDEMNIFICATION 19

7.1 LPC Components 19
7.1.1 LPC Obligation 19
7.1.2 Limitation 19
7.1.3 Entire Liability 19
7.2 Proxima Components 19
7.2.1 Proxima Obligation 19
7.2.2 Limitation 20
7.2.3 Entire Liability 20
7.3 Joint Components 20
7.3.1 Joint Indemnification 20
7.3.2 Limitation 21

SECTION 8 - GENERAL INDEMNITIES 21

8.1 Indemnification by Proxima 21
8.2 Indemnification by LPC 21

SECTION 9 - CONFIDENTIAL INFORMATION 22

9.1 Definition 22
9.2 Obligation 22
9.3 Exceptions 22
9.4 Enforcement 23
9.5 Duration 23
9.6 Remedies 23
</TABLE>

-iii-
<PAGE> 5
<TABLE>
<S> <C>
SECTION 10 - TERM AND TERMINATION 23

10.1 Term 23
10.2 Termination for Material Default 23
10.3 Termination by Proxima 23
10.4 Termination by LPC 24
10.5 Rights Upon Termination 24
10.5.1 Proxima's Rights 24
10.5.2 LPC's Rights 26
10.6 Survival of Certain Terms 27

SECTION 11 - COMPLIANCE WITH LAWS 27

11.1 Governmental Requirements 27
11.1.1 Registration, Notification and Recordation of Agreement 27
11.1.2 Export Regulation 27

SECTION 12 - LIMITATION OF LIABILITY 28

SECTION 13 - THIRD PARTY LICENSES 28

13.1 General Obligation 28
13.2 LPC Components 28
13.2.1 LPC Components to be Sold to Proxima and 3rd Parties 28
13.2.2 LPC Components to be Sold Only to Proxima 28
13.3 Joint Components 29
13.4 Proxima Technology 29

SECTION 14 - WARRANTIES 30

14.1 LPC Warranty 30
14.1.1 Express Warranty 30
14.1.2 LPC Warranty Disclaimer 30
14.2 Proxima Warranty Disclaimer 30

SECTION 15 - GENERAL PROVISIONS 30

15. 1 Governing Law and Dispute Resolution 30
15.2 Entire Agreement 30
</TABLE>

-iv-
<PAGE> 6
<TABLE>
<S> <C>
15.3 Confidentiality of Agreement and Activities 31
15.4 Waiver 31
15.5 Notices 31
15.6 Force Majeure 32
15.7 No Assignment 32
15.8 Expenses 32
15.9 Counterparts 32
15.10 Independent Contractors 32
15.11 Public Announcement 33
</TABLE>

EXHIBITS

Exhibit A - PRODUCTS
Exhibit B - PROXIMA COMPONENTS
Exhibit C - DEVELOPMENT PROGRAM
Exhibit D - SPECIFICATIONS
Exhibit E - INITIAL STEERING COMMITTEE MEMBERSHIP

-v-
<PAGE> 7
COOPERATIVE DEVELOPMENT AND LICENSE AGREEMENT

This Cooperative Development and License Agreement (the "Agreement") is made and
entered into this 11th day of January, 1994 (the "Effective Date") by and
between Proxima Corporation, a Delaware corporation, having its principal place
of business at 6610 Nancy Ridge Drive, San Diego, CA 92121-3297 ('Proxima') and
Laser Power Corporation, a Delaware corporation, having its principal place of
business at 12777 High Bluff Drive, San Diego, CA 92130 ("LPC").

RECITALS

WHEREAS, Proxima is engaged in the business of designing, developing,
manufacturing, marketing and selling desktop display products generally known as
projection panels; and

WHEREAS, LPC is engaged in the business of designing, developing, manufacturing,
marketing and selling microlaser engines and microlaser components; and

WHEREAS, the parties believe that it is in their mutual best interests to
combine their development and engineering skills as part of a collaborative
program in the area of Multimedia (as hereinafter defined) imaging applications
with the goal of producing a series of Products (as hereinafter defined)
directed to the Field (as hereinafter defined); and

WHEREAS, pursuant to this collaborative program, the parties desire to enter
into various development, licensing, manufacturing, sales and supply
arrangements, all as more fully described herein; and

WHEREAS, Proxima will make an investment in LPC pursuant to that certain Stock
Purchase Agreement executed between the parties of even date herewith, in
reliance in part on the promises contained in this Agreement.

NOW, THEREFORE, IN CONSIDERATION OF THE FOREGOING AND THE MUTUAL PROMISES
CONTAINED HEREIN, IT IS AGREED AS FOLLOWS:

SECTION 1
DEFINITIONS

1.1 Affiliate. "Affiliate" means any entity (whether organized under
the laws of the United States or the laws of any other country) which, either
directly or indirectly, (a) controls a party to this Agreement, (b) is
controlled by such party or (c) is under the common control with such party. In
the event that the parties disagree as to whether an entity constitutes an
Affiliate of a party pursuant to this definition, then the parties agree to
proceed to dispute resolution in accordance with Section 15.1 below.
<PAGE> 8
1.2 Products. "Products" means those Multimedia imaging application
products set forth on Exhibit A hereto which are intended for use within the
Field and which are intended to be developed by the parties pursuant to this
Agreement. Products shall be made up of Proxima Components, LPC Components and
Joint Components. Products may be added, deleted or modified from time to time
by mutual agreement of the parties.

1.3 Proxima Components. "Proxima Components" means those certain
components of the Products which are set forth on Exhibit B hereto and which are
developed or are intended to be developed solely by Proxima. Proxima Components
may be added, deleted or modified from time to time by mutual agreement of the
parties.

1.4 LPC Components. "LPC Components" means those certain components of
the Products which are set forth on Exhibit B hereto and which are developed or
are intended to be developed solely by LPC. LPC Components may be added, deleted
or modified from time to time by mutual agreement of the parties.

1.5 Joint Components. "Joint Components" means those certain components
of the Products which are set forth on Exhibit B hereto and (i) which are
jointly developed or are intended to be jointly developed by Proxima and LPC
pursuant to the terms and conditions of this Agreement or (ii) which are
developed using LPC Technology by third parties other than Proxima or LPC
through the use of funds provided to such third parties directly by Proxima
outside of the scope of Section 2.4 below. Joint Components may be added,
deleted or modified from time to time by mutual agreement of the parties.

1.6 Proxima Technology. "Proxima Technology" means the technical data,
designs, concepts, algorithms, processes, formulae, know-how and information
pertaining to the design, development, manufacture, sale and use of Proxima
Components, including without limitation any patent or other intellectual
property rights related thereto, that are owned, licensed to, or developed by
Proxima without the participation of LPC before, during or after the term of
this Agreement.

1.7 LPC Technology. "LPC Technology" means the technical data, designs,
concepts, algorithms, processes, formulae, know-how and information pertaining
to the design, development, manufacture, sale and use of LPC Components,
including without limitation any patent or other intellectual property rights
related thereto, that are owned, licensed to, or developed by LPC without the
participation of Proxima, before, during or after the term of this Agreement.

1.8 Joint Technology. "Joint Technology" means the technical data,
designs, concepts, algorithms, processes, formulae, know-how and information,
and all intellectual property rights related thereto, (i) developed jointly by
the parties pursuant to the development program contemplated by this Agreement
or (ii) developed using LPC Technology by third parties other than Proxima or
LPC through the use of funds provided to such third parties by Proxima outside
of the scope of Section 2.4 below. The final determination as to whether

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<PAGE> 9
particular information constitutes Joint Technology shall be governed by the
provisions of Section 6.2. Joint Technology shall exclude all Proxima Technology
and LPC Technology.

1.9 Field. "Field" means any and all markets for microlaser-based
Proxima Components which are directed to commercial, business and educational
applications, including without limitation meeting room, classroom, museum,
theater and stadium/arena applications, but specifically excluding (i)
applications intended for the home entertainment market where viewing of
projected images is not primarily for commerce, business or educational
purposes, (ii) applications intended for the headset market where there is only
one viewer of an image at any one time and (iii) any other applications
excluded from the Field pursuant to Section 3.5 below. Except as specified in
this Section 1.9 or in Section 3.5 below, the Field shall include markets for
small projectors that are currently being exploited by Proxima as well as
markets for large projectors that Proxima intends to exploit in the future.

1. 10 Multimedia. "Multimedia" means the combination or interaction of
video, audio, computer generated text, graphics, and/or other inputs.

1.11 Development Program. "Development Program" means the collaborative
program for the development of Products, referred to as the Memphis Project, as
defined in Section 2 below and as further described in Exhibit C hereto.

1. 12 Stock Purchase Agreement. "Stock Purchase Agreement" shall mean
that certain Stock Purchase Agreement between LPC and Proxima of even date
herewith, pursuant to which Proxima has agreed to invest in LPC by exercising
warrants to purchase or by otherwise purchasing shares of LPC Series A
Convertible Preferred Stock.

1. 13 Net Revenues. "Net Revenues" means either (i) gross revenues
actually received by a party from the sale of a particular product to a
non-Affiliate or (H) such party's reasonable estimate, based on list prices and
sales of similar products to non-Affiliates, of gross revenues applicable to the
sale of a particular product by such party to an Affiliate, in each case less
discounts, price adjustments, returns, freight charges and allowances, all as
reflected in the seller's financial records.

1. 14 LPC Competitive Product. "LPC Competitive Product" has the
meaning set forth in Section 3.3.

1. 15 Proxima Competitive Product. "Proxima Competitive Product" has
the meaning set forth in Section 3.4.

1.16 Aggressive Marketing. "Aggressive Marketing" has the meaning set
forth in Section 3.7.

1.17 Designated Product. "Designated Product" has the meaning set forth
in Section 3.7.

-3-

<PAGE> 10
SECTION 2

DEVELOPMENT PROGRAM

2.1 General. This Agreement has been entered into by the parties in
order to create a business arrangement for the development, marketing and
distribution of the Products within the Field. Pursuant to this Agreement, the
parties shall undertake a Development Program to develop LPC Components, Proxima
Components and Joint Components for the Products according to the schedule and
milestones set forth in Exhibit C hereto. The Development Program shall
specifically include the development of an RGB microlaser engine or microlaser
components and subsystems for high resolution Multimedia projection systems
designed to Proxima's specifications. Although development work for LPC
Components and Proxima Components shall be accomplished through the independent
efforts of the parties according to the guidelines set forth in this Agreement,
each party intends that the development work for Joint Components shall be
accomplished through the cooperative efforts of the parties as contemplated by
this Agreement.

2.2 Budget. Within thirty (30) days after the Effective Date, the
parties shall prepare a mutually acceptable budget, which may be amended from
time to time by the Steering Committee, for all proposed expenditures pursuant
to the Development Program.

2.3 Steering Committee.

2.3.1 Establishment of Committee. The parties shall establish
and maintain a Steering Committee which shall be primarily responsible for
overseeing the Development Program and all other aspects of the mutual
relationship contemplated herein. Each party shall have the right to appoint and
replace two (2) members of the Steering Committee and the total membership of
the Steering Committee shall be four (4) members. During the first year of this
Agreement a representative of Proxima shall chair such committee. Thereafter,
chairmanship shall be rotated between the parties on an annual basis, commencing
with the first anniversary of the Effective Date. Actions of the Steering
Committee shall be taken by a unanimous vote of its members. Any disputes shall
be referred to successively higher-level management representatives from each
party until, if necessary, such disputes reach the chief executive of each
party. The initial members of the Steering Committee are set forth in Exhibit D
hereto.

2.3.2 Responsibilities of Committee. The Steering Committee
shall be responsible for reviewing and approving the Development Program and the
milestones and budgets combined therein. In addition, the Steering Committee
shall provide a mechanism for the exchange of information and review of
activities and, if desirable, shall add, delete or modify Products, Proxima
Components, LPC Components or Joint Components. Without limitation, some of the
other specific activities of the Steering Committee shall be to (i) appoint a
manager for the Development Program who shall be replaced by the Steering
Committee from time to time as appropriate; (ii) monitor progress on each
particular research and development

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<PAGE> 11
project contemplated herein; (iii) review specific research and development
reports by each party; (iv) review and approve proposed expenditures; (v) review
actual spending as compared to budget at least once during each calendar quarter
during the term of this Agreement; (vi) review and approve beta site testing
proposals for products resulting from the Development Program; (vii) review and
approve the appointment of project managers; (viii) review Joint Technology and
decide on the method of protecting it; (ix) review all uses of Joint Technology
and determine whether the user is required to pay royalties in accordance with
Section 4.3; and (x) review and resolve intellectual property disagreements. 'Me
Steering Committee shall assume any other responsibilities that are mutually
agreed to by the parties.

2.3.3 Meetings. The Steering Committee shall meet regularly as
necessary to fully perform its duties under Section 2.3.2 above, but in any
event not less than once each calendar quarter throughout the duration of the
Development Program described in Section 2.1 above.

2.3.4 Product Planning. Except as otherwise prohibited by this
Agreement, each party shall have the right to continue to do its own product
planning and development independently of the Development Program and the
Steering Committee established hereby.

2.3.5 Reports and Information. Each party shall use its best
efforts to provide complete and accurate reports and information to the Steering
Committee as necessary for such committee to fully perform its duties.

2.4 Funding of Development Program by LPC. Throughout the term of this
Agreement and the Development Program contemplated herein, LPC agrees to apply
all proceeds received from Proxima pursuant to the Stock Purchase Agreement (the
"Proxima Funds") in furtherance of the Development Program contemplated herein.
Pursuant to the Stock Purchase Agreement, Proxima agrees to initially provide
LPC with a minimum of $500,000 of Proxima Funds. The application of all Proxima
Funds shall be governed by the provisions of this Section 2.4.

2.4.1 Accounting for LPC Expenditures. Expenditures by LPC in
furtherance of the Development Program shall be accounted for in the same
manner as if Proxima had granted LPC a research and development contract
similar to those granted to LPC by various United States governmental
agencies. Except as contemplated by Section 2.4.2 below, total charges to the
Development Program shall include [ *** ]

-5-

* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 12
2.4.2 Accounting for Funding in Excess of Initial Budget. Each
time that LPC delivers to Proxima a Funding Request as contemplated in Section
1.3 of the Stock Purchase Agreement, LPC shall include with such Funding Request
a calculation by LPC showing the work performed by LPC up to the date of the
Funding Request (including the extent to which the milestones set forth on
Exhibit C have been accomplished) and the application of all Proxima Funds
received up to such date and a statement as to whether the Development Program
is proceeding with the expenditure levels contemplated by the original budget
prepared in accordance with Section 2.2. To the extent that the Development
Program has exceeded such budgeted expenditures, all Proxima Funds thereafter
provided to LPC which are in excess of such budgeted expenditures shall be
accounted for as contemplated by Section 2.4.1, except that the fee ("Revised
Fee") applied to remaining expenditures shall be calculated as follows:

[ *** ] [ *** ] [ *** ]
[ *** ]
------------------------------------------- ------------------
[ *** ]

Notwithstanding the above, funds provided (i) for excess expenditures
due to a change in the scope of work authorized by the Steering Committee or
(ii) for excess expenditures used to develop Proxima Technology ('Committee
Authorized Expenditures") will not be included in the above calculation and will
continue to be accounted for with a [ *** ] provided however, that LPC shall not
be permitted to account for any funds as Committee Authorized Expenditures
unless, prior to the provision of such funds to LPC by Proxima, the Steering
Committee has issued a written notice to both parties indicating that such funds
shall be treated as Committee Authorized Expenditures.

2.4.3 Allocation of Funding in Excess of Warrant Shares. In
the event Proxima chooses to provide funds to LPC beyond the funds provided by
full exercise of the Warrant, Proxima, at its sole option, may either (i) choose
to receive additional shares of series A preferred stock of LPC as contemplated
by Section 1.4 of the Stock Purchase Agreement or (ii) choose to account for
such additional funding as an expense associated with product development and
receive no stock from LPC.

2.4.4 Excess Funding For Equity Investment. In the event that
the Development Program contemplated herein is completed prior to the time that
all Proxima Funds have been allocated by LPC, LPC shall be entitled to use the
remaining Proxima Funds in any manner and for any purposes whatsoever.

2.4.5 Pass-Through Funding. In the event that Proxima desires
that any Proxima funds be passed through by LPC to third party companies who
shall perform research and development in furtherance of the Development
Program, LPC shall be required to allocate only [ *** ] of such funds to the
work performed by such third party in accordance with the provisions of this
Section 2.4. [ *** ] Proxima and LPC each agree that "pass-through" situations
shall be avoided in the event any

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alternative means to accomplish a given research and development goal can be
found, and each party agrees to use its best efforts to seek out such
alternative means.

SECTION 3

MARKETING AND DISTRIBUTION RIGHTS

3.1 General. Pursuant to the terms of this Agreement, and in
consideration of the joint development efforts and Proxima Funds provided by
Proxima pursuant to Section 2 above, LPC desires to grant to Proxima certain
exclusive (including with respect to LPC) marketing and distribution rights
within the Field with respect to LPC Components, Joint Components and Products.
LPC further agrees to grant Proxima all rights necessary to accomplish these
objectives.

3.2 Grant of Rights. Subject to the terms and conditions of this
Agreement, including without limitation Section 3.3 below, LPC hereby grants to
Proxima the exclusive (including with respect to LPC) right throughout the term
of this Agreement to market and distribute LPC Components and Joint Components
within the Field.

3.3 Meeting Room and Classroom Products. For as long as Proxima either
(i) continues to comply with its Development Program funding obligations
pursuant to Section 2 above or (ii) continues to Aggressively Market (as defined
in Section 3.7 below) any of the Products, LPC agrees that it shall not (a) sell
any microlaser-based engines or components for use in laser projectors,
including without limitation LPC Components (collectively "LPC Competitive
Products"), to any third party within the meeting room and classroom market
segments of the Field or (b) otherwise collaborate with any Proxima competitors
within the meeting room and classroom market segments of the Field for the
purpose of producing LPC Competitive Products without the prior written consent
of Proxima. If LPC suspects or should reasonably suspect that an entity may be
competitive with Proxima within the Field, LPC shall obtain approval from
Proxima in writing prior to undertaking any such collaboration. In the event
that a dispute arises between the parties as to whether a particular entity is
or is not competitive with Proxima, and the Steering Committee can not resolve
the dispute in accordance with Section 2.3.1 above, the parties agree to proceed
to dispute resolution in accordance with Section 15.1 below. Notwithstanding the
foregoing, nothing in this Agreement shall prevent LPC from selling or
otherwise distributing its standard catalog red, green and blue microlasers
within the Field without restriction.

3.4 Right of First Refusal. In the event that LPC intends to develop,
by itself or in conjunction with third parties, any products other than LPC
Components for any market segments within the Field other than the meeting room
or classroom segments, LPC agrees to promptly notify Proxima of its intentions
with respect to such products and to provide Proxima with a period of sixty (60)
days to notify LPC whether it wishes to participate in the development phase of
such products pursuant to material terms and conditions (including without

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<PAGE> 14
limitation price and product performance specifications) at least as favorable
as those offered to any third party or, if LPC has decided to develop such
products itself, pursuant to reasonable terms and conditions negotiated between
the parties in good faith. In the event that Proxima declines to exercise its
right of first refusal with respect to the development phase of any such LPC
product during the sixty (60) day period provided herein, LPC agrees (i) to
again notify Proxima approximately six (6) months prior to the time such LPC
product is intended to be made available for commercial distribution and (H) to
provide Proxima with a period of sixty (60) days to notify LPC whether it wishes
to market or distribute such product pursuant to material terms and conditions
(including without limitation price and product performance specifications) at
least as favorable as those offered to any third party or, if LPC intends to
distribute such product itself, pursuant to reasonable terms and conditions
negotiated between the parties in good faith. Notwithstanding the above, if
Proxima is currently marketing a laser projection product that would compete
directly with such LPC product (a "Proxima Competitive Product"), Proxima's
right to develop, market or distribute such LPC product shall be conditioned
upon (i) Proxima's ceasing marketing its Proxima Competitive Product at least
sixty (60) days prior to the time such LPC product is intended to be made
available for commercial distribution and (ii) Proxima agreeing to Aggressively
Market (as defined in Section 3.7 below) the LPC product. In the event that
Proxima declines to exercise its rights of first refusal with respect to both
(x) the development of and (y) the marketing and distribution of any particular
LPC product during each of the sixty (60) day periods provided for herein, or if
Proxima refuses to cease marketing any Proxima Competitive Product in accordance
with this Section 3.4, LPC shall have full rights to market the LPC product
within any market segments of the Field other than the meeting room or classroom
segments, including through other companies who may be competitors of Proxima;
provided, however, that LPC agrees that it shall refrain from entering into any
agreement with any third party with respect to the marketing and distribution of
such LPC product, or any other product (i) substantially similar thereto in
functionality or (ii) without significant differentiation therefrom, on material
terms and conditions more favorable than those offered to Proxima with respect
to such LPC product. LPC further agrees that it shall refrain from developing,
marketing or distributing any product (i) substantially similar in functionality
to, or (H) without significant differentiation from, any product for which
Proxima has already exercised its right of first refusal pursuant to this
Section 3.4.

3.5 Special Projection and Display Products. Notwithstanding Sections
3.3 and 3.4 above, the parties agree that projection and display products
intended for commercial, government, or military applications other than meeting
room, classroom, museum, theater and stadium/arena applications ("Special
Projection/Display Products") are not part of the Field. Examples, without
limitation, of Special Projection/Display Products are flight simulators and
displays on ships, airplanes, and vehicles. The parties agree that,
notwithstanding anything to the contrary contained in this Agreement, either
party may independently seek out and/or accept research, development, or
production orders or contracts for Special Projection/Display Products, and each
party may use its own technology and Joint Technology pursuant thereto;
provided, however, that if Joint Technology is used, the parties agree that,
subject to the exclusions contained in Section 4.3 below, they shall negotiate
in good faith, in light of the specific nature of the Special Projection/Display
Products project and the contribution and

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<PAGE> 15
importance of the Joint Technology to said project, to determine (i) whether a
royalty with respect to such Joint technology is appropriate (ii) if so, the
appropriate amount of such royalty. The parties agree to inform each other, on a
regular basis and subject to the restrictions on confidentiality contained in
Section 9 below, of the status of any contemplated or in-process Special
Project/Display Products projects which employ microlaser technology to the
extent allowed by third party confidentiality agreements and/or government
secrecy requirements. Each party will use its best efforts to obtain the freedom
to inform the other party.

The parties agree that when one party (the "Lead Party") decides to
submit a quotation or proposal for research, development or production orders or
contract Special Projection/Display Products, the Lead Party will offer the
other party the right of first refusal to participate in said order or contract
to the extent that the other party is capable of providing services and/or
products which otherwise would be provided by a third party. The other party
shall have fifteen (15) days to exercise the right of first refusal after
notification and will be required to pay for its own proposal preparation costs.
The Lead Party will use its best efforts to notify the other party of its intent
to submit a quotation and proposal on a timely basis so as to permit the other
party a reasonable amount of time to prepare a responsive proposal.

3.6 Mutual Representation. Each party represents and warrants that the
execution and performance of this Agreement and the transactions contemplated
hereby will not result in a violation or breach of, or conflict with, any term
or provision of, or constitute a default under, any agreement, instrument or
other obligation to which such party is subject. Each party hereby agrees to
indemnify, defend and hold the other party harmless from and against any claim,
suit or proceeding arising out of any breach or alleged breach of the forgoing
representation and warranty. These representations, warranties and
indemnification's shall continue throughout the term of this Agreement.

3.7 Aggressive Marketing. As used in this Agreement, the term
"Aggressive Marketing" or "Aggressively Market" with respect
to any Product, Joint Component, LPC Component or other product (a
"Designated Product") shall be defined as follows:

3.7.1 Marketing and Sales. Proxima's marketing and sales
programs which support the Designated Product shall receive an allocation of the
marketing and sales budgets appropriate to the reasonably expected return on
investment for products similarly situated with respect to the Designated
Product's market maturity and level of revenues.

3.7.2 Staffing and Training. Proxima shall train its sales,
marketing and distribution organization for the Designated Product in the same
or similar manner, and with the same or similar thoroughness, as it does for its
other current and future projector products. Proxima shall maintain a Designated
Product marketing manager.

3.7.3 Sales Emphasis. Proxima shall not utilize the Designated
Product solely as a promotional vehicle for selling Proxima's other projector
products.

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<PAGE> 16
3.7.4 Print and Promotional Materials. Proxima shall prepare
product literature, advertising and promotional materials for the Designated
Product of the same quality as it does for Proxima's other projector products.
Proxima shall disseminate the promotional materials to its distributors and
potential customers in a timely manner utilizing the same or similar methods as
Proxima does for its other projector products. Proxima shall maintain sufficient
stocks of print materials for the Designated Product to stimulate and satisfy
market interest in a timely manner.

3.7.5 Trade Shows and Exhibitions. Where Proxima participates
in trade shows and exhibitions which require the display and promotion of its
projector products, the Designated Product shall be provided appropriate display
space and prominence.

3.7.6 Dispute Resolution. In the event a dispute arises
between the parties as to whether or not Proxima is conducting Aggressive
Marketing, and such dispute can not be resolved by the Steering Committee
pursuant to Section 2.3.1 above, the parties agree to proceed to dispute
resolution in accordance with Section 15.1 below.

SECTION 4

MANUFACTURING AND ROYALTIES

4.1 Manufacturing of Components and Subsystems. Throughout the term of
this Agreement, Proxima shall retain the exclusive right to manufacture or have
manufactured Proxima Components. However, with respect to LPC Components and
Joint Components, the Steering Committee established pursuant to Section 2 above
shall decide, based upon a review of cost estimates and manufacturing plan
alternatives, which of such components shall be initially supplied by Proxima,
LPC or third parties.

4.2 Manufacturing Licenses. LPC hereby grants to Proxima a
non-exclusive license under the LPC Technology and the Joint Technology, to
make, have made, use and sell LPC Components and any other products which use or
incorporate LPC Technology or Joint Technology within the Field; provided,
however, that throughout the term of this Agreement, Proxima's exercise of its
license under the Joint Technology and LPC Technology to make, have made, use or
sell LPC Components shall be governed by the manufacturing decisions of the
Steering Committee pursuant to Section 4.1 above. The Steering Committee shall
supervise (i) the transfer to Proxima, or its third party manufacturers, of all
LPC Technology required for Proxima to exercise the manufacturing licenses
contemplated herein as well as (ii) the return or destruction, at any time
deemed appropriate by the Steering Committee during the term of this Agreement,
of any such embodiments of LPC Technology in the possession of Proxima or its
third party manufacturers. Proxima agrees to hold all such embodiments of the
LPC Technology in confidence pursuant to the provisions contained in Section 9
below and not to use such LPC Technology for any other purpose other than the
manufacture and maintenance of products

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<PAGE> 17
pursuant to the licenses granted by this Section 4.1 or contemplated upon
termination of this Agreement under certain circumstances.

4.3 Royalties.

4.3.1 Royalties on Distribution. In consideration of the
development services provided by LPC hereunder and the licenses granted by LPC
to Proxima herein, Proxima shall pay to LPC a royalty [ *** ] of
the Net Revenues received by Proxima for any product, including without
limitation the Products, distributed by Proxima which uses or incorporates any
LPC Technology or any Joint Technology; provided, however, that (a) Proxima
shall have no obligation to pay royalties to LPC for the use of LPC-manufactured
standard catalog red, green and blue microlasers with respect to any particular
product and (b) Proxima shall have no obligation to pay royalties to LPC for the
use of Joint Technology with respect to any particular product (i) if such
product is a non-laser-based product and such product was not developed through
the joint efforts of the parties pursuant to this Agreement; or (ii) in the
event all of the Joint Technology incorporated in such product relates solely to
circuitry, firmware or the like; or (iii) in the event none of the Joint
Technology incorporated in such product would reasonably be deemed to be
essential to the operation of such product. LPC further agrees that, during and
after the term of this Agreement, the royalty rate being paid by Proxima to LPC
for the use of LPC Technology or Joint Technology shall be equal to or lower
than the royalty rate charged by LPC to any third party for use of such
technology and LPC shall have the obligation to inform Proxima immediately if
LPC licenses LPC Technology or Joint Technology to any other party at a royalty
rate lower than the royalty rate then applicable to Proxima. For purposes of
royalty calculation pursuant to this Section 4.3. 1, the applicable "product"
upon which the percentage royalty shall be based shall be restricted to the
smallest component or set of components which include LPC Technology or
royalty-bearing Joint Technology and which are reflected as separate
revenue-bearing items in Proxima's financing records.

4.3.2 Royalties on Sublicense. In the event that, during or
after the term of this Agreement, either party (a "Licensing Party") sublicenses
Joint Technology, as permitted pursuant to Section 6.2 of this Agreement, the
Licensing Party shall pay the non-Licensing Party fifty percent (50%) of any
royalties or license fees paid by the licensee to the Licensing Party in respect
of such license. For purposes of computing the amount of royalties or licensee
fees charged and/or collected by a Licensing Party for sublicenses of Joint
Technology pursuant to this Section 4.3.2, each of Proxima and LPC agrees that
(i) all such royalties or license fees charged to sublicenses shall be at least
equivalent, in all cases, to royalties and license fees that would be charged by
the Licensing Party to a licensee in an arms length transaction and (ii) all
royalties and licensee fees received by a Licensing Party pursuant to a
sublicensing transaction that includes Joint Technology as well as other
technology licensed by the Licensing Party shall be presumed to be solely
associated with the Joint Technology, unless the associated sublicensing
agreement clearly states otherwise. Each party agrees to account to and pay the
other party its share of sublicense fees and royalties received from Joint
Technology in a manner substantially similar to that described in Section 4.4
below.

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4.4 Accounting and Payment. Proxima shall keep, at all times, an
accurate account of all products distributed by Proxima which use or incorporate
LPC Technology. Proxima shall render to LPC a written statement of the revenues
from such products sold, distributed or otherwise disposed of by Proxima during
each calendar quarter within thirty (30) days after the end of such calendar
quarter. Proxima shall pay LPC the amount of all royalties described in such
written statement simultaneously with the rendering of the written statement.
LPC shall have the right, at reasonable times during normal business hours of
Proxima, and on reasonable notice to Proxima, to have Proxima's accounts with
respect to sale and distribution of products examined by an independent
chartered or certified accountant selected and paid by LPC for the purpose of
verifying such royalty statements. If such examination accurately discloses that
Proxima underpaid royalties due to LPC hereunder, then Proxima shall immediately
remit to LPC the amount of such underpayment. The cost of such examination shall
be borne by LPC, unless the examination establishes that LPC was underpaid by
three percent (3%) (but at least $10,000) with respect to products sold or
distributed by Proxima in any quarter which use or incorporate the LPC
Technology, in which event the cost of such examination shall be promptly be
reimbursed to LPC by Proxima. In the event such examination establishes that LPC
was overpaid, LPC shall promptly issue a credit to Proxima in the amount of the
overpayment which shall be applied against future payments due by Proxima to
LPC. Proxima shall not be required to maintain such account information
statements for a period of more than three (3) years after the end of the
respective calendar quarter in which such statements are made. In the event that
LPC obtains any rights to Proxima Technology following termination of this
Agreement pursuant to Section 10.5.2 below, LPC shall thereafter be required to
fulfill obligations consistent with those required from Proxima pursuant to this
Section 4.4 and Proxima shall thereafter hold rights consistent with those held
by LPC pursuant to this Section 4.4.

4.5 Penalty for Late Payment of Royalties. In the event that any
payment of royalties hereunder shall remain unpaid (the "Late Payment") for more
than ten (10) days following the date such payment is due, then the amount of
such Late Payment shall bear interest at one and one-half percent (1.5 %) per
month, calculated from the due date until said Late Payment and all interest
accrued thereon shall have been paid.

4.6 Manufacturing Escrow.

4.6.1 Escrow. In order to facilitate each party's exercise of
(i) the manufacturing licenses granted pursuant to Section 4.2 above during the
term of this Agreement and (ii) the manufacturing licenses contemplated
following termination of this Agreement, and to ensure uninterrupted
availability of the LPC Components, Proxima Components, Joint Components and/or
the Products and their ongoing manufacturing, maintenance and support, each
party shall, within thirty (30) days of the Effective Date, enter into an escrow
agreement ("Escrow Agreement") with a mutually agreeable escrow agent ("Escrow
Agent"). The Escrow Agreement shall be in a form and content reasonably
acceptable to the parties hereto and shall contain, as a minimum and without
limitation, the terms and conditions set forth in this Section 4.6. The Escrow
Agreement shall provide, among other things, for the deposit into escrow with
the Escrow Agent, within thirty (30) calendar days of its execution, for storage
at

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<PAGE> 19
such Escrow Agent's premises, of all the Proxima Technology, LPC Technology and
Joint Technology defined in Sections 1.6, 1.7 and 1.8 above which is available,
which is used by Proxima or LPC for the manufacturing of the Proxima Components,
LPC Components, Joint Components or the Products, and which is reasonably
acceptable in form and content to the Steering Committee (the "Escrow
Materials"). Each party shall update the Escrow Materials with relevant designs,
drawings, and other helpful materials as modifications or new releases of
Proxima components, LPC Components, Joint Components or Products are created.
Costs for such filing, updating and management of the Escrow Materials shall be
shared equally by the parties. Each party will use due care in ensuring the
completeness and accuracy of the Escrow Materials provided. If the Escrow Agent
provides the Escrow Materials to either party under the Escrow Agreement, such
party agrees to hold these materials and information in confidence pursuant to
the provisions contained in Section 9 below, and not to use them for any purpose
other than the manufacture and maintenance of products pursuant to the licenses
contemplated upon termination of this Agreement under certain circumstances.

4.6.2 Technical Assistance. Each party will provide to the
other, prior to the deposit of the relevant Escrow Materials pursuant to Section
4.6.1 above, such technical assistance, at an agreed-upon location, as is
reasonably required to allow competent technical employee(s) of the
non-depositing party to understand the Escrow Materials and to establish the
sufficiency of its content. All documentation and other material created in the
course of such technical assistance shall form a part of the Escrow Materials.
Each party, at its option and expense, may request that the completeness and
accuracy of any Escrow Materials deposited by the other party be verified by the
Escrow Agent or another party reasonably acceptable to the non-depositing party.
Such verification may be requested by either party once per deposit of Escrow
Materials to the Escrow Agent. Each party may in its discretion and at its
expense designate a representative to be present at any particular verification.

4.6.3 Access. Escrow Materials shall remain under seal and
unopened unless and until a Release Condition (as defined below) occurs;
provided, however, that nothing in this Section 4.6 shall be read to restrict or
limit either party's ownership of, and correspondent right of access to, the
Joint Technology. Either party shall be entitled to examine the Escrow Materials
at the Escrow Agent's location at any time during normal business hours.

4.6.4 Release of Escrow Materials. Upon the occurrence of any
of the following events ("Release Conditions"), in addition to any other rights
available to either party under this Agreement or by law, each party will be
entitled to possession of the relevant Escrow Materials deposited by the other
party (the "Depositing Party") for the purposes set forth in Section 4.6.5
below:

(i) The institution by the Depositing Party of
insolvency, receivership or bankruptcy proceedings or any other material
proceedings for the settlement of its debts, including without limitation, a
reorganization, a compromise, an arrangement or assignment for the benefit of
its creditors; the institution of such proceedings against the Depositing Party;
the

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<PAGE> 20
Depositing Party making a general assignment for the benefit of creditors; or
the Depositing Party's dissolution or ceasing to do business in the normal
course; or

(ii) Upon a termination of this Agreement for any
reason other than the receiving party's material default in accordance with the
terms of Section 10 below.

(iii) In addition, Proxima shall be entitled to
possession of the relevant Escrow Materials in the event that (a) the Steering
Committee has determined that LPC should be the exclusive manufacturer of an LPC
component or Joint Component and (b) LPC has persistently and materially failed
during (i) any sixty (60) consecutive day period or (ii) any two (2) thirty (30)
consecutive day periods within any twelve (12) month period to manufacture and
ship any such LPC Component or Joint Component to Proxima in accordance with the
directions of the Steering Committee.

The Escrow Agreement shall provide that, subject to the right of either
party to contest a release, the Escrow Agent will release the Escrow Materials
to the receiving party within ten (10) calendar days from the date of the
receiving party's written request for the release of the required Escrow
Materials accompanied by a declaration from a senior officer of the receiving
party stating the particulars of the reasons for its request and confirming that
a copy of such request and declaration have been delivered to the Depositing
Party.

4.6.5 Licenses. Upon release of the Escrow Materials to a
receiving party pursuant to Release Conditions (i) and (ii) set forth in Section
4.6.4 above, the receiving party's right to exploit such Escrow Materials shall
be governed by Section 10.5 of this Agreement, as applicable. Upon release of
the relevant Escrow materials to Proxima pursuant to Release Condition (iii) set
forth in Section 4.6.4 above, Proxima shall be thereafter permitted to exercise
its non-exclusive manufacturing license with respect to the affected LPC
Component or Joint Component pursuant to Section 4.2 above, and Proxima's
ability to exercise such license shall no longer be governed by the
manufacturing decisions of the Steering Committee.

SECTION 5

MOST FAVORED CUSTOMER

LPC agrees that, with respect to the distribution of LPC Components and
Joint Components by LPC pursuant to Section 3 above, LPC shall offer such LPC
Components and Joint Components to Proxima on price, payment and other material
terms which are at least as favorable as the price, payment and other material
terms offered, as permitted by this Agreement, to any of LPC's other
distributors, OEMs or end-user customers of such components. In the event LPC
offers such LPC Components and Joint Components to any other distributor, OEM or
end-user customer at such more favorable terms, LPC shall give Proxima the
opportunity to substitute such other terms and conditions for the price, payment
and other

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material provisions contained in this Agreement with respect to those
LPC Components and Joint Components.

SECTION 6

INTELLECTUAL PROPERTY RIGHTS

6.1 Separate Ownership.

6.1.1 LPC Ownership. Proxima agrees that, except for the
licenses and other rights granted pursuant hereto, LPC or its licensors owns all
right, title and interest in LPC Technology and LPC Components, and in all
patents, trademarks, trade names, inventions, copyrights, know-how, mask work
rights and trade secrets in and to LPC Technology and LPC Components.

6.1.2 Proxima Ownership. LPC agrees that, except for the
licenses and other rights granted pursuant hereto, Proxima or its licensors own
all right, title and interest in Proxima Technology and Proxima Components, and
in all patents, trademarks, trade names, inventions, copyrights, know-how, mask
work rights and trade secrets in and to Proxima Technology and Proxima
Components.

6.1.3 Patents. Proxima and LPC may, in their discretion, elect
to pursue statutory protection, including without limitation United States and
foreign patent and copyright protection or trade secret protection, for their
respective Proxima Technology or LPC Technology, but shall not be required to
pursue any such protection; provided, however, that during the term of this
Agreement, to the extent such Proxima Technology or LPC Technology relates to
the Field (a "Field Invention"), Proxima-and LPC shall at their own cost
diligently file, prosecute and maintain patents and patent applications covering
any such Field Invention, including without limitation Field Inventions made by
either party's respective employees or consultants, if such Field Invention is
determined, in the reasonable estimation of the developing party, to be
patentable. Each party shall discuss and evaluate with the other such Field
Inventions and shall confer with the other regarding the advisability of filing
patent applications, and in which countries, with respect to Field Inventions.
Subject to the confidentiality provisions set forth in Section 9 below, each
party shall submit to the other a substantially complete draft of each patent
application embodying a Field Invention for review and comment prior to filing.

6.1.4 Abandonment of Separately Owned Patents. In the event
that either Proxima or LPC wishes to discontinue its maintenance or prosecution
of any patents or patent applications owned by it and embodying any part of the
Proxima Technology or the LPC Technology respectively, such discontinuing party
shall (i) notify the other in writing at least sixty (60) days prior to any
deadline for action required for maintenance or prosecution, which notice shall
offer to assign to the other party such patent or patent application at no cost;
and (ii)

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<PAGE> 22
furnish complete and original information regarding the patent or
application, including without limitation filings and communications with patent
authorities, to the other party promptly upon the other party's request. 'Me
other party may, in its sole discretion, elect to either (a) refuse the offer of
assignment, in which case the patent or application shall be abandoned by the
parties, or (b) accept the assignment, including without limitation the right to
exploit or license such patent or application in its sole discretion and without
accounting to the discontinuing party for any compensation or royalties
therefrom, and assume the maintenance or prosecution of the patent or
application at its own expense; provided, however, that the discontinuing party
shall have a nonexclusive, nontransferable, paid-up, worldwide license,
including the right to sublicense, to make, have made, use and sell products
covered by the patent or application (except that if the discontinuing party is
LPC, such license shall be limited by the exclusive rights to LPC Technology
granted to Proxima in this Agreement).

6.1.5 Enforcement of Separately Owned Rights. Each party shall
notify the other in the event it becomes aware of any unauthorized third party
manufacture, use or sale of a product covered by any patents or patent
applications owned by the other party. Such notice shall (i) be in writing, (H)
identify the third party, and (iii) be given to the other party within thirty
(30) days of the party's notice of such manufacture, use or sale. Upon either
party becoming aware that a third party is manufacturing, using or selling,
without authorization, products covered by its patents or patent applications,
the party owning such patent or patent application shall have the exclusive
right, at it sole expense, and in its sole control, to take action against the
third party or to settle the matter, and to retain any money judgments or
settlements resulting therefrom; provided, however, that any consent judgment or
settlement made by the party shall not diminish the rights of the other party
hereto. In the event such party brings such an action or proceeding, the other
party shall have the obligation and duty to cooperate and provide full i and
assistance to such party and its counsel in connection with any such action or
proceeding. The party initiating such action shall promptly reimburse the other
party for costs incurred as a result of such cooperation.

In the event that either party does not desire to exercise its
exclusive right to bring any given infringement action or proceeding with
respect to its solely-owned technology, the parties shall negotiate, in good
faith, to reallocate the right to bring such an action or proceeding. If the
parties have not resolved such an allocation of rights within sixty (60) days
following the date when the party owning the technology has declined to
institute a given infringement action or proceeding with respect thereto, the
non-owning party shall then be given the exclusive right to institute and
control such an action. The party owning the technology shall have the
obligation to cooperate and provide full information and assistance to the
non-owning party, at the non-owning party's expense, with respect to any such
action and any recovery from such action, after the payment of all costs
associated therewith, shall belong solely to the non-owning party.

6.2 Joint Ownership. Although, as set forth in Sections 6.1.1 and
6.1.2 above, each party shall retain all intellectual property rights in and to
proprietary technology that it has previously developed or hereafter develops
independently of any joint development arrangement

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hereunder, all intellectual property rights in and to Joint Technology shall be
allocated in accordance with this Section 6.2. Subject to the royalty provisions
set forth in Section 4.3 above, each of Proxima and LPC shall be permitted to
use, sublicense and otherwise exploit Joint Technology without restriction in
accordance with this Section 6.2; provided, however, that prior to the
termination or expiration of this Agreement, neither party shall be permitted to
sublicense any Joint Technology without the prior written approval of the
Steering Committee. 'Me determination whether or not any jointly developed
invention is considered to be Joint Technology shall be governed by general
principles of inventorship and authorship under U.S. copyright and patent law.
In the event that any dispute arises between the parties as to whether or not a
particular invention is to be considered Joint Technology and the Steering
Committee can not resolve the dispute in accordance with Section 2.3.1 above,
the parties agree to proceed to dispute resolution in accordance with Section
15.1 below.

6.2.1 Notification. Each party shall notify the other in
writing, within thirty (30) days of the conception thereof, of any Joint
Technology developed pursuant to this Agreement.

6.2.2 Protection of Joint Technology. Within ninety (90) days
of the giving of a notice under Section 6.2. 1. above, the Steering Committee
shall decide whether to pursue patent protection for the Joint Technology. (i)
If the parties (through their representatives on the Steering Committee)
mutually agree to pursue patent protection for the Joint Technology, the parties
will mutually control and share equally the cost of the prosecution of United
States and/or foreign patent applications. The parties shall retain joint
ownership of any and all patents arising from the applications, and neither
party shall grant any licenses with respect to any such jointly owned patents
without the prior written consent of the other except to the extent necessary to
have made products which use or incorporate such technology; provided, however,
that upon termination of this Agreement, each party shall have the right to
license rights under such jointly owned patents without the consent of the other
party (subject to the limitations and exclusive rights, if any, of Proxima
following such termination as set forth in Section 10). (ii) If only one party
(the "Pursuing Party") desires to pursue patent protection for Joint Technology,
that party will solely control and bear the entire cost of the prosecution of
United States and/or foreign patent applications. The Pursuing Party shall
retain sole ownership of any patent arising from any such patent application,
including without limitation the right to exploit or license such patent in its
sole discretion and without accounting to the other party for any compensation
or royalties therefrom; provided, however, that the other party shall have a
nonexclusive, nontransferable, paid-up, worldwide license, including the right
to sublicense, to make, have made, use and sell products covered by the patent
(subject, in each case, to the exclusive rights granted to Proxima hereunder).

6.2.3 Trade Secret Protection. If both parties do not wish to
seek patent protection for a certain element of Joint Technology, and either or
both parties desire to maintain Joint Technology as a trade secret both during
and/or after termination of this Agreement, (i) either party may exploit the
Joint Technology for its internal purposes without accounting to the other party
therefor, (ii) either party may license the Joint Technology to a third party
solely for the third party's internal purposes, provided that the third party
has entered into an appropriate

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<PAGE> 24
confidentiality agreement containing substantially the same protections as those
contained in Section 9 below; and (iii) the Joint Technology shall be deemed the
Confidential Information (as defined in Section 9 below) of each party hereto,
and both parties shall be subject to the obligations of confidentiality set
forth in Section 9.

6.2.4 No Protection. If both parties agree in writing that
neither patent protection nor trade secret status is desired for any Joint
Technology, (i) either party may make, have made, use or sell the Joint
Technology or products covered by the Joint Technology and (ii) either party may
license the Joint Technology to a third party, without accounting to the other
therefor (subject, in each case, to the exclusive rights granted to Proxima
hereunder).

6.2.5 Abandonment of Jointly Owned Patents. In the event that
either party wishes to discontinue its obligations relating to any jointly owned
patent or patent application under Section 6.2.2 (i) hereto (an "Abandoning
Party"), such party shall (a) notify the other in writing at least sixty (60)
days prior to any deadline for action required for maintenance or prosecution of
the patent or patent application, which notice shall offer to assign the
Abandoning Party's interest in the patent or patent application to the other
party at no cost. Such other party may, in its sole discretion, elect to either
(a) refuse the offer of assignment, in which case the patent or application
shall be abandoned by the parties; or (b) accept the assignment, including
without limitation the right to exploit or license such patent or application in
its sole discretion and without accounting to the discontinuing party for any
compensation or royalties therefrom, and assume the maintenance or prosecution
of the patent or application at its own expense; provided, however, that the
Abandoning Party shall have a nonexclusive, nontransferable, paidup, worldwide
license, including the right to sublicense, to make, have made, use and sell
products covered by the patent or application (except that if the Abandoning
Party is LPC, such license shall be limited by the exclusive rights to Joint
Technology granted to Proxima in this Agreement). Any abandonment of Joint
Technology that has become separately owned technology pursuant to Section 6.2.2
(H) above shall be governed by the provisions of Section 6.1.4.

6.2.6 Enforcement of Rights. In the event either party becomes
aware of any unauthorized third party manufacture, use or sale of a product
covered by any jointly owned intellectual property rights, it shall promptly
notify the other party. Such notice shall (i) be in writing, (ii) identify the
third party, and (iii) be given to the other party within thirty (30) days of
the party's notice of such manufacture, use or sale. If the parties mutually
agree to take action against the third party, they shall mutually control and
share the expenses of an action against the third party, and shall share equally
any money judgments or settlements resulting therefrom. If only one party
desires to take action against the third party, the action shall be under the
sole control of and at the sole expense of that party, and that party shall
retain any money judgments or settlements resulting therefrom.

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<PAGE> 25
SECTION 7

INDEMNIFICATION

7.1 LPC Components.

7. 1.1 LPC Obligation. In the event any claim, suit or
proceeding (a "Claim") is brought against Proxima or its customers on the issue
of infringement of any patent, copyright, trademark, mask work or other
intellectual property right in any part of the world by any LPC Component
manufactured or distributed by or for Proxima or LPC, LPC shall bear the costs
of the defense of any such Claim, including any settlement or final judgment of
such Claim plus costs and attorneys' fees awarded with respect to such Claim.
Proxima agrees to provide LPC with control over the defense and/or settlement
negotiations related to any such Claim and LPC shall be released from its
obligations under this Section 7.1.1 unless (i) Proxima promptly notifies LPC in
writing of any known Claim; (ii) Proxima gives LPC authority to proceed as
contemplated herein; and (iii) Proxima gives LPC proper and full information and
assistance in settling and/or defending any such Claim.

7.1.2 Limitation. Notwithstanding the provisions of Section
7.1.1 above, LPC assumes no liability to Proxima for:

7.1.2.1 any Claim with respect to any LPC Component
used in combination with other products or services which would not cover the
LPC Component standing alone;

7.11.2 any Claim with respect to any LPC Component
that has been modified in any manner by Proxima or any third party licensed by
Proxima to manufacture the LPC Components and such claim would riot have
occurred but for such modification; or

7.1.2.3 any trademark infringements involving any
marking or branding applied to any LPC Component by or at the request of
Proxima.

7.1.3 Entire Liability. THE FOREGOING PROVISIONS OF THIS
SECTION 7.1 STATE THE ENTIRE LIABILITY OF LPC, AND THE EXCLUSIVE REMEDY OF
PROXIMA, WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF PATENTS, COPYRIGHTS,
TRADEMARKS, MASK WORK RIGHTS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY LPC
COMPONENTS MANUFACTURED OR DISTRIBUTED BY OR FOR EITHER PARTY DURING OR AFTER
THE TERM OF THIS AGREEMENT.

7.2 Proxima COMPONENTS.

7.2.1 Proxima Obligation. In the event any claim, suit or
proceeding (a 'Claim') is brought against LPC or its customers on the issue of
infringement of any patent,

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<PAGE> 26
copyright, trademark, mask work or other intellectual property right in any part
of the world by any Proxima Component manufactured or distributed by or for LPC
or Proxima, Proxima shall bear the costs of the defense of any such Claim,
including any settlement or final judgment of such Claim plus costs and
attorneys" fees awarded with respect to such Claim. LPC agrees to provide
Proxima with control over the defense and/or settlement negotiations related to
any such Claim and Proxima shall be released from its obligations under this
Section 7. 1. 1 unless (i) LPC promptly notifies Proxima in writing of any known
Claim; (ii) LPC gives Proxima authority to proceed as contemplated herein; and
(iii) LPC gives Proxima proper and full information and assistance in settling
and/or defending any such Claim.

7.2.2 Limitation. Notwithstanding the provisions of Section
7.2.1 above, Proxima assumes no liability to LPC for:

7.2.2.1 any Claim with respect to any Proxima
Component used in combination with other products or services which would not
cover the Proxima Component standing alone,

7.2.2.2 any Claim with respect to any Proxima
Component that has been modified in any manner by LPC or any third party
licensed by LPC to manufacture the Proxima Components and such claim would not
have occurred but for such modification; or

7.2.2.3 any trademark infringements involving any
marking or branding applied to any Proxima Component by or at the request of
LPC.

7.2.3 Entire Liability. THE FOREGOING PROVISIONS OF THIS
SECTION 7.2 STATE THE ENTIRE LIABILITY OF PROXIMA, AND THE EXCLUSIVE REMEDY OF
LPC, WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF PATENTS, COPYRIGHTS,
TRADEMARKS, MASK WORK RIGHTS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY PROXIMA
COMPONENTS MANUFACTURED OR DISTRIBUTED BY OR FOR EITHER PARTY DURING OR AFTER
THE TERM OF THIS AGREEMENT.

7.3 Joint Components.

7.3.1 Joint Indemnification. In the event any claim, suit or
proceeding (a "Claim") is brought against either party on the issue of
infringement of any patent, copyright, trademark, mask work or other
intellectual property right in any party of the world by any Joint Component
manufactured or distributed by either party, both parties shall have the
obligation and duty to share equally in the costs of the defense any such Claim,
including any settlement or final judgment of such Claim plus costs and
attorneys' fees awarded with respect to such Claim. The parties agree to share
joint control over the defense and/or settlement negotiations related to any
such Claim and each party (each an "Indemnifying Party") shall be released from
its obligations under this Section 7.3.1 unless (i) the other party promptly
notifies the Indemnifying Party in writing of any known Claim; (ii) the other
party gives the Indemnifying Party authority

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to proceed as contemplated herein; and (iii) the other party gives the
Indemnifying Party proper and full information and assistance to settle and/or
defend any such Claim.

7.3.2 Limitation. Notwithstanding the provisions of Section
7.3.1 above, each party assumes no liability to the other for:

7.3.2.1 any Claim with respect to any Joint Component
used in combination with other products or services which would not cover the
Joint Component standing alone;

7.3.2.2 any Claim with respect to any Joint Component
that has been modified in any manner by the other party or any third party
licensed by the other party to manufacture the Joint Components and such Claim
would not have occurred but for such modification; or

7.3.2.3 any trademark infringements involving any
marking or branding applied to a Joint Component by or at the request of the
other party.

SECTION 8

GENERAL INDEMNITIES

8.1 Indemnification by Proxima. All financial obligations associated
with Proxima's business are the sole responsibility of Proxima. All sales and
other agreements between Proxima and its customers are Proxima's exclusive
responsibility and shall have no effect on Proxima's obligations under this
Agreement. Proxima shall be solely responsible for, and shall indemnify and hold
LPC and its directors, officers, employees and agents free and harmless from,
any and all losses, claims, damages, proceedings, lawsuits and expenses
(including LPC's attorneys' fees) arising out of the acts of Proxima, its
employees or its agents.

8.2 Indemnification by LPC. All financial obligations associated with
LPC's business are the sole responsibility of LPC. All sales and other
agreements between LPC and its customers are LPC's exclusive responsibility and
shall have no effect on LPC's obligations under this Agreement. LPC shall be
solely responsible for, and shall indemnify and hold Proxima and its directors,
officers, employees and agents free and harmless from, any and all losses,
claims, damages, proceedings or lawsuits and expenses (including Proxima's
attorneys" fees) arising out of the acts of LPC, its employees or its agents.

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SECTION 9

CONFIDENTIAL INFORMATION

9.1 Definition. The term "Confidential Information" shall mean any
information disclosed by one party to the other in connection with this
Agreement which is in written, graphic, machine-readable or other tangible form
and is marked "Confidential", "Proprietary" or in some other manner to indicate
its confidential nature. Confidential Information may also include information
that is disclosed orally or visually, provided that such information is
designated as confidential at the time of disclosure and confirmed in writing as
confidential within a reasonable time after its oral or visual disclosure.

9.2 Obligation. Each party shall treat as confidential all Confidential
Information received from the other party, shall not use such Confidential
Information except as expressly permitted under this Agreement, and shall not
disclose such Confidential Information to any third party without the other
party's prior written consent, except to employees or contractors of a party who
are similarly bound by a written agreement to keep such information confidential
or to entities to whom the receiving party is permitted to license or sublicense
such Confidential Information. Without limiting the foregoing, each party shall
use at least the same degree of care which it uses to prevent the disclosure of
its own confidential information of like importance to prevent the disclosure of
the other party's Confidential Information.

9.3 Exceptions. Notwithstanding the above, the restrictions of this
Section 9 shall not apply to information that:

9.3.1 was independently developed by the receiving party
without any use of the Confidential Information of the other party and by
employees or other agents of (or independent contractors hired by) the receiving
party who had not been exposed to such Confidential Information at the time of
development, as shown by the files and records of the receiving party;

9.3.2 becomes known to the receiving party, without
restriction, from a source other than the other party hereto without the
receiving party's knowledge of any breach of this Agreement and otherwise not in
knowing violation of the other party's rights;

9.3.3 was in the public domain at the time it was disclosed or
hereafter becomes in the public domain through no act or omission of the
receiving party;

9.3.4 was known to the receiving party, without restriction,
at the time of disclosure; or

9.3.5 is disclosed pursuant to the order or requirement of a
court, administrative agency, or other governmental body; provided, however,
that the receiving party shall provide prompt notice of any such order or
requirement to the other party and shall use all reasonable

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<PAGE> 29
efforts to cooperate with the other party to obtain a protective order or
otherwise prevent public disclosure of such information.

9.4 Enforcement. Each party shall exert all reasonable efforts,
including, but not limited to, the execution of proprietary non-disclosure
agreements with employees and consultants, and legal action, to enforce
compliance with the provisions of this Section 9 by its directors, officers,
employees, and any third party to whom it provides access to Confidential
Information of the other party.

9.5 Duration. Each party's obligation of non-disclosure of Confidential
Information shall continue throughout the term of this Agreement and for a
period of five (5) years thereafter in the event such party no longer retains a
continuing license to use the other party's technology and Confidential
Information following termination of this Agreement; otherwise, after
termination of this Agreement, each party shall be bound by the terms of Section
9.2 (as limited by Section 9.3) for so long as such party has a continuing
license to access and/or use the technology and Confidential Information of the
other party.

9.6 Remedies. If either party breaches any of its obligations under
this Section 9, the other party shall be entitled to equitable relief to protect
its interest therein, including but not limited to injunctive relief, as well as
money damages.

SECTION 10

TERM AND TERMINATION

10.1 Term. This Agreement shall commence on the Effective Date and
shall continue in full force and effect unless and until it is terminated as
provided below.

10.2 Termination for Material Default. If either party defaults in the
performance of any material provision of this Agreement, then the nondefaulting
party may give written notice to the defaulting party that if the default is not
cured within sixty (60) days the Agreement will be terminated. If the
nondefaulting party gives such notice and the default is not cured during the
sixty (60) day period, then the nondefaulting party shall have the right to
terminate this Agreement at the end of that period immediately upon giving
notice to the defaulting party.

10.3 Termination by Proxima. Proxima may terminate this Agreement (i)
at any time following the four (4) month period beginning on the Effective Date
upon ninety (90) days' prior written notice to LPC, (ii) at any time following
the Effective Date if LPC is acquired by any entity which could reasonably be
deemed to be a competitor of Proxima or (iii) at any time if LPC shall have
breached the representation set forth in Section 2.9(c) of the Stock Purchase
Agreement or shall be unable to confirm such representation at the time of a
subsequent Closing under the Stock Purchase Agreement pursuant to Section 4.2.1
thereof, provided, however, that with respect to termination by Proxima pursuant
to clause (iii) herein, (a) Proxima shall have

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<PAGE> 30
previously given notice to LPC that it believes LPC to be in breach of the
representation set forth in Section 2.9 of the Stock Purchase Agreement, (b)
Proxima shall have allowed LPC a thirty (30) day period to present a
satisfactory program to remedy the breach hereunder and such period shall have
elapsed without LPC presenting such a satisfactory program, (c) Proxima shall
not be required by this Agreement to provide any additional funding to LPC until
such time as LPC has presented such a satisfactory program, and (d) upon
presentation of such a satisfactory program, Proxima will immediately purchase,
with no fifteen (15) day delay, Warrant Shares or Additional Shares as specified
in any Funding Request theretofore received by Proxima. In the event that,
following such thirty-day remedy period, LPC has not presented such a
satisfactory program and Proxima terminates this Agreement pursuant to clause
(iii) above, (a) the parties agree to wind down the Development Program during a
period beginning on the date of termination and continuing for a maximum of
thirty (30) days therefrom and (b) following the "wind down" period, Proxima
agrees, to the extent that Proxima has not already provided such funding, to
reimburse LPC for up to fifty percent (50%) of the costs incurred by LPC during
the "wind down" period.

10.4 Termination by LPC. LPC may terminate this Agreement (i)
immediately and without notice (a) in the event Proxima fails to purchase
Additional Shares or otherwise provide additional funds pursuant to Section 1.4
of the Stock Purchase Agreement following receipt of a Funding Request after the
Warrant has been fully exercised or (b) in the event Proxima fails to purchase
Warrant Shares following Proxima's receipt of a Funding Request and the
fulfillment of the closing conditions set forth in Section 4.2 of the Stock
Purchase Agreement, or (ii) at any time following the two (2) year period
beginning on the Effective Date in the event Proxima is Aggressively Marketing
(as defined in Section 3.7 above) no Designated Products; provided, however,
that (a) LPC shall have previously given notice to Proxima that it is
Aggressively Marketing no Designated Product and (b) LPC shall have allowed
Proxima a thirty (30) day period to present a satisfactory program to begin
Aggressively Marketing at least one Designated Product. and such period shall
have elapsed without Proxima presenting such a satisfactory program.

10.5 Rights Upon Termination. Upon termination of this Agreement
pursuant to Sections 10.2, 10.3 or 10.4 above, the rights of the parties shall
be governed by the provisions of this Section 10.5:

10.5.1 Proxima's Rights.

a. Upon Material Default by Proxima. If termination
of this Agreement occurs as a result of Proxima's material default pursuant to
Section 10.2 above, Proxima shall have no rights to the LPC Technology;
provided, however, that Proxima's rights to the Proxima Technology and the Joint
Technology shall remain unaffected by any such termination. For purposes of this
Section 10.5.1, the occurrences set forth in Section 10.4 above shall not
constitute a material default of the Agreement by Proxima.

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<PAGE> 31
b. Termination for Failure to Provide Additional
Funding or Upon Material Default by LPC. If termination of this Agreement occurs
(x) as a result of Proxima's failure to provide additional funding requested by
LPC as set forth in Sections 10.4(i) above, (y) as a result of LPC's material
default pursuant to Section 10.2 above, or (z) pursuant to Section 10.3 above,
Proxima's continuing rights under the LPC Technology shall be determined as
follows:

(i) In the event Proxima's total funding to
LPC under the Development Program contemplated by this Agreement has not reached
$2 million at the time of termination of this Agreement, Proxima shall retain no
rights under the LPC Technology unless the termination is pursuant to Section
10.3, (ii); or Section 10.3 (iii).

(ii) In the event that Proxima's total
funding to LPC under the Development Program contemplated by this Agreement has
equaled or exceeded $2 million, but has not yet reached $2.9 million, at the
time of termination of this Agreement, or if the termination is pursuant to
Section 10.3 (ii) or Section 10.3 (iii) (regardless of the amount of Proxima's
total funding to LPC under the Development Program), (x) LPC shall grant to
Proxima an exclusive, nontransferable, perpetual license under the LPC
Technology to make, have made, use and sell any laser-based product, including
without limitation Products incorporating LPC Components, within the meeting
room and classroom market segments of the Field and (y) LPC shall grant to
Proxima a nonexclusive, nontransferable, perpetual license under the LPC
Technology to make, have made, use and sell any laser-based product, including
without limitation products incorporating LPC Components, in all market segments
of the Field other than the meeting room and classroom market segments;

(iii) In the event that Proxima's total
funding to LPC under the Development Program contemplated by this Agreement has
exceeded $2.9 million at the time of termination of this Agreement, LPC shall
grant to Proxima an exclusive (subject to any rights already declined by Proxima
pursuant to Section 3.4 above), nontransferable, perpetual license under the LPC
Technology to make, have made, use and sell any laser-based products, including
without limitation Products incorporating LPC Components, within the entire
Field.

(iv) For purposes of any licenses that may
be granted by LPC to Proxima pursuant to Subsections (ii) or (iii) above, (x)
the nature of any exclusive license granted to Proxima shall be subject to the
exceptions contained in Sections 3.3 and 3.4 of this Agreement which shall
survive termination of this Agreement; and (y) Proxima shall pay a fixed royalty
to LPC for such license in accordance with the provisions of Sections 4.3, 4.4
and 4.5 above which shall survive termination of this Agreement; provided,
however, that if termination of this Agreement occurs as a result of LPC having
been acquired by a competitor of Proxima, the maximum royalty rate payable by
Proxima shall be [ *** ].

c. Termination for Failure to Aggressively Market. In
the event of termination of this Agreement as a result of Proxima's Aggressively
Marketing no Designated Products as set forth in Section 10.4(ii) above, or in
the event of Proxima similarly is

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* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 32
Aggressively Marketing no Designated Products after termination of this
Agreement, all of the rights and licenses granted by LPC to Proxima pursuant to
this Agreement shall continue according to their same terms; provided, however,
that all such licenses shall immediately become nonexclusive to the extent they
are not already nonexclusive.

10.5.2 LPC's Rights.

a. Upon Material Default by LPC. If termination of
this Agreement occurs as a result of LPC's material default pursuant to Section
10.2 above, LPC shall have no rights to the Proxima Technology; provided,
however, that LPC's rights to the LPC Technology and the Joint Technology shall
remain unaffected by any such termination, which rights shall be subject only to
limitations imposed as a result of rights granted to Proxima upon such
termination. For purposes of this Section 10.5.2, the occurrence set forth in
Section 10.3(ii) above shall constitute a material default of the Agreement by
LPC.

b. For Any Reason Other Than LPC's Material Default.
If termination of this Agreement occurs for any reason other than LPC's material
default, then LPC shall have the following rights:

(i) with respect to LPC Technology and Joint
Technology, LPC shall have the right to use such technology without limitation,
except as imposed as a result of rights granted to Proxima upon such
termination;

(ii) with respect to Proxima Technology
developed by LPC with funds provided to LPC by Proxima pursuant to the terms of
this Agreement, which technology is unique to laser based projectors and is not
essential to the operation of any projector (including, without limitation,
projection optics and laser diode drivers), LPC shall have a
non-exclusive, nontransferable, perpetual royalty-free license under such
Proxima Technology to make, have made, use and sell any laser-based products,
including without limitation Products, but subject to limitations imposed as a
result of any rights granted to Proxima upon termination of this Agreement;

(iii) with respect to Proxima Technology not
developed by LPC, which technology is unique to laser based projectors and is
not essential to the operation of any projector (including, without
limitation, projection optics and laser diode drives), LPC shall be
entitled to receive from Proxima a non-exclusive, nontransferable, perpetual,
license under such Proxima Technology to make, have made, use and sell any
laser-based products, including without limitation Products, but subject to any
limitations imposed as a result of rights granted to Proxima upon termination of
this Agreement; provided, however, that at Proxima's sole option, the
consideration from LPC to Proxima for the grant of the aforementioned license
shall include either (i) the reimbursement of Proxima by LPC for the development
costs expended by Proxima in the Development of such technology (in a manner
similar to LPC's accounting for the use of proceeds pursuant to Section 2.4.1
above) or (ii) the payment by LPC to Proxima of a

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<PAGE> 33
reasonable royalty for use of such technology, such royalty to be determined
through the good faith negotiation of the parties following termination of this
Agreement.

(iv) Notwithstanding anything hereunder to
the contrary, in no event shall LPC obtain, following the termination or
expiration of this Agreement, any rights in and to Proxima's Cyclops technology
and the 'look and feel' of Proxima's projector products.

10.6 Survival of Certain Terms. The provisions of Sections 4.3, 4.4,
4.5, 4.6 (to the extent it addresses Release Conditions which may occur after
such termination or expiration), 6.1.4, 6.1.5 (but only with respect to a party
that has a continuing license in and to the other parry's solely-owned
technology pursuant to Section 10.5 above), 6.2, 7, 8, 9, 10, 11, 12, and 15
shall survive the termination of this Agreement for any reason.

SECTION 11

COMPLIANCE WITH LAWS

11.1 Governmental Requirements.

11.11 Registration, Notification and Recordation of Agreement.
If the terms of this Agreement are such as to require or make it appropriate
that the Agreement or any part of it be registered with or reported to a
national or supra-national agency of any area in which a party will do business
under the Agreement, then such party will, at least fifteen (15) days prior to
commencing to do any business under this Agreement in any such area, and at the
sole expense of such party, undertake such registration or report. Notice and
appropriate verification of the act of registration or report of any agency
ruling resulting from such registration will be provided immediately to the
other party by such party. Any formal recordation of this Agreement required by
the laws of any national or supra-national agency of any area in which a party
will do business shall also be carried out by such party, at its sole expense,
and appropriately verified proof of such recordation shall be furnished
immediately to the other party.

11.1.2 Export Regulation. The Export Regulations of the United
States Department of Commerce prohibit, except under a special validated
license, the exportation from the United States of technical data relating to
certain commodities (listed in the Export Administration Regulations), unless
the exporter has received certain written assurances from the foreign importer.
Each party hereby covenants and agrees, at all times during the term of this
Agreement, to comply with the Export Administration Regulations of the United
States Department of Commerce, as currently in effect and as in effect in the
future, and hereby gives to the other party assurances called for in Part 379.4
of the Export Administration Regulations. 'Me requirement on the part of any
party to supply technology to the other party shall be subject, at all times
during the term of this Agreement, to all laws and regulations of the United
States now or hereafter applicable to the exportation of technical data.

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<PAGE> 34
SECTION 12

LIMITATION OF LIABILITY

NEITHER PROXIMA NOR LPC SHALL UNDER ANY CIRCUMSTANCES BE LIABLE TO THE OTHER FOR
ANY INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT
LIMITED TO, LOSS OF PROFITS, REVENUE, OR BUSINESS OR THE COST OF PROCUREMENT OF
SUBSTITUTE GOODS OR SERVICES) RESULTING FROM OR IN ANY WAY RELATED TO THIS
AGREEMENT, OR THE TERMINATION OF THIS AGREEMENT, OR ARISING OUT OF OR ALLEGED TO
HAVE ARISEN OUT OF A BREACH OF THIS AGREEMENT. THIS LIMITATION APPLIES
REGARDLESS OF WHETHER SUCH DAMAGES ARE SOUGHT BASED ON BREACH OF CONTRACT,
NEGLIGENCE, OR ANY OTHER LEGAL THEORY. THESE LIMITATIONS SHALL APPLY
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.

SECTION 13

THIRD PARTY LICENSES

13.1 General Obligation. Either Proxima or LPC may determine that it is
desirable to license technology from a third party in connection with their
respective separately owned technologies or the Joint Technology. In the event
that such third party licenses are obtained by a party, such party will use
commercially reasonable efforts to obtain sublicensing rights under such third
party licenses for the benefit of the other party. 'Me responsibility for
obtaining such third party licenses and the payment of license fees and
royalties thereunder shall be governed by Sections 13.2, 13.3 and 13.4 below:

13.2 LPC Components.

13.2.1 LPC Components to be Sold to Proxima and Third Parties.
Except as provided by Section 14.1.1 below, if a license from a third party is
required, currently or in the future, for the manufacture and sale of an LPC
Component, which LPC Component LPC intends to sell to third parties as well as
to Proxima, then LPC solely shall be responsible for obtaining such third party
license and for paying all fees and expenses associated with such third party
license, including (without limitation) all legal fees, lump-sum and minimum
payments and royalties; provided, however, LPC shall be entitled to include such
royalties as a cost of manufacture of such LPC Components in determining the
sales price payable by Proxima for such LPC Components manufactured by LPC and
sold to Proxima.

13.2.2 LPC Components to be Sold Only to Proxima. If a license
from a third party is required, currently or in the future, for the manufacture
and sale of an LPC Component,

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<PAGE> 35
which LPC Component LPC does not intend to sell to any party other than Proxima,
then, at Proxima's option, either LPC or Proxima shall be responsible for
obtaining such third party license and Proxima shall be solely responsible for
paying all fees and expenses associated with such third party license, including
(without limitation) all legal fees, lump-sum and minimum payments and
royalties, except for royalties payable by LPC as a result of the manufacture
and sale of such LPC Component by LPC to Proxima; provided, however, LPC shall
cooperate with Proxima if Proxima elects to pay for such fees and costs
(excluding royalties) as costs of the Development Program and such amounts shall
be considered to be Committee Authorized Expenditures (as defined in Section
2.4.2 above); provided further, however, that any royalties payable by LPC as a
result of the manufacture and sale of such LPC Component may be included by LPC
as a cost of manufacture of such LPC Component in determining the sales price
payable by Proxima for such LPC Component manufactured by LPC and sold to
Proxima.

13.3 Joint Components. If a license from a third party is required,
currently or in the future, for the manufacture and sale of a Joint Component or
a Product incorporating a Joint Component, then the Steering Committee shall be
responsible for determining which party shall be obligated to negotiate and
obtain such third party license. If LPC intends to sell Joint Components or
products incorporating Joint Components to parties other than Proxima, then LPC
shall share equally with Proxima in the fees and costs associated with obtaining
such third party license, except that each party shall be responsible for all
royalties payable on Joint Components or products incorporating Joint Components
sold by such party. If LPC does not intend to sell Joint Components or products
incorporating Joint Components to parties other than Proxima, then Proxima shall
be solely responsible for paying all fees and costs associated with such third
party license, except for royalties payable on a sale of a Joint Component or a
product incorporating a Joint Component by LPC to Proxima, which shall be
payable by LPC; provided, however, LPC shall be entitled to include such
royalties as a cost of manufacture of such Joint Components in determining the
sales price payable by Proxima for such Joint Components.

13.4 Proxima Technology. In the event that a license is required from a
third party for the manufacture and sale of products incorporating Proxima
Technology, then Proxima shall be solely responsible for obtaining such third
party license and for paying all fees and costs associated with such third party
license, including (without limitation) all legal fees, lump-sum and minimum
payments and royalties; provided, however, Proxima shall be entitled to include
such royalties as a cost of manufacture of such products incorporating Proxima
Technology in determining the sales price payable by LPC for the purchase by LPC
of such products incorporating Proxima Technology.

-29-
<PAGE> 36

SECTION 14

WARRANTIES

14.1 LPC Warranty.

14.1.1 Express Warranty. LPC represents and warrants to
Proxima that it has entered into the Patlex License (as that term is defined in
Section 2.9 of the Stock Purchase Agreement).

14.1.2 LPC Warranty Disclaimer. EXCEPT AS SET FORTH IN
SECTION 14.1.1 ABOVE AND THE STOCK PURCHASE AGREEMENT, LPC MAKES
AND PROXIMA RECEIVES NO WARRANTIES WITH RESPECT TO THE LPC TECHNOLOGY OR JOINT
TECHNOLOGY, EXPRESS, IMPLIED, STATUTORY OR IN ANY PROVISION OF THIS AGREEMENT OR
COMMUNICATION WITH PROXIMA, AND LPC SPECIFICALLY DISCLAIMS ANY IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

14.2 Proxima Warranty Disclaimer. EXCEPT AS SET FORTH IN THE STOCK
PURCHASE AGREEMENT, PROXIMA MAKES AND LPC RECEIVES NO WARRANTIES WITH RESPECT TO
THE PROXIMA TECHNOLOGY OR JOINT TECHNOLOGY, EXPRESS, IMPLIED, STATUTORY OR IN
ANY PROVISION OF THIS AGREEMENT OR COMMUNICATION WITH LPC, AND PROXIMA
SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE.

SECTION 15

GENERAL PROVISIONS

15.1 Governing Law and Dispute Resolution. The rights and obligations
of the parties under this Agreement shall be governed by and construed under the
laws of the State of California, including its Uniform Commercial Code, without
reference to conflict of laws principles. Subject to the provisions of Section
2.3.1, any dispute or claim arising out of this Agreement shall be referred to
non-binding mediation pursuant to which two (2) senior executives from each of
Proxima and LPC shall meet with each other and an independent mediator mutually
acceptable to the parties and familiar with the technology covered by this
Agreement in order to resolve their differences. If the parties are unable to
resolve their dispute or claim through mediation, such dispute or claim shall be
finally settled by binding arbitration in San Diego, California by one (1)
arbitrator, which arbitration shall be administered by and in accordance with
the then existing Rules of Practice and Procedure of Judicial Arbitration and
Mediation Services, Inc. ("JAMS"). Such a shall be governed by the substantive
laws of the State of California, without reference to conflict of law
principles. Judgment on the

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<PAGE> 37
award rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Notwithstanding the foregoing, in the event of breach by either party
of Section 9, either party may apply to any court of competent jurisdiction for
injunctive relief without breach of this arbitration provision.

15.2 Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the parties relating to the subject matter herein and
supersedes all previous agreements and understandings, whether oral or written,
between the parties hereto with respect to the subject matter herein. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless set forth in a writing signed by
the party to be bound thereby. Capitalized terms not defined herein but defined
in the Stock Purchase Agreement shall have the meanings ascribed to them in the
Stock Purchase Agreement.

15.3 Confidentiality of Agreement and Activities. Each party agrees
that the terms and conditions of this Agreement shall be treated as the
Confidential Information of each party and that, following the Effective Date,
no reference to the terms and conditions of this Agreement or to activities
pertaining hereto shall be made in any form of public or commercial advertising
without the prior written consent of the other party; provided, however, that
each party may disclose the terms and conditions of this Agreement:

15.3.1 as required by any court, administrative agency or
other governmental body;

15.3.2 as otherwise required by law, including without
limitation any disclosures required by the Securities and Exchange Commission,

15.3.3 to legal counsel of the parties;

15.3.4 in confidence, to accountants, banks, and financing
sources and their advisors;

15.3.5 in confidence, in connection with the enforcement of
this Agreement or rights under this Agreement; or

15.3.6 in confidence, in connection with a merger or
acquisition or proposed merger or acquisition, or the like.

15.4 Waiver. No delay, omission, or failure to exercise any right or
remedy provided for in this Agreement shall be deemed to be a waiver thereof or
an acquiescence in the event giving rise to such remedy, but every such right or
remedy may be exercised, from time to time, as may be deemed expedient by the
party having such right or remedy.

15.5 Notices. Any notice required or permitted by this Agreement shall
be in writing and shall be sent by courier or facsimile confirmed in writing and
addressed to each party at the

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<PAGE> 38
address shown for such party at the beginning of this Agreement or at such other
address for which such party gives notice hereunder. Such notice shall be deemed
to have been given when delivered or, if delivery is not accomplished by reason
of some fault of the addressee, when tendered.

15.6 Force Majeure. Nonperformance of either party, except for the
making of payments, shall be excused to the extent that performance is rendered
impossible by strike, fire, flood, earthquake, governmental acts or orders or
restrictions, failure of suppliers, or any other reason where the failure to
perform is beyond the control and not caused by the negligence of the
nonperforming party.

15.7 No Assignment. Neither party shall be permitted to assign its
rights or obligations under this Agreement without the prior written consent of
the other party, which consent shall not be unreasonably withheld, and any
purported assignment without such consent shall have no force or effect;
provided, however, that either party may assign this Agreement without consent
to a successor to all or substantially all of its assets to which this Agreement
relates. Subject to the foregoing, this Agreement shall be binding upon and
inure to the benefit of the parties hereto, their successors and assigns.

15.8 Expenses. All expenses incurred in connection with the preparation
and execution of this Agreement shall be borne by the party incurring such
expenses. The prevailing party in any legal action brought by one party against
the other arising out of this Agreement shall be entitled, in addition to any
other rights and remedies it may have, to reimbursement for its expenses,
including court costs and reasonable attorneys' fees.

15.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.

15.10 Independent Contractors. The relationship of Proxima and LPC
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to (i) give either party the
power to direct and control the day-to-day activities of the other party, (H)
constitute the parties as partners, joint ventures, co-owners or otherwise as
participants in a joint or common undertaking, or (iii) allow either party to
create or assume any obligation on behalf of the other party for any purpose
whatsoever.

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<PAGE> 39
15.11 Public Announcement. At a mutually agreed time, but not later
than five (5) business days following the Effective Date, Proxima and LPC shall
issue a joint press release announcing the relationship contemplated by this
Agreement in such a manner as is mutually agreed upon in writing by the parties.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
in duplicate by duly authorized officers or representatives as of the date first
above written.

PROXIMA CORPORATION LASER POWER CORPORATION

By: /s/ K. OLSON By: /s/ GLENN H. SHERMAN
---------------------------- ---------------------------

Name: K.E. Olson Name: Glenn H. Sherman
------------------------- ------------------------

Title: CEO Title: Chairman, CEO
------------------------- ------------------------

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<PAGE> 40
Exhibit A

PRODUCTS

PROJECTORS

<PAGE> 41
Exhibit B

PROXIMA COMPONENTS

1. Electronic Circuitry
2. Mechanical Packaging
3. Projection Optic
4. Software
5. Firmware
6. User Controls
7. User Interface
8. Look and Feel

LPC COMPONENTS

1. Microlasers

2. Rotating Scanning Systems

3. Laser Optics

4. Individually Addressable Microlaser Arrays consisting of individually
addressable arrays of laser diodes optically coupled to laser and/or
nonlinear crystals, provided that the diode arrays are not developed by
a third party with funds provided to such third party directly by
Proxima (i.e., funds other than those funds provided to LPC and `passed
through' to the third party).

JOINT COMPONENTS

1. Individually Addressable Laser Arrays consisting of individually
addressable arrays of laser diodes optically coupled to laser and/or
nonlinear crystals that may employ LPC Technology and that are developed
by a third party with funds provided to such third party directly by
Proxima (i.e., funds other than those funds provided to LPC and `passed
through' to the third party).

2. Mathematical Algorithms

<PAGE> 42
Exhibit C page 1

[***]

* Confidential Treatment Requested
<PAGE> 43
Exhibit C page 2

MEMPHIS-MILESTONE DEFINITIONS:

[***]

* Confidential Treatment Requested
<PAGE> 44
Exhibit C page 3

[***]

* Confidential Treatment Requested
<PAGE> 45
Exhibit C page 4

Memphis Development Plan

This page depicts in PERT chart format 14 summary tasks along with start/stop
dates and major milestones.

<PAGE> 46
Exhibit C page 5

Memphis Development Plan

This page depicts in PERT chart format subtasks under the 14 summary tasks with
start/stop dates, fixed delays and major milestones.

<PAGE> 47
Exhibit C page 6

Memphis Development Plan

This page depicts in PERT chart format subtasks under the 14 summary tasks with
start/stop dates, fixed delays and major milestones.

<PAGE> 48
Exhibit C page 7

Memphis Development Plan

This page depicts in PERT chart format subtasks under the 14 summary tasks with
start/stop dates, fixed delays and major milestones.

<PAGE> 49
Exhibit C page 8

[***]

* Confidential Treatment Requested

<PAGE> 50
Exhibit C page 9

[***]

* Confidential Treatment Requested
<PAGE> 51
Exhibit C page 10

[***]

* Confidential Treatment Requested
<PAGE> 52
Exhibit C page 11

[***]

* Confidential Treatment Requested
<PAGE> 53
Exhibit C page 12

[***]

* Confidential Treatment Requested
<PAGE> 54
Exhibit C page 13

[***]

* Confidential Treatment Requested
<PAGE> 55
Exhibit C page 14

[***]

* Confidential Treatment Requested
<PAGE> 56
Exhibit C page 15

[***]

* Confidential Treatment Requested
<PAGE> 57
Exhibit D

INITIAL STEERING COMMITTEE MEMBERSHIP

1. Art Minich

Ken Olson

Glenn Sherman

Shlomo Assa

EXHIBIT 10.20

DEVELOPMENT AND MANUFACTURING AGREEMENT FOR
RGB-LASERS

This Development and Manufacturing Agreement (The "Agreement") is dated July
1st, 1996 and is by and between the following Parties:

LASER POWER CORPORATION
1277 High Bluff Drive
San Diego, California
USA
- hereinafter referred to as "LPC" -

and

LDT GmbH & Co.
LASER-DISPLAY-TECHNOLOGIE KG
Carl-Zeiss-Stra(beta)e 2 (Haus 4)
07552 Gera
GERMANY
- hereinafter referred to as "LDT" -

SECTION 1: INTRODUCTION

1.1 LPC is very experienced in the field of the development and manufacturing of
red, green and blue (RGB) solid-state microlasers. LDT is a company established
for the development and marketing of scanning single beam direct write laser
display systems and the technology associated with such systems.

1.2 During the past year the parties conducted discussions concerning the
development of RGB microlasers for the LDT display systems described in Section
1.1 and further in Section 2.4. The parties executed a Non Disclosure Agreement
on February 22, 1996 and a memorandum of Understanding (MOU) on May 22, 1996 on
the basis of LPC's development offer dated March 28, 1996, supplemented on April
12, 1996.

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<PAGE> 2
1.3 By signing of the above mentioned MOU the parties agreed that the
development activities of LPC shall begin after payment of [ *** ]. The payment
was received by LPC on June 20, 1996 and work began officially on July 1, 1996.

SECTION 2: DEFINITIONS

2.1 "Development Project" is that development project which is the subject of
this Agreement and described in Annexes A and B.

2.2 "LPC Microlaser" means a separate red, green, or blue diode-pumped solid
state microlaser based on technology developed by LPC.

2.3 "RGB Solid-State Microlaser" means an assembly of red, green, and blue LPC
Microlasers to be used in a Contract Product or License Product as defined in
Sections 2.5 and 2.6.

2.4 "LDT Product" means a scanning beam direct write laser display system, such
system using RGB lasers based on any laser technology, each red, green, and blue
beam from said lasers being modulated by some fashion in order to impress
information onto said beams, said beams being combined into one beam which is
focused into a light guide, such light guide meant to deliver the modulated,
combined beam to a beam scanning head.

2.5 "Contract Product" means an LDT Product according to the specifications
listed in Annex A, where the laser technology employed is an RGB Solid-State
Microlaser, the modulation technology employed is [ *** ] and
the [ *** ].

2.6 License product is a product or one of its components which is derived from
the Contract Product and incorporates Project Technology and/or Project
Intellectual Property.

2.7 "Other Technology" means the technology in and to the LPC Microlasers and
displays employing same, including (without limitation) all designs, drawings,
prototypes, software, data, know-how and other proprietary information relating
to microlasers and displays that were (1) previously created or developed in
connection with other projects conducted by LPC, alone or with others, prior to
the beginning of the Development Project, or (2) are or will be created or
developed in connection with other projects not funded by LDT during or after
the performance period of the Development Project.

2.8 "Other Patents" means patents, patent applications and inventions that were
(1) previously conceived by LPC prior to the beginning of this Development
Project or (2) are or will be created in connection with other projects not
funded by LDT during or after the performance period of the Development Project.

* CONFIDENTIAL TREATMENT REQUESTED

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<PAGE> 3
2.9 "Project Technology" means the technology, designs, know-how, soft-ware and
firmware developed or created in connection with the Development Project by LPC
excluding Other Technology.

2.10 "Project Intellectual Property" shall mean the Intellectual Property such
as patents, patent applications, inventions, copyrights, etc. in or to the
Project Technology, excluding Other Patents.

2.11 An "Affiliate" of a party shall mean any person, corporation or entity (a)
who is directly or indirectly controlled by the party, or (b) who directly or
indirectly controls the party, or (c) who is controlled by any person(s),
corporation(s) or entity(ies) who also control(s) the party. Control may be
direct or indirect with a share interest - direct or indirect - of 50% or more.
Each party is responsible for its Affiliates and for ensuring the compliance of
its Affiliates with this Agreement.

2.12 "Confidential Information" means all confidential or proprietary
information disclosed or made available by the disclosing party to the receiving
party, which is designated in writing, or verbally as confidential or
proprietary information, or is observed by the receiving party while on the
premises of the disclosing party. Notwithstanding the foregoing, Confidential
Information shall not include any Information which the receiving party can show
(a) is now or later becomes available in the public domain without breach of
this Agreement by the receiving party, (b) was in the possession of the
receiving party prior to the disclosure to the receiving party by the disclosing
party, (c) was received from a third party without breach of any nondisclosure
obligations to the disclosing party or otherwise in violation of the disclosing
party's rights, or (d) was developed by the receiving party independently of any
Confidential Information received from the disclosing party.

2.13 "LDT Licensees" means third parties who may enter into a license agreement
with LDT with respect to the production, sale, lease, use or any other disposal
of an LDT Product for professional or commercial purposes including TV systems.

2.14 "LDT Business Field" means business activities which are related to the LDT
Product.

2.15 "LPC Business Field" means all LPC activities at the closing date of the
Agreement including Proxima business field as defined in the MOU.

2.16 "Annex A" is that certain Annex A attached hereto which sets forth the
performance specifications for the Contract Product and the License Product,
which may be amended from time to time by mutual written agreement of the
parties.

2.17 "Annex B" is that certain Annex B attached hereto which sets forth the work
plan and schedule for the Development Project, which may be amended from time to
time by mutual written agreement of the parties.

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<PAGE> 4

2.18 "Basic Program" and "Option Program" are as defined in Annex A and Annex B.

SECTION 3: SCOPE OF DEVELOPMENT ACTIVITIES

3.1 LPC shall make reasonable efforts to develop the Contract Product with the
performance specifications set forth in Annex A, and in accordance with the work
plan and time schedule set forth in Annex B.

3.2 LPC shall use reasonable efforts to develop the Contract Product in a
manufacturing technology appropriate for production by LPC.

3.3 LPC agrees to provide sufficient and approved engineering resources and
development tools necessary for the execution of the Development Program in
accordance with the provisions of Annex B.

3.4 Annexes A and B are hereby made a part of the Agreement.

SECTION 4: EXECUTION OF THE AGREEMENT AND COLLABORATION OF LDT

4.1 LDT will furnish to LPC, [***] and in a timely fashion, the documents
and information necessary to perform the development activities within the
specified time frame as set forth in Annex B. All documents and information are
provided to LPC on loan for the purpose of LPC performing its obligation under
this Agreement and shall be returned to LDT upon termination of the Agreement.

4.2 During the performance period of the Agreement, LDT also will provide, [***]
and in a timely fashion, the required collaborative actions as set forth in
Annex B, including (without limitation) the discussion and testing of interim
milestone results.

4.3 LPC will transmit to LDT [***] reports concerning the development
progress. The report shall set forth any actual or potential delay in completing
the Development Program in accordance with the time schedule set forth in Annex
B or the discovery of any fact which could adversely impact the development
goals.

4.4 The parties shall meet every [***] when LPC will verbally report to LDT
on the development status, necessary modifications of the specifications and any
risk to the development progress. LPC shall provide LDT with copies of all
documents and information concerning the attained development results except
those which would violate third party rights.

4.5 LPC shall fulfill its obligations to perform the development activities by
exploiting newest state of the art technology and utilizing the know-how and
experience at its disposal to the extent not in violation of any law, rule or
regulation, or the rights of any third parties.

4.6 The results of the development activities shall be written in technical
documentation, including construction drawings, which shall be provided to LDT
upon termination of the Basic Program and the Option Program; provided, however,
if disclosure of any of the information to be provided by LPC pursuant to this
section would violate third party rights, LPC shall have the right to exclude
such information from such documentation.

4.7 LDT will receive the developed prototypes as described in Annex A [***]
within the agreed time frame as set forth in Annex B. but subject to delays
beyond the reasonable control of LPC. Documentation as described in Section 4.6
will be delivered to LDT concurrent with the prototypes. Upon delivery the above
items become the property of LDT.

*CONFIDENTIAL TREATMENT REQUESTED

-4-
<PAGE> 5

SECTION 5: CHANGES OF THE SPECIFICATION

5.1 LDT has the right, during the development activities, to make changes in the
specifications as set forth in Annex A, to the extent such modifications are
both necessary and possible, but subject to the agreement of LPC. Before a
modification desired by LDT is implemented,the parties shall agree in writing,
whether such change requires (1) a reduction or increase of costs and/or (2) a
chance in the time schedule set forth in Annex B. If the parties are not able to
agree, such failure shall not Give use to the other party's right to terminate
the Agreement with cause.

5.2 LPC may request chances to the specifications set forth in Annex A due to
unforeseen events or other reasons beyond the reasonable control of LPC, subject
to agreement of LDT. Before proposed changes are implemented, both parties shall
agree in writing as to the terms of the chance, the appropriate increase or
decrease in price and the modification in the time schedule set forth in Annex
B, as necessary.

SECTION 6: ACCEPTANCE

6.1 LPC shall submit to LDT the development results in accordance with the
milestones schedule set forth in Annex B, subject to delays beyond the
reasonable control of LPC. LDT shall test the RGB laser prototypes delivered by
LPC at the end of the Basic Program and the system delivered at the end of the
Option Program.

6.2 The prototypes and the system will be considered as conforming to
specification. unless within 20 days after submission. LDT submits to LPC in
writing a specific, detailed complaint. In the event that LPC receives such a
complaint, LPC shall respond to the complaints within 20 days and, if necessary,
to repair, replace, or otherwise correct any deviation from specifications
within a mutually agreed upon period of time.

6.3 If the deviations are not correctable or a deviation from specification is
not possible, the parties will discuss whether the Development Program may be
continued by adaptation of specification under terms and conditions mutually
agreed upon, or shall be terminated. In the event that LDT decides to terminate
the development activities caused by non-fulfillment of the specification
according to Annex A, [***] except as provided in Section 9.3).

6.4 Development costs paid to LPC in accordance with successfully accomplished
milestones are [***].

SECTION 7: IMPLEMENTATION DATES

7.1 Contractually agreed upon implementation dates of LPC according to Annex B
are binding fixed dates, unless the circumstances specified in Section 7.2
occur. The parties will inform each other as soon as possible about any fact
which such party believes could adversely impact the time schedule set forth in
Annex B and will initiate any reasonable step to avoid such time delay.

*CONFIDENTIAL TREATMENT REQUESTED

-5-
<PAGE> 6
7.2 Implementation dates will be extended by a suitable period, to be upon in
each individual case, if unforeseen events beyond the reasonable control of LPC
occur, including without limitation force majeure events.

7.3 If the implementation dates set forth in Annex B are exceeded by more than
30 days for reasons which are not beyond the reasonable control of LPC, LDT
shall have the right to demand immediate fulfillment of said implementation no
later than 60 days from the original implementation date. If LPC is still in
arrears after expiration of said 60-day period, then at LDT's election it may
extend the period for fulfillment or terminate the Agreement, stop further
payments and withhold the last holdback amount, subject to the provisions of
Section 9.3.

7.4 Unless LPC is guilty of malfeasance or gross negligence, then LDT's sole
remedy hereunder for any breach or failure under the Agreement shall be to
terminate this Agreement, to stop additional payment, and withhold holdback
amount per section 9.3.

SECTION 8: TERMINATION BY LDT

LDT has the right to terminate the Agreement at any time with cause or without
cause. "With cause" shall not include a failure by LPC to fulfill or perform any
of its obligations hereunder if such failure is beyond the reasonable control of
LPC. If LDT terminates the Agreement without cause, then LDT shall pay to LPC
the amount of development costs already incurred by LPC for development
activities plus unavoidable termination costs of LPC. The unavoidable
termination costs in no case shall be higher than [***]. All invoiced costs must
be adequately documented by LPC. If LDT terminates this Agreement with cause,
then, except as otherwise provided in Section 7.4, its sole remedy shall be to
terminate this Agreement and withhold payment of any holdback amounts, subject
to the provisions of Section 9.3.

SECTION 9: DEVELOPMENT COSTS

9.1 The development costs of LPC for all development activities as defined in
Annex A and B are fixed costs, except as mutually agreed to by the parties as
follows and payable by LDT in advance for each phase:

<TABLE>
<CAPTION>
Basic Program
- -------------
<S> <C>
9.1.1 Milestone I [***]
9.1.2 Milestone II [***]
9.1.3 Milestone III [***]
-----
[***]
</TABLE>

Additional Program (in parallel to the Basic program)

<TABLE>
<S> <C>
9.1.4 Milestone IV [***]
9.1.5 Milestone V [***]
9.1.6 Milestone VI [***]
-----
[***]
</TABLE>

*CONFIDENTIAL TREATMENT REQUESTED

-6-

<PAGE> 7

9.2 In accordance with the MOU, LDT has paid to LPC a start up amount of
[***]. This amount will be [***] for the first
Milestone according to Section 9.1.1

9.3 LDT will pay the development costs according to Section 9.1 for each
Milestone program as defined in Annex B [***]. [***] will be paid by LDT to LPC
in the event that LDT decides, after reviewing the development results of the
specific milestone program, to proceed with the next milestone or, in the event
that LDT terminates the Agreement without cause. If LDT elects to terminate
because LPC has not met a milestone, yet the milestone has been partially met
(for example, blue and green portion is met, red portion is not met), then LDT
will [***] which can be [***] of the milestone. Similar considerations apply at
the end of the Development Program.

9.4 LDT will review the development results of each milestone within [***] of
submission by LPC, but agrees that LPC shall proceed with its development
activities with respect to the next milestone in order to avoid any time delay.
In the event that LDT terminates the Agreement after such review, then such
termination shall be a termination without cause pursuant to Section 8 thereof.
Failure to notify within [***] will be deemed an approval to proceed with the
next milestone.

9.5 LDT shall make payments in US-Dollars immediately upon approval or deemed
approval for proceeding with the next milestone.

SECTION 10: DEVELOPMENT RESULTS AND PROTECTIVE RIGHTS

10.1 Other Technology and Other Patents of LPC shall remain in the sole
ownership of LPC and LDT shall not succeed to any interest therein by the virtue
of this Agreement or the activities contemplated hereunder. LPC agrees, that in
the case that LPC cannot or does not wish to fulfill the supply needs (in
respect to commercially reasonable prices, volume, delivery time and quality) of
LDT, its Affiliates and/or LDT Licensees such that a second source for such
products is required or two years after the end of development program LDT
decides that a second source is necessary. Then LPC will grant to another
manufacturer necessary licenses, provided reasonable terms and conditions can be
agreed upon, including without limitations royalties payable to LPC.

10.2 All Project Technology and all Project Intellectual Property shall be
jointly owned by LDT and LPC, except as otherwise provided herein. With respect
to patents and patent applications included within the Project Intellectual
Property the inventions covered thereby shall be jointly owned by the parties
and LPC shall be responsible for (i) filing the patent applications first in USA
and later on in other foreign countries as mutually agreed upon by both parties,
and (ii) preparing for execution such documents as required to vest ownership
jointly in LPC and LDT.

10.3 Except as otherwise provided herein the parties will [***] related to the
formal protection of Project Intellectual Property.

*CONFIDENTIAL TREATMENT REQUESTED

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<PAGE> 8
10.4 At least three months before the one year priority period after filing of
patent applications in USA the parties will decide about the filing of
corresponding applications in other countries. If a party decides not to
participate in the filing of a patent application in USA or later on in any
other country the other party has the right to do it in its own name and must
[***] to the respective patent application. In such case the
party acting as sole applicant owns all rights in such patents and patent
applications, and the nonparticipating party agrees to cooperate as necessary to
allow the other party to obtain patent protection, such as reviewing
applications and signing documents associated therewith.

If one party decides at any time to not further participate in the [***] for
patents and patent applications according to Section 10.3, then that party must
notify the other party in writing, and subsequent thereto, if the other party
decides to continue [***] the patent or patent application then such party will
become the [***] of the patent applications and patents resulting therefrom and
will [***]. The notifying party agrees to perform all necessary tasks, including
executing necessary documents to [***] to the [***] and the [***] will not be
required to [***] the notifying party for previously [***], and the [***] has no
responsibility to [***] for such patents to the other party and such patent is
no longer Project Intellectual Property.

10.5 LPC shall take all efforts necessary to protect any invention arising
during the development activities. LPC will inform LDT as soon as possible about
any invention and to the extent patentable both parties will cooperate in the
preparation, filing and prosecution of mutually owned patent applications in USA
and any other country.

10.6 All Project Technology and Project Intellectual Property may be used
without restriction by LPC for its LPC Business Field and by LDT for its LDT
Business Field. Neither party shall be required to account to the other party
for such use and both parties agree not to interfere in the business activity
reserved for the other party as described above.

10.7 In its reserved business activity each party has the right to grant
sublicenses or user rights under the Project Technology and Project Intellectual
Property jointly owned under terms and conditions which are subject to the sole
discretion of the entitled party. User rights and sublicenses for Project
Technology and Project Intellectual Property in common ownership for all other
business fields may be granted by both parties under terms and conditions
mutually agreed upon.

10.8 In undertaking to develop and in developing the Contract Products
hereunder, LPC will not knowingly infringe any valid patent, copyright, trade
secret right or any other intellectual property right of any third party except
for any exceptions listed in Annex C, which may be amended from time to time by
mutual agreement. The parties will inform each other immediately about any third
party Intellectual Property Right which comes to the knowledge of the party and
which could be infringed by manufacturing use or sale of Contract Products or
License Products.

*CONFIDENTIAL TREATMENT REQUESTED

-8-
<PAGE> 9
10.9 LPC will use best efforts to a) avoid any infringement of third party
patents or, if this is not possible, b) to design around or, c) to obtain a
license under such third party patents. LDT and LPC will agree to any amendments
to the Agreement necessary to ensure that technology used in the Development
Project does not infringe upon existing valid patents.

SECTION 11: PRODUCTION OF CONTRACT PRODUCTS

11.1 LPC takes the obligation to manufacture and sell the developed Contract
Products and License Products [***] in the necessary quantities and quality
under reasonable and marketable but in any case most favorable supply and price
conditions for like product and quantity. For the delivery of Contract Products
and License Products in quantities the parties will close separately
corresponding supply agreements.

11.2 LPC has the right to sell Contract Products and License Products to any
third party. For sales to companies which are not Affiliates of LDT or LDT
Licensees [***]. In such case LDT shall receive for [***]:

- [***] of the net sales price of the sold Contract Products
and License Products by LPC up to a total volume of
[***].

- [***] of the net sales price of the sold Contract Products
and License Products for volume beyond [***].

The royalty payments are valid for only [ *** ] from the end of the
Development Project, as far as Project Technology is concerned, and for the
lifetime of patents as far as Project Intellectual Property is concerned. Net
sales price shall mean [ *** ].

11.3 Commencing with the [ *** ], and each [ *** ] thereafter, within [ *** ]
days after the end of each [ *** ]. LPC shall [ *** ].

11.4 LDT shall have the right to have an independent third party accounting firm
acceptable to both parties, audit LPC's compliance with the terms of this
Agreement upon reasonable notice to LPC. Such audit shall be conducted not more
than once a year. The auditor shall not disclose any financial information but
shall only state that the remitted royalty payments were correct or that a
credit or additional amounts are due and owing. LPC shall maintain and retain
appropriate records for three (3) years after the end of each accounting year.
If payment of royalties are underpaid by [ *** ] or more, then LPC shall pay the
costs for the audit. Otherwise, the audit costs shall be paid by LDT. Any
additional payments shall be made within [ *** ] days of the audit. Any credit
shall be credited with the [ *** ] under this Agreement.

* CONFIDENTIAL TREATMENT REQUESTED

-9-
<PAGE> 10
SECTION 12: COMPETITIVE PROHIBITION

LPC agrees, for the duration of the Development Project plus an additional two
year periods, not to develop or deliver Contract Products or License Products to
be used in payment applications based on or substantially similar to the LDT
Product for any third party without prior approval of LDT. Any publication of
the existence and content of this Agreement, the development results or the
intention to start series production for LDT respectively, its Affiliates or its
LDT Licensees is only allowed after prior written approval of LDT.

SECTION 13: CONFIDENTIALITY

13.1 It may become necessary during the course of this Agreement for a party to
disclose to the other Confidential Information. Written Confidential Information
shall be clearly labeled "Proprietary", "Confidential", or the like. Oral,
visual or machine readable Confidential Information shall be so identified at
the time of disclosure and summarized within (30) days of the disclosure by the
disclosing party in writing to the receiving party.

13.2 The receiving party shall maintain all such Confidential Information in
confidence and shall not disclose it to a third party without the prior written
consent of the disclosing party.

These nondisclosure obligations shall terminate ten (10) years after receipt of
such information. This section 13.2 shall survive the expiration or any
termination of this Agreement.

13.3 Project Technology shall not be considered as Confidential Information
related to LDT as far as no Other Technology is involved. LDT has the right to
provide Confidential Information to its Affiliates and LDT Licensees as far as
this is necessary for the introduction and commercialization of Contract
Products respectively, any equipment containing such Contract Products, except
that when such Confidential Information would violate third party rights, then
LPC's permission to provide the Confidential Information is required.

SECTION 14: REPRESENTATIONS

LPC and LDT, each for itself, represents and warrants that it is duly organized,
existing and in good standing under the laws of its applicable jurisdiction,
with full power and authority to enter into this Agreement and to perform its
obligations herein and under any instrument executed pursuant hereto, except for
any exceptions listed in Annex C. LPC and LDT represent and warrant that the
execution of this Agreement and the performance of its obligations herein and
under any instruments executed pursuant hereto have been duly authorized by all
necessary action and do not and will not conflict with, result in a violation
of, or constitute a default under any provision of any Agreement binding upon it
or restricting the use of its properties, or of any law, regulation or court
order applicable to it, except for any exceptions listed in Annex C.

-10-

<PAGE> 11
SECTION 15: TERM AND TERMINATION

15.1 This Agreement becomes effective retrospective on July 1, 1996 with the
signature of both parties and shall continue until [***.] Section 10, 11 and 12
shall survive the termination of the Agreement for the lifetime of Contract
Products, License Products, and Project Intellectual Property. Section 13 shall
survive according to the stipulation in Section 13.

15.2 LDT may terminate the Agreement at any time according to the stipulation in
Section 8.

15.3 If a party breaches this Agreement and fails to cure said breach within 30
days of written notice from the non-breaching party, the non-breaching party may
terminate this Agreement upon 45 days advance notice of termination. If the
breaching party reasonably requires more than 30 days to cure the breach, the 30
day period shall be extended as reasonably necessary, provided that the
breaching party is diligent in pursuing the cure to completion. Such termination
shall be in addition to any other relief and remedies to which the non-breaching
party may be entitled.

SECTION 16: PLACE OF PERFORMANCE

Place of performance for all development activities according to this Agreement
by LPC is San Diego, California, USA, and/or other locations as the parties may
mutually agree.

-11-

* CONFIDENTIAL TREATMENT REQUESTED

<PAGE> 12
SECTION 17: JURISDICTION AND DISPUTE RESOLUTION

The rights and obligations of the parties under this Agreement shall be covered
by and construed under the laws of the State of California, including its
Uniform Commercial Code. Any dispute or claim arising out of this Agreement
shall be finally settled by binding arbitration in San Diego, California by one
(1) arbitrator, which arbitration shall be administered by and in accordance
with the then existing Rules of Practice and Procedure of Judicial Arbitration
and Mediation Services, Inc. ("JAMS"), or a similar organization to be mutually
agreed upon by the parties. Such arbitration shall be governed by the
substantive laws of the State of California, without reference to conflict of
law principles. Judgment on the award rendered by the arbitrator may be entered
in any court having jurisdiction thereof.

SECTION 18: SEVERABILITY

In case any one or more of the provisions contained herein shall, for any
reason, be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provisions
of this Agreement, and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision(s) had never been contained herein; provided
that such invalid, illegal or unenforceable provisions shall firsts be
curtailed, limited or amended to the extent necessary to remove such invalidity,
illegality or unenforceability with respect to the applicable law as it shall
then be applied. This provision shall be enforced to the extent that it is
enforceable.

SECTION 19: FINAL PROVISION

19.1 Neither party has the rights nor the power to assign this Agreement without
first obtaining the written consent of the other party except to the assignment
to an Affiliate of the respective party. Such consent shall not be unreasonably
withheld. Such consent is deemed given if the assignment is to a person or
entity which purchases or acquires substantially all of the business assets of a
party. Any assignee must deliver to the other party a written acceptance of this
Agreement and the assigning party's obligations thereunder.

19.2 This Agreement constitutes the final and complete agreement between the
parties concerning the subject matter of this Agreement and supersedes all prior
agreements, understandings, negotiations and discussions, written or oral,
between the parties with respect thereto, including, without limitation, the
MOU. Any modification, revision or amendment of this Agreement shall not be
effective unless made in a writing executed by both of the parties.

19.3 All notices, requests, demands and other communications hereunder shall be
in writing and shall be sent by registered certified mail, return receipt
requested, or by commercial courier or by facsimile transmission to the parties
at the addresses set forth at the beginning of the Agreement, or to such other
person and place as either party shall designate for itself by notice to the
other party.

-12-
<PAGE> 13

19.4 To the extent that any version of the Agreement exists in a language other
that English, the English version shall be controlling and represent the
agreement of the parties.

LASER POWER CORPORATION LDT GmbH & Co.
Laser-Display-Technologie KG

Gera, the 20th September 1996 Gera, the Sept. 20th, 1996
---------------------- --------------------
Signature /s/ GLENN H. SHERMAN Signature /s/ BERNHARDT DETER
---------------------- --------------------
Name Glenn H. Sherman Name Bernhardt Deter
--------------------------- -------------------------
Title CEO Title General Manager
-------------------------- ------------------------

-13-
<PAGE> 14

ANNEX A

<PAGE> 15
Laser Power Corporation Company Proprietary

REQUIREMENT DEFINITION

[ * * * ]

Laser Power Corporation Company Proprietary

* CONFIDENTIAL TREATMENT REQUESTED

<PAGE> 16
Laser Power Corporation Company Proprietary

TABLE I
ANNEX A

RGB MICROLASER SPECIFICATION

[ * * * ]

Laser Power Corporation Company Proprietary

* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 17

ANNEX B

<PAGE> 18
Laser Power Corporation Company Proprietary

[ * * * ]

Laser Power Corporation Company Proprietary

* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 19

Laser Power Corporation Company Proprietary

[ * * * ]

Laser Power Corporation Company Proprietary

* CONFIDENTIAL TREATMENT REQUESTED

<PAGE> 20

Laser Power Corporation Company Proprietary

[ * * * ]

Laser Power Corporation Company Proprietary

* CONFIDENTIAL TREATMENT REQUESTED

<PAGE> 21

- -------------------------------------------------------------------------------
PROGRAM SCHEDULE
ANNEX B - TABLE II
- -------------------------------------------------------------------------------
[***]

* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 22
Laser Power Corporation Company Proprietary

ANNEX C

Laser Power Corporation Company Proprietary

-23-
<PAGE> 23
Laser Power Corporation Company Proprietary

ANNEX C

United States patent number 4,809,291 entitled "Diode Pumped Laser and Doubling
to Obtain Blue Light" covers certain blue laser technology (the "Stanford
Patent"). LPC's blue microlaser may infringe upon the Stanford Patent.

LPC is at present working on various means to avoid infringement of the Stanford
Patent in the future, including licensing and design-around, and holds a good
faith belief that a satisfactory solution will be found, but can give no
guarantee that this will be the case.

While LPC has demonstrated a high degree of competency in performing research
and development on microlasers and microlaser-based display systems, it has
little experience manufacturing products based on these technologies. Although
LPC believes it will be able to successfully manufacture volumes of microlasers
necessary to fulfill the needs of LDT, its Affiliates, and its Licensees, LPC
can give no guarantee that this will be the case.

The field of diode pumped solid-state lasers is rapidly growing, and there may
be issued or pending patents of which LPC is not aware upon which LPC microlaser
technology infringes. If LPC becomes aware of such patents, LPC believes it can
obtain licenses or design around such patents, but LPC can give no guarantee
that this will be the case.

Laser Power Corporation Company Proprietary

-24-