PREMIER LASER SYSTEMS INC, 424B4, 1996-10-16

PREMIER LASER SYSTEMS INC
424B4, 1996-10-16
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE>

FILED PURSUANT TO RULE 424(b)(4)

REG. STATEMENT NO. 333-4219

PROSPECTUS

11,000 UNITS

[LOGO]

EACH UNIT CONSISTING OF
190 SHARES OF CLASS A COMMON STOCK AND
95 REDEEMABLE CLASS B WARRANTS

Each unit ("Unit") of Premier Laser Systems, Inc. (the "Company") offered
hereby consists of 190 shares of Class A Common Stock, no par value ("Class A
Common Stock") and 95 redeemable Class B Warrants ("Class B Warrants"). The
Class B Warrants are immediately exercisable and are transferable separately
from the Class A Common Stock. The number of shares of Class A Common Stock and
Class B Warrants included in each Unit has been determined by D.H. Blair
Investment Banking Corp. (the "Underwriter") based primarily upon the current
market price of the Class A Common Stock, as well as the Underwriter's
determination of the number of shares and Class B Warrants per Unit necessary to
successfully market the Units in light of the size of the offering made hereby
(the "Offering") relative to the number of shares of Class A Common Stock
outstanding immediately prior to the Offering. Fractional Units may not be
purchased in the Offering.

Each Class B Warrant entitles the registered holder thereof to purchase one
share of Class A Common Stock for $8.00, subject to adjustment, at any time from
the date of issuance through November 30, 1999. Commencing November 30, 1997,
the Class B Warrants will be subject to redemption by the Company at a
redemption price of $.05 per Warrant on 30 days' written notice provided that
the average closing bid price as reported by the Nasdaq Stock Market ("Nasdaq")
of the Class A Common Stock exceeds $11.20 per share for 30 consecutive trading
days ending within 15 days of the notice of redemption. The public offering
price of the Units and the exercise price and other terms of the Class B
Warrants were determined by negotiations between the Company and the Underwriter
and are not necessarily related to the Company's asset value, net worth or other
criteria of value. The Underwriter is the subject of an investigation by the
Securities and Exchange Commission (the "Commission"). See "Risk Factors" and
"Underwriting."

The Company's Class A Common Stock, Class A Warrants and Class B Warrants
are presently quoted on the Nasdaq National Market. The last reported sale
prices of the Class A Common Stock and Class B Warrants on October 14, 1996 as
reported by the Nasdaq National Market, were $7 3/4 and $1 3/4, respectively.
The Units offered hereby will not be listed on Nasdaq. The Class A Common Stock
is one of three classes of the Company's Common Stock. The Company also has
outstanding publicly traded units (the "IPO Units"), each IPO Unit consisting of
one share of Class A Common Stock, one Class A Warrant and one Class B Warrant
sold in the Company's initial public offering in December 1994. See "Description
of Securities."
--------------------------

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
IMMEDIATE DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7 AND "DILUTION."
--------------------------

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
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Unit...................... $1,000 $75 $925
Total (3)..................... $11,000,000 $825,000 $10,175,000
</TABLE>

(FOOTNOTES ON FOLLOWING PAGE)

These Units are being offered by the Underwriter on a "firm commitment"
basis when, as and if delivered to and accepted by the Underwriter, and subject
to withdrawal or cancellation of the offer without notice and to its right to
reject orders in whole or in part and to certain other conditions. It is
expected that delivery of the certificates representing the Units will be made
at the offices of D.H. Blair Investment Banking Corp., 44 Wall Street, New York,
New York 10005, on or about October 18, 1996.

D.H. BLAIR INVESTMENT BANKING CORP.
---------------

The date of this Prospectus is October 15, 1996.

<PAGE>
(FOOTNOTES FROM PREVIOUS PAGE)

(1) Does not reflect additional compensation to be received by the Underwriter
in the form of (i) a nonaccountable expense allowance of $330,000 ($379,500
if the over-allotment option is exercised in full); and (ii) an option to
purchase up to 1,100 Units at 120% of the per Unit public offering price,
exercisable over a period of three years commencing two years from the date
of this Prospectus (the "Unit Purchase Option"). In addition, the Company
has agreed to indemnify the Underwriter for certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."

(2) Before deducting expenses of the Offering payable by the Company, estimated
to be $975,000, including the Underwriter's nonaccountable expense
allowance.

(3) The Company has granted the Underwriter an option (the "Over-Allotment
Option"), exercisable within 45 days of the date of this Prospectus, to
purchase up to 1,650 additional Units on the same terms set forth above
solely to cover over-allotments, if any. If the Over-Allotment Option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be increased to $12,650,000,
$948,750 and $11,701,250. See "Underwriting."

[LOGO]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK AND/ OR THE CLASS B WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING,
THE UNDERWRITER AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE
AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A
COMMON STOCK AND/OR THE CLASS B WARRANTS ON NASDAQ IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT"). SEE
"UNDERWRITING."

Altair, AngleTIPS, Arago, Arcturus, Aurora, Centauri, Dentalaser, MOD,
Orion, Pegasus, Polaris, Premier Laser Systems,
Proclosure-Registered Trademark-, Sirius and TouchTIPS are trademarks of the
Company. This Prospectus also includes trademarks and trade names of companies
other than the Company.

Pursuant to Rule 429 under the Securities Act, this Prospectus also relates
to and may be used in connection with the securities previously registered under
said Act pursuant to Registration Statement No. 33-83984 and consisting of (i)
4,120,149 shares of Class A Common Stock and 4,120,149 Class B Warrants issuable
upon exercise of outstanding Class A Warrants; (ii) 7,247,198 shares of Class A
Common Stock issuable upon exercise of Class B Warrants that are either
presently outstanding or are issuable upon exercise of outstanding Class A
Warrants; and (iii) 240,000 shares of Class A Common Stock, Class A Warrants and
Class B Warrants issuable upon exercise of unit purchase options (the "IPO Unit
Purchase Options") received by the Underwriter and its designees in connection
with the Company's initial public offering (the "IPO"), 240,000 shares of Class
A Common Stock and Class B Warrants issuable upon exercise of said Class A
Warrants and 480,000 shares of Class A Common Stock issuable upon exercise of
all of said Class B Warrants.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES
(I) A PUBLIC OFFERING PRICE OF $1,000 PER UNIT, (II) NO EXERCISE OF THE
UNDERWRITER'S OVER-ALLOTMENT OPTION AND (III) NO EXERCISE OF ANY OTHER
OUTSTANDING WARRANTS OR OPTIONS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."

THE COMPANY

Premier Laser Systems, Inc. develops, manufactures and markets several lines
of proprietary medical lasers, fiberoptic delivery systems and associated
products for a variety of dental, ophthalmic and surgical applications
principally for use in surgical centers and medical offices. The Company's
lasers and related products use the controlled application of thermal, acoustic
and optical energy to allow the physician or dentist to perform selected
minimally invasive procedures which, compared to conventional techniques not
involving the use of lasers, vaporize or sever tissue with minimal blood loss
and scarring, increase patient comfort and reduce patient treatment time and
treatment costs.

The Company's product line of proprietary lasers includes argon, diode,
CO(2), neodymium:yttrium aluminum garnet ("Nd:YAG"), erbium:yttrium aluminum
garnet ("Er:YAG") and holmium:yttrium aluminum garnet ("Ho:YAG") lasers, which
the Company believes are capable of a wide range of procedures in multiple
medical and surgical specialties ranging from cutting bone and teeth to removing
precise layers of cellular tissue in the eye. Representative procedures for
which the Company has market clearance from the United States Food and Drug
Administration ("FDA") include teeth whitening, treatment of endometriosis,
treatment of gum disease, laparoscopic procedures, dermatological treatment of
port wine stains and discectomy. The Company is currently conducting various
clinical trials relating to additional applications for its laser products. The
Company also manufactures a variety of disposable fiberoptic delivery systems
and sculpted fiberoptic probes, optical tips, waveguides and catheters which are
designed for single-patient use. The Company believes that the increasing demand
for product sterility and cost containment will result in an increase in
disposable product sales and will provide a recurring revenue stream.

In dentistry, the Company currently markets its lasers for soft tissue
(gums) procedures, composite curing in cavity preparation and teeth whitening
procedures. The Company's Aurora diode laser is currently used by dentists and
periodontists to treat periodontal disease and has been shown to postpone or in
some cases eliminate the need for conventional periodontal surgery. The
Company's Arago and MOD (Multi Operatory Dentalaser) argon lasers are currently
used by dentists to accelerate the curing of composites placed in cavity
preparations. The use of the laser for this application has been shown to result
in a stronger restoration than composites cured by traditional curing lights.
The Company is seeking clearance for additional dental applications to enable it
to market its Centauri Er:YAG laser for hard tissue (teeth) procedures, and is
currently initiating clinical trials for cavity prevention.

Medical lasers have been used for the treatment of eye disorders for many
years and are widely accepted in the ophthalmic community. The Company's
multiple application Centauri Er:YAG laser is priced significantly below current
single purpose refractive lasers and has been cleared for anterior capsulotomy
(one step in the cataract extraction procedure) and occuloplastic and other
cosmetic procedures, among other indications. The Centauri laser is also
currently being tested in clinical trials and animal studies for cataract
removal, glaucoma treatment and corneal sculpting (treatment of myopia,
hyperopia and astigmatism).

The Company believes surgical lasers, either in conjunction with or
independent of traditional sutures or staples, may be used for various wound
closure procedures. The Company believes that the benefits of the use of
surgical lasers for tissue melding, as compared to sutures and staples, include
fluid-static seals, immediate closure strength and reduced surgical time. The
Company and its strategic partner are currently conducting clinical and animal
studies for tissue melding for ducts, arteries, veins and skin, in support of
future regulatory applications.

3
<PAGE>
The Company's strategy is to seek to increase its market penetration in the
dental, ophthalmic and surgical markets by (i) expanding its marketing and
distribution efforts, (ii) creating market awareness through increased publicity
and the education of dentists and physicians, (iii) pursuing clearances for
additional laser applications, (iv) capitalizing on disposable aftermarket
related products, and (v) expanding domestically and internationally through
strategic alliances or acquisitions of companies with additional distribution
channels, complementary products or an international presence.

The Company commenced operations in August 1991, after acquiring
substantially all of the assets of Pfizer Laser Systems, a division of Pfizer
Hospital Products Group, Inc. ("Pfizer HPG"), in an acquisition led by the
Company's Chief Executive Officer. The assets acquired by the Company included
the proprietary rights to a broad base of laser and fiberoptic technologies,
which the Company developed over the past four years into 19 laser models
cleared for market introduction. Following an initial public offering in
December 1994, the Company increased inventory and expanded its dental sales
force in December 1995 to include five area sales managers and 25 independent
marketing representatives. As a result of this expansion, the Company achieved
$723,000 in sales to the dental market for the fiscal year ended March 31, 1996.

The Company has not generated significant revenues to date, and may continue
to incur losses for the foreseeable future due to substantial costs associated
with manufacturing, marketing and distributing its laser products and continued
research and development related to additional applications for these products.

The Company's principal executive offices are located at 3 Morgan, Irvine,
California 92718. The Company's telephone number is (714) 859-0656.

THE OFFERING

<TABLE>
<S> <C>
Securities Offered by the Company...... 11,000 Units, each Unit consisting of 190 shares of
Class A Common Stock and 95 Class B Warrants. Each
Class B Warrant is exercisable at $8.00 (subject to
adjustment) to purchase one share of Class A Common
Stock, at any time from the date of issuance
through November 30, 1999, subject to earlier
redemption by the Company. See "Capitalization" and
"Description of Securities."

Class A Common Stock Outstanding Before
the Offering (1)(2)................... 4,750,554 shares

Class A Common Stock Outstanding After
the Offering (1)(2)................... 6,840,554 shares

Class E-1 Common Stock Outstanding
Before and After the Offering (1)..... 1,256,818 shares

Class E-2 Common Stock Outstanding
Before and After the Offering (1)..... 1,256,818 shares

Nasdaq National Market Symbols......... Class A Common Stock -- PLSIA
Class A Warrants -- PLSIW
Class B Warrants -- PLSIZ

Nasdaq SmallCap Symbols................ IPO Units -- PLSIU
</TABLE>

4
<PAGE>

<TABLE>
<S> <C>
Use of Proceeds........................ To fund the expansion of the Company's marketing
and distribution capabilities, including
distribution to international markets, through
acquisitions, strategic alliances or internal
development; to invest in inventory and
demonstration equipment; to fund additional
research and development; to repay indebtedness;
and for general corporate and working capital
purposes.

Risk Factors........................... The securities offered hereby involve a high degree
of risk and immediate and substantial dilution to
public investors. Investors should purchase the
securities offered hereby only if they can afford
the loss of their entire investment. See "Risk
Factors" and "Dilution."
</TABLE>

- ------------------------
(1) The Class E-1 and Class E-2 Common Stock (collectively, the "Escrow Shares")
will be automatically converted into Class A Common Stock if the Company
attains certain earnings levels over the next four years or if the Class A
Common Stock attains certain market price targets over the next year, and
will be cancelled by the Company on June 30, 2000 if the Escrow Shares have
not been converted into Class A Common Stock prior to that time. See
"Description of Securities."

(2) Does not include (i) 723,796 shares of Class A Common Stock issuable upon
exercise of outstanding options as of October 14, 1996 granted under the
Company's 1992 Employee Stock Option Plan, 1995 Stock Option Plan and 1996
Stock Option Plans; (ii) 470,250 shares of Class A Common Stock issuable
upon exercise of the Over-Allotment Option (and the underlying Class B
Warrants); (iii) 313,500 shares of Class A Common Stock issuable upon
exercise of the Unit Purchase Option (and the underlying Class B Warrants);
(iv) 696,540 shares of Class A Common Stock issuable upon exercise of other
outstanding options and warrants to purchase Class A Common Stock; (v)
8,240,298 shares of Class A Common Stock issuable upon exercise of the
Company's outstanding publicly-held Class A Warrants and the underlying
Class B Warrants; (vi) 3,127,049 shares of Class A Common Stock issuable
upon exercise of the Company's outstanding publicly-held Class B Warrants;
(vii) 960,000 shares of Class A Common Stock issuable upon exercise of the
IPO Unit Purchase Options (and the underlying Class A Warrants and Class B
Warrants) and (viii) 1,256,818 shares of each of Class E-1 Common Stock and
Class E-2 Common Stock. For a description of the Class A Warrants, Class B
Warrants (collectively, the "Warrants"), IPO Unit Purchase Options, Class
E-1 Common Stock and Class E-2 Common Stock, see "Description of
Securities." For a description of the Company's stock option plans and
options outstanding thereunder, see "Management -- Stock Option Plans."

5
<PAGE>
SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, JUNE 30,
---------------------------------------- --------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Net sales.............................. $ 2,079,335 $ 1,249,403 $ 1,704,390 $ 112,564 $ 1,254,082
Cost of sales.......................... 1,753,352 1,298,420 3,324,757 450,353 1,028,611
------------ ------------ ------------ ------------ ------------
Gross profit (loss).................... 325,983 (49,017) (1,620,367) (337,789) 225,471
Selling and marketing expenses......... 1,087,461 1,035,863 1,308,767 195,831 461,772
Research and development expenses...... 678,279 1,035,705 1,213,471 255,959 126,779
General and administrative expenses.... 1,322,888 1,747,090 1,709,327 501,078 326,786
------------ ------------ ------------ ------------ ------------
Loss from operations................... (2,762,645) (3,867,675) (5,851,932) (1,290,657) (689,866)
Interest (expense) income, net......... (434,851) (322,540) 99,037 94,449 (7,194)
------------ ------------ ------------ ------------ ------------
Loss before extraordinary items........ (3,197,496) (4,190,215) (5,752,895) (1,196,208) (697,060)
Extraordinary gain from extinguishment
of indebtedness....................... -- 381,730 -- -- --
------------ ------------ ------------ ------------ ------------
Net loss............................... $ (3,197,496) $ (3,808,485) $ (5,752,895) (1,196,208) (697,060)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------

SELECTED PER SHARE DATA:
Net loss............................... $ (1.26) $ (0.27) $ (0.15)
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding
(1)................................... 4,556,959 4,501,899 4,719,923
Pro forma loss before extraordinary
item (2).............................. $ (2.45) $ (1.59)
Extraordinary gain from extinguishment
of indebtedness....................... -- .15
------------ ------------
Pro forma net loss (2)................. $ (2.45) $ (1.44)
------------ ------------
------------ ------------
Pro forma weighted average shares
outstanding (1)(2).................... 1,288,751 2,584,722
</TABLE>

<TABLE>
<CAPTION>
AT JUNE 30, 1996
-----------------------------
AS ADJUSTED
ACTUAL (3)
------------- --------------
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 135,881 $ 7,735,881
Working capital................................................................. 4,449,812 13,649,812
Total assets.................................................................... 15,670,277 22,825,367
Total debt...................................................................... 881,195 400,000
Shareholders' equity............................................................ 12,223,544 21,423,544
</TABLE>

- --------------------------
(1) Does not include 1,256,818 shares of each of Class E-1 or Class E-2 Common
Stock outstanding as of March 31, 1996 and June 30, 1996, which are subject
to cancellation under certain circumstances. See "Description of Securities
-- Common Stock" and Notes 2 and 16 of Notes to Financial Statements.

(2) Adjusted to give pro forma effect to the conversion of certain of the
Company's indebtedness which occurred upon completion of the Company's IPO.
The effect on net loss per common share from the conversion of such
indebtedness was to reduce historical net loss by $37,500 and $67,995, and
to increase weighted average shares outstanding by 76,875 and 321,099 shares
for the fiscal years ended March 31, 1994 and 1995, respectively.

(3) Adjusted to reflect the receipt by the Company of estimated net proceeds
from the issuance of 11,000 Units offered hereby and the application of the
net proceeds thereof. See "Use of Proceeds" and "Capitalization."

6
<PAGE>
RISK FACTORS

In evaluating an investment in the securities being offered hereby,
investors should consider carefully the following principal risk factors, as
well as the other information contained in this Prospectus.

LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES. The Company was
formed in July 1991 and has not generated significant revenues to date. As of
June 30, 1996, the Company had an accumulated deficit of $19,313,474. For the
three months ended June 30, 1996 and the fiscal years ended March 31, 1994, 1995
and 1996, the Company had operating losses of $689,866, $2,762,645, $3,867,675
and $5,851,932, respectively, resulting principally from costs incurred in
research and development and other costs of operations. The Company expects that
operating losses will continue until such time as product sales generate
sufficient revenues to fund its continuing operations, as to which there can be
no assurance.

INDEPENDENT ACCOUNTANTS' REPORT; GOING CONCERN QUALIFICATION. The report
from the Company's independent accountants includes an explanatory paragraph
which describes substantial doubt concerning the ability of the Company to
continue as a going concern. The Company may incur losses for the foreseeable
future due to the significant costs associated with manufacturing, marketing and
distributing its laser products and due to continual research and development
activities which will be necessary to develop additional applications for the
Company's laser technology. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Financial Statements --
Report of Independent Accountants."

UNCERTAINTIES CONCERNING FUTURE PROFITABILITY. The Company's ability to
achieve profitability will depend, in part, on its ability to continue to
successfully develop clinical applications and obtain regulatory approvals for
its products and to develop the capacity to manufacture and market such products
on a wide scale. There is no assurance that the Company will be able to
successfully make the transition from research and development to manufacturing
and selling commercial medical laser products on a broad basis. While attempting
to make this transition, the Company will be subject to all risks inherent in a
growing venture, including the need to produce reliable and effective products,
develop marketing expertise and enlarge its sales force. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

UNCERTAIN MARKET ACCEPTANCE. The Company's future sales are dependent, in
part, on the Company's ability to demonstrate to dentists, ophthalmologists and
other physicians the potential cost and performance advantages of its laser
systems over traditional methods of treatment and, to a lesser extent, over
competitive laser systems. To date, commercial sales of the Company's lasers
have been limited, and no assurance can be given that these laser products can
be successfully commercialized on a broad basis. Lasers have not been widely
used in dentistry and their use requires training and expertise. The acceptance
of dental lasers may be adversely affected by their high cost, concerns by
patients and dentists relating to their safety and efficacy, and the substantial
market acceptance and penetration of alternative dental tools such as the dental
drill. Current economic pressure may make dentists and physicians reluctant to
purchase substantial capital equipment or invest in new technology. The failure
of medical lasers to achieve broad market acceptance would have a material
adverse effect on the Company's business, financial condition and results of
operations. No assurance can be given that any of the Company's products will be
accepted by the medical or dental community or by patients, or that a
significant market for the Company's laser systems will be developed and
sustained. The Company currently has a limited sales force and will need to hire
additional sales and marketing personnel to facilitate the general acceptance of
its products. See "Business -- Market Overview."

DEPENDENCE ON SUPPLIERS. The Company purchases certain raw materials,
components and subassemblies included in the Company's products from a limited
group of qualified suppliers and does not maintain long-term supply contracts
with any of its key suppliers. The disruption or termination of these sources
could have a material adverse effect on the Company's business and results of
operations. For example, during fiscal 1994, the Company's sole supplier of the
specialized optic fiber required for use in the Company's Er:YAG lasers ceased
to provide this fiber to the Company. The

7
<PAGE>
Company's inability to obtain sufficient quantities of this specialized optical
fiber had a material adverse effect on the volume of Er:YAG lasers the Company
was able to sell during fiscal 1994 and 1995. The Company's arrangement with the
supplier of its Arago argon laser terminates in November 1996, and if this
arrangement is not renewed and the Company is unable to secure another source
for this argon laser, the Company's results of operations may be adversely
affected. There can be no assurance that this or any other supplier could be
replaced in a timely manner. Any interruption in the supply of these and other
key components can have a material adverse effect on the Company's ability to
manufacture its products and, consequently, on its business, financial condition
and results of operations. See "Business -- Manufacturing and Materials."

RISKS APPLICABLE TO FOREIGN SALES. For the years ended March 31, 1994, 1995
and 1996, sales to foreign markets accounted for approximately 22%, 63% and 40%,
respectively, of the Company's net sales. Foreign sales expose the Company to
certain risks, including the difficulty and expense of maintaining foreign sales
distribution channels, barriers to trade, potential fluctuations in foreign
currency exchange rates, political and economic instability, availability of
suitable export financing, accounts receivable collections, tariff regulations,
quotas, shipping delays, foreign taxes, export licensing requirements and other
United States and foreign regulations that may apply to the export of medical
lasers. The regulation of medical devices worldwide also continues to develop,
and there can be no assurance that new laws or regulations will not have an
adverse effect on the Company. In addition, the Company may experience
additional difficulties in providing prompt and cost effective service of its
medical lasers in foreign countries. The Company does not carry insurance
against such risks. The occurrence of any one or more of these events may
individually or in the aggregate have a material adverse effect upon the
Company's business, financial condition and results of operations. See "Business
- -- Marketing, Sales and Service."

RISK OF TECHNOLOGICAL OBSOLESCENCE. The markets in which the Company's
laser products compete are subject to rapid technological change, as well as the
potential development of alternative surgical techniques or new pharmaceutical
products. Such changes could render the Company's products uncompetitive or
obsolete. The Company will be required to invest in research and development to
attempt to maintain and enhance its existing products and develop new products.
No assurances can be given that such research and development efforts will
result in the introduction of new products or product improvements. See
"Business -- Research and Development."

DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success
will depend, in part, on its ability to obtain patent protection for products
and processes, to preserve its trade secrets and to operate without infringing
the proprietary rights of third parties. The Company holds 19 United States
patents and has other patent applications pending in the United States. The
Company also holds 13 foreign patents including two utility model patents and
has other foreign patent applications pending. No assurance can be given that
any additional United States or foreign patents will be issued, that the scope
of any patent protection will exclude competitors or that any of the Company's
patents will be held valid if subsequently challenged. Further, there can be no
assurance that others will not independently develop similar products, duplicate
the Company's products or design products that circumvent any patents used by
the Company. The Company is aware of certain patents which, along with other
patents that may exist or be granted in the future, could restrict the Company's
right to market certain of its technologies without a license, including,
without limitation, patents relating to the Company's lens emulsification
product and ophthalmic probes for the Er:YAG laser. In the past, the Company has
received allegations that certain of the Company's laser products infringe other
patents. There has been significant patent litigation in the medical industry in
general, and in the medical laser industry in particular. Adverse determinations
in litigation or other patent proceedings to which the Company may become a
party could subject the Company to significant legal judgments or other
liabilities to third parties and could require the Company to seek licenses from
third parties that may or may not be economically viable. Patent and other
intellectual property rights disputes often are settled through licensing
arrangements. No assurance can be given that any licenses required under these
or any other patents or proprietary rights would be available on terms
acceptable to the Company, if at all. If the Company does not obtain such
licenses, it could encounter delays in product introductions while it attempts
to design around such patents, or it

8
<PAGE>
could find that the development, manufacture or sale of products requiring such
licenses could be enjoined. If the Company is found, in a legal proceeding, to
have infringed the patents or other proprietary rights of others, it could be
liable for significant damages. The Company also relies upon unpatented trade
secrets, and no assurance can be given that others will not independently
develop or otherwise acquire substantially equivalent trade secrets.

POTENTIAL CHARGES RESULTING FROM WRITE-OFFS OF INTANGIBLES. At June 30,
1996, the Company's financial statements reflect patents, licenses and other
intangible assets in the approximate net amount of $7,211,072 which amount is
being amortized over the next two to 15 years. Accordingly, the Company expects
to recognize a charge to earnings of approximately $700,000 for the fiscal year
ending March 31, 1997, and expects to continue to recognize substantial charges
to earnings in subsequent fiscal years. In addition, at each balance sheet date,
the Company is required to review the value of its intangible assets based on
various factors, such as changes in technology. Any adjustment downward in such
value may result in a write-off of the intangible asset and a substantial charge
to earnings, thereby adversely affecting the operating results of the Company in
the future.

NEED FOR FDA AND FOREIGN GOVERNMENTAL APPROVALS; GOVERNMENT REGULATION. The
Company's products are regulated as medical devices by the FDA under the Federal
Food, Drug and Cosmetic Act (the "FDC Act") and the regulations promulgated
thereunder. As such, these devices require either Section 510(k) premarket
clearance ("510(k)") or approval of a premarket approval application ("PMA") by
the FDA prior to commercialization. Satisfaction of applicable regulatory
requirements may take several years and varies substantially based upon the
type, complexity and novelty of such devices, as well as the clinical procedure.
There can be no assurance that some of the Company's products will not require
the more rigorous and time consuming PMA approval, including laser uses for
vasovasotomy or other tissue melding, dental hard tissue, cavity prevention,
cosmetic surgery, sclerostomy and lens emulsification, among others. Filings and
governmental approvals may be required in foreign countries before the devices
can be marketed in these countries. There can be no assurance that further
clinical trials of the Company's medical lasers or of any future products will
be successfully completed or, if they are completed, that any requisite FDA or
foreign governmental clearances or approvals will be obtained. FDA or other
governmental clearances or approvals of products developed by the Company in the
future may require substantial filing fees which could limit the number of
applications sought by the Company and may entail limitations on the indicated
uses for which such products may be marketed. In addition, approved or cleared
products may be subject to additional testing and surveillance programs required
by the FDA and other regulatory agencies, and product approvals and clearances
could be withdrawn for failure to comply with regulatory standards or by the
occurrence of unforeseen problems following initial marketing. Also, the Company
has made modifications to certain of its existing products which it does not
believe require the submission of a new 510(k) notification to the FDA. However,
there can be no assurance that the FDA would agree with the Company's
determination and not require the Company to discontinue marketing one or more
of the modified devices until they have been cleared by the FDA. There also can
be no assurance that any such clearance of modifications would be granted should
it become necessary. The Company is also required to adhere to applicable
requirements for current Good Manufacturing Practices ("cGMP") and radiological
health requirements, to engage in extensive record keeping and reporting and to
comply with the FDA's product labeling, promotional and advertising
requirements. Noncompliance with state, local, federal or foreign requirements
can result in fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, delay, denial or withdrawal
of premarket clearance or approval of devices, recommendations by the FDA that
the Company not be allowed to enter into government contracts, and criminal
prosecution, all of which would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's
manufacturing facilities are subject to periodic inspections by state and
federal agencies, including the FDA, the California Department of Health
Services, and comparable agencies in other countries. See "Business --
Government Regulation."

9
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The Company depends to a considerable degree
on a limited number of key personnel, including Colette Cozean, Ph.D., its
Chairman of the Board, Chief Executive Officer, President and Director of
Research. Dr. Cozean is also an inventor of a number of the Company's patented
technologies. During the Company's limited operating history, many key
responsibilities within the Company have been assigned to a relatively small
number of individuals. The loss of Dr. Cozean's services or those of certain
other members of management could adversely affect the Company. The Company has
no long-term employment agreements with its key personnel. The success of the
Company will also depend, among other factors, on the successful recruitment and
retention of qualified technical and other personnel. See "Management."

HIGHLY COMPETITIVE INDUSTRY. The medical laser industry is subject to
intense competition and is characterized by rapid technological change. The
Company is and will continue to be subject to competition in its targeted
markets, principally from businesses providing other traditional surgical and
nonsurgical treatments, including existing and developing technologies, and to a
lesser extent competitors' CO(2), argon, diode, Er:YAG and Nd:YAG lasers. Many
of the Company's competitors have substantially greater financial, marketing and
manufacturing resources and experience than the Company. Furthermore, the
Company expects other companies will enter the market, particularly as medical
lasers gain increasing market acceptance. Significant competitive factors which
will affect future sales in the marketplace include regulatory approvals,
performance, pricing and general market acceptance. See "-- Dependence on
Suppliers" and "Business -- Competition."

POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Due to the
relatively high sales price of the Company's laser systems and the low sales
unit volume, minor timing differences in receipt of customer orders have
produced and could continue to produce significant fluctuations in quarterly
results. In addition, if anticipated sales and shipments in any quarter do not
occur when expected, expenditures and inventory levels could be
disproportionately high, and the Company's operating results for that quarter,
and potentially for future quarters, would be adversely affected. Quarterly
results may also fluctuate based on a variety of other factors, such as
seasonality, production delays, product mix, cancellation or rescheduling of
orders, new product announcements by competitors, receipt of clearances or
approvals by the Company or its competitors, notices of product suspension or
recall, the Company's ability to manage product transitions, sales prices and
market conditions. In addition, if the Company expands or augments its
manufacturing capabilities in connection with the introduction of new products,
quarterly revenues and operating results are expected to fluctuate to an even
greater degree. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

UNCERTAIN ABILITY TO MEET CAPITAL NEEDS. The Company will require
substantial additional funds for its research and development programs,
preclinical and clinical testing, development of its sales and distribution
force, operating expenses, regulatory processes and manufacturing and marketing
programs. The Company's capital requirements will depend on numerous factors,
including the progress of its research and development programs, results of
preclinical and clinical testing, the time and cost involved in obtaining
regulatory approvals, the cost of filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights, competing
technological and market developments, developments and changes in the Company's
existing research, licensing and other relationships and the terms of any new
collaborative, licensing and other arrangements that the Company may establish.
The Company believes that the net proceeds of the Offering, together with its
available short-term assets and investment income, will be sufficient to meet
its operating expenses and capital expenditures through the next 12 months. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
However, the Company's cash requirements may vary materially from those now
planned due to potential future acquisitions, the progress of research and
development programs, results of clinical testing, relationships with strategic
partners, if any, competitive and technological advances, the FDA and foreign
regulatory processes and other factors. There can be no assurance, however, that
additional financing will be available when needed, or if available, will be
available on acceptable terms. Insufficient funds may prevent the Company from
implementing its business strategy or may

10
<PAGE>
require the Company to delay, scale back or eliminate certain of its research
and product development programs or to license to third parties rights to
commercialize products or technologies that the Company would otherwise seek to
develop itself.

BROAD DISCRETION OVER USE OF PROCEEDS. The Company intends to use a
substantial portion of the net proceeds of the Offering to expand the Company's
marketing and distribution capabilities through internal development, strategic
alliances and acquisitions. In addition, the Company may use of a portion of the
net proceeds to increase its available technologies or products through
acquisitions, capital and research and development expenditures or a combination
or both. Management's allocation decisions concerning such net proceeds will be
dependent upon a variety of factors, including the progress and results of
clinical trials, the timing of receipt of regulatory approvals and potential
strategic alliances and acquisitions. The Company is not engaged in discussions
relating to any acquisitions and has not yet determined the extent to which it
will expand its marketing, distribution, technologies and products through
acquisitions or strategic alliances, as contrasted with internal growth. As a
result, a significant portion of the net proceeds will be available for
acquisitions and projects that are not yet identified, and the Board of
Directors will have broad discretion with respect to the application of such
proceeds. There can be no assurance that the Company will be able to consummate
acquisitions or identify and arrange projects that meet the Company's
requirements. Approximately $500,000 of the net proceeds will be used to pay in
full a note due to Pfizer HPG which is secured by certain tangible and
intangible assets of the Company. The Company has not made a payment with
respect to this note that was due in July 1996, but is attempting to negotiate
an extension of this payment date. No assurance can be given, however, that such
extension will be granted or that Pfizer will not seek to enforce its rights
under such note. See "Use of Proceeds."

POSSIBLE VOLATILITY OF STOCK PRICE. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of the Company's securities. In addition,
the market price of the Company's securities has been and is likely to be highly
volatile. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new products by the Company or its
competitors, FDA and international regulatory actions, developments with respect
to patents or proprietary rights, public concern as to the safety of products
developed by the Company or its competitors, changes in health care policy in
the United States and internationally, changes in analysts' recommendations
regarding the Company, other medical companies or the medical laser industry
generally and general market conditions may have a significant effect on the
market price of the Company's securities. See "Price Range of Securities."

PRODUCT LIABILITY EXPOSURE. The sale of the Company's laser products
involves the inherent risk of product liability claims against the Company. The
Company currently maintains product liability insurance coverage in the amount
of $5 million per occurrence and $5 million in the aggregate, but such insurance
is expensive, subject to various coverage exclusions and may not be obtainable
by the Company in the future on terms acceptable to the Company. There can be no
assurance that claims against the Company arising with respect to its products
will be successfully defended or that the insurance carried by the Company will
be sufficient to cover liabilities arising from such claims. A successful claim
against the Company in excess of the Company's insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Product Liability and Insurance."

LIMITATIONS ON THIRD PARTY REIMBURSEMENT. The Company's laser products are
generally purchased by physicians, dentists and surgical centers which then bill
various third party payors, such as government programs and private insurance
plans, for the procedures conducted with the Company's lasers. Third-party
payors carefully review and are increasingly challenging the prices charged for
medical products and services. Reimbursement rates from private companies vary
depending on the procedure performed, the third-party payor, the insurance plan
and other factors. Medicare reimburses hospitals a prospectively-determined
fixed amount for the costs associated with an in-patient

11
<PAGE>
hospitalization based on the patient's discharge diagnosis, and reimburses
physicians a prospectively-determined fixed amount based on the procedure
performed, regardless of the actual costs incurred by the hospital or physician
in furnishing the care and unrelated to the specific devices used in that
procedure. Third-party payors are increasingly scrutinizing whether to cover new
products and the level of reimbursement for covered products. Payors may deny
coverage and reimbursement for the Company's products if they determine that the
device was not reasonable and necessary for the purpose for which used, was
investigational or not cost-effective. As a result, there can be no assurance
that reimbursement from third party payors for these procedures will be
available or if available, that reimbursement will not be limited, thereby
adversely affecting the Company's ability to sell its products on a profitable
basis. Moreover, the Company is unable to predict what legislation or
regulation, if any, relating to the health care industry or third-party coverage
and reimbursement may be enacted in the future, or what effect such legislation
or regulation may have on the Company.

UNCERTAINTIES REGARDING HEALTH CARE REFORM. Several states and the United
States government are investigating a variety of alternatives to reform the
health care delivery system and further reduce and control health care spending.
These reform efforts include proposals to limit spending on health care items
and services, limit coverage for new technology and limit or control the price
health care providers and drug and device manufacturers may charge for their
services and products. If adopted and implemented, such reforms could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Government Regulation."

CHARGE TO EARNINGS IN THE EVENT OF RELEASE OF ESCROW SHARES. The Company
has outstanding 1,256,818 shares of each of Class E-1 and Class E-2 Common Stock
which are being held by the Company in escrow, and which will be released from
escrow and converted into shares of Class A Common Stock if certain criteria are
met. In the event any of these criteria are met and any Escrow Shares are
released from escrow to shareholders who are officers, directors, employees or
consultants of the Company, a substantial noncash compensation expense will be
recorded for financial reporting purposes. The recognition of such compensation
expense may have an adverse effect on the market price of the Company's
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Potential Future Charge to Income," "Principal
Shareholders" and "Description of Securities -- Common Stock."

SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE EFFECT ON MARKET PRICE OF
CLASS A COMMON STOCK RESULTING FROM EFFECT OF OUTSTANDING OPTIONS AND
WARRANTS. Sales of a substantial number of shares of Class A Common Stock in
the public market following the Offering could adversely affect the market price
for the Class A Common Stock. Other than 161,352 shares of Class A Common Stock
held by the Company's officers, directors and certain shareholders which are
subject to 13 month lock-up agreements, substantially all of the Company's
6,840,554 shares of Class A Common Stock to be outstanding upon completion of
the Offering will be freely tradeable, including the shares offered hereby,
3,708,997 registered shares of Class A Common Stock which have been previously
registered under the Securities Act and 1,041,557 unregistered shares of Class A
Common Stock which may be sold in the public market subject to compliance with
Rule 144 promulgated under the Securities Act. An additional 11,367,347 shares
of Common Stock are issuable upon the full exercise of the Company's outstanding
publicly traded Warrants, and 2,380,336 shares of Class A Common Stock are
issuable upon exercise of other outstanding warrants and options. The issuance
of shares upon the exercise of the outstanding Warrants, the IPO Unit Purchase
Options and options under the 1995 Stock Option Plan has been registered under
the Securities Act, and 718,680 shares of Class A Common Stock issuable upon
exercise of the remaining options and warrants may be resold pursuant to Rule
701 under the Securities Act. The existence of the Company's outstanding
warrants and options could adversely affect the Company's ability to obtain
future financing. The price which the Company may receive for the Class A Common
Stock issued upon exercise of such options and warrants will likely be less than
the market price of the Class A Common Stock at the time such options and
warrants are exercised. Moreover, the holders of the options and warrants might
be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain

12
<PAGE>
needed capital by a new offering of its securities on terms more favorable than
those provided for by the options and warrants. See "Management -- Stock Option
Plans" and "Shares Eligible for Future Sale."

POTENTIAL ANTI-TAKEOVER EFFECTS OF PREFERRED STOCK. The Company's Articles
of Incorporation authorize the issuance of 8,850,000 shares of "blank check"
preferred stock, which will have such designations, rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without shareholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
the Company's Common Stock. In the event of such issuance, the preferred stock
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company. See "Description of
Securities -- Preferred Stock."

POTENTIAL ADVERSE EFFECT OF REDEMPTION OF CLASS B WARRANTS. The Class B
Warrants may be redeemed by the Company at any time commencing November 30, 1997
at a redemption price of $.05 per Class B Warrant upon 30 days' notice if the
average closing bid prices (or last sales prices if listed on a national
securities exchange) of the Class A Common Stock exceeds $11.20 for 30
consecutive trading days ending within 15 days of the notice of redemption.
Redemption of the Class B Warrants could force the holders (i) to exercise the
Class B Warrants and pay the exercise price at a time when it may be
disadvantageous for the holders to do so, (ii) to sell the Class B Warrants at
the then current market price when they might otherwise wish to hold the Class B
Warrants, or (iii) to accept the nominal redemption price, which is likely to be
substantially less than the market value of the Class B Warrants at the time of
redemption. See "Description of Securities -- Redeemable Warrants."

CURRENT PROSPECTUS AND STATE REGISTRATION TO EXERCISE CLASS B
WARRANTS. Holders of Class B Warrants will be able to exercise the warrants
only if (i) a current prospectus under the Securities Act relating to the
securities underlying the Class B Warrants is then in effect and (ii) such
securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states in which the various holders of Class B
Warrants reside. Although the Company has undertaken and intends to use its best
efforts to maintain a current prospectus covering the securities underlying the
Class B Warrants following completion of the Offering to the extent required by
federal securities laws, there can be no assurance that the Company will be able
to do so. The value of the Class B Warrants may be greatly reduced if a
prospectus covering the securities issuable upon the exercise of the Class B
Warrants is not kept current or if the securities are not qualified, or exempt
from qualification, in the states in which the holders of Class B Warrants
reside. Persons holding Class B Warrants who reside in jurisdictions in which
such securities are not qualified and in which there is no exemption will be
unable to exercise their Class B Warrants and would either have to sell their
Class B Warrants in the open market or allow them to expire unexercised. If and
when the Class B Warrants become redeemable by the terms thereof, the Company
may exercise its redemption right even if it is unable to qualify the underlying
securities for sale under all applicable state securities laws. See "Description
of Securities -- Redeemable Warrants."

POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF THE COMPANY'S SECURITIES DUE TO THE
INVESTIGATION OF D.H. BLAIR INVESTMENT BANKING CORP. AND D.H. BLAIR & CO., INC.
BY THE SECURITIES AND EXCHANGE COMMISSION. The Commission is conducting an
investigation concerning various business activities of the Underwriter and D.H.
Blair & Co., Inc. ("Blair & Co."), a selling group member which will distribute
substantially all of the Units offered hereby. The investigation appears to be
broad in scope, involving numerous aspects of the Underwriter's and Blair &
Co.'s compliance with the federal securities laws and compliance with the
federal securities laws by issuers whose securities were underwritten by the
Underwriter or Blair & Co., or in which the Underwriter or Blair & Co. made
over-the-counter markets, persons associated with the Underwriter or Blair &
Co., such issuers and other persons. The Company has been advised by the
Underwriter that the investigation has been ongoing since at least 1989 and that
the Underwriter is cooperating with the investigation. The

13
<PAGE>
Underwriter cannot predict whether this investigation will ever result in any
type of formal enforcement action against the Underwriter or Blair & Co., or, if
so, whether any such action might have an adverse effect on the Underwriter,
Blair & Co. or the securities offered hereby. The Company has been advised that
Blair & Co., which has continued to make a market in the Company's securities
since the IPO, intends to make a market in the securities following the
Offering. An unfavorable resolution of the Commission's investigation could have
the effect of limiting such firm's ability to make a market in the Company's
securities, which could affect the liquidity or price of such securities. See
"-- Adverse Effect on Liquidity Associated with Possible Restrictions on Market
Making Activities in the Company's Securities" and "Underwriting."

ADVERSE EFFECT ON LIQUIDITY ASSOCIATED WITH POSSIBLE RESTRICTIONS ON MARKET
MAKING ACTIVITIES IN THE COMPANY'S SECURITIES. The Underwriter has advised the
Company that Blair & Co. intends to continue to make a market in the Company's
securities. Rule 10b-6 promulgated under the Securities Act of 1934, as amended
(the "Exchange Act") may prohibit Blair & Co. from engaging in any market-making
activities with regard to the Company's securities for a period from nine
business days (or such other applicable period as Rule 10b-6 may provide) prior
to any solicitation by the Underwriter of the exercise of the Warrants until the
later of the termination of such solicitation activity or the termination (by
waiver or otherwise) of any right that the Underwriter may have to receive a fee
for the exercise of Warrants following such solicitation. As a result, Blair &
Co. may be unable to provide a market for the Company's securities during
certain periods while the Warrants are exercisable. Any temporary cessation of
such market-making activities could have an adverse effect on the market price
of the Company's securities.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 11,000 Units being
offered hereby are estimated to be $9,200,000 (or $10,676,750 if the
Underwriter's Over-Allotment Option is exercised in full) after deducting
underwriting discounts and estimated offering expenses payable by the Company.

The Company intends to use the net proceeds of the Offering to fund the
expansion of the Company's marketing and distribution capabilities, including
distribution into international markets, through acquisitions, strategic
alliances or internal development. The Company also plans to invest in inventory
and demonstration or loaner equipment, and to fund additional research and
development including further clinical trials.

The Company also plans to use approximately $1.6 million of the net proceeds
of the Offering to repay outstanding indebtedness including approximately $1.1
million in trade payables and approximately $500,000 representing the
outstanding principal and unpaid accrued interest on a promissory note payable
to Pfizer HPG representing acquisition indebtedness, which note bears interest
at the rate of 10.0% per annum, and matures on the closing of the Offering.

The remaining proceeds are expected to be used for working capital and other
general corporate purposes, including possible strategic alliances with or
acquisitions of businesses that may provide distributor networks, complementary
products or an international presence. There are no present negotiations,
agreements or understandings with respect to any such acquisitions. Because a
significant portion of the net proceeds will be available for acquisitions and
projects that are not yet identified, the Board of Directors will have broad
discretion with respect to the application of such proceeds. There can be no
assurance that the Company will be able to identify and arrange projects that
meet the Company's requirements or to consummate any such acquisition.

Pending the application of such proceeds, the Company intends to invest the
net proceeds of the Offering in bank deposits and short-term, investment grade
securities.

14
<PAGE>
PRICE RANGE OF SECURITIES

The Company's Class A Common Stock, Class A Warrants and Class B Warrants
are quoted on the Nasdaq National Market under the symbols "PLSIA," PLSIW and
"PLSIZ," respectively. Prior to May 1, 1995, the Company's Class A Common Stock
and Warrants were listed on the Nasdaq SmallCap Market under the same symbols.
The Company's IPO Units are listed on the Nasdaq SmallCap Market under the
symbol "PLSIU." The following table sets forth, for the quarters indicated, the
high and low bid prices of the Company's Class A Common Stock, IPO Units and
Warrants on the Nasdaq SmallCap Market through April 30, 1995, and the high and
low last sale prices of the Class A Common Stock and Warrants on the Nasdaq
National Market thereafter.
<TABLE>
<CAPTION>
CLASS A CLASS A CLASS B
COMMON STOCK WARRANTS WARRANTS
------------------ ------------------ ------------------
HIGH LOW HIGH LOW HIGH LOW
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1995:
Third Quarter (commencing November 30, 1994).............. $ 4 $ 4 $ 1 $ 3/4 $ 1/2 $ 1/2
Fourth Quarter............................................ 4 1/2 3 1/2 31/32 5/8 5/8 1/2
FISCAL YEAR ENDED MARCH 31, 1996:
First Quarter*............................................ $ 6 3/4 $ 3 3/4 $ 2 5/16 $ 63/64 $ 3/4 $ 25/32
Second Quarter............................................ 7 5 5/8 2 1/2 1 3/4 2 1 1/2
Third Quarter............................................. 6 1/8 5 3 1/8 1 1/2 2 3/8 1 3/8
Fourth Quarter............................................ 8 5/8 3 7/8 4 3/4 1 3/4 3 1 5/8
FISCAL YEAR ENDING MARCH 31, 1997:
First Quarter............................................. $ 10 3/4 $ 8 $ 7 7/8 $ 3 7/8 $ 3 5/8 $ 2 1/8
Second Quarter............................................ 9 6 1/8 5 7/8 3 2 3/4 1 3/8
Third Quarter (through October 14, 1996).................. 7 3/4 6 1/4 4 5/8 3 1/8 1 3/4 1 3/16

<CAPTION>
IPO
UNITS
------------------
HIGH LOW
-------- -------
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1995:
Third Quarter (commencing November 30, 1994).............. $ 7 $ 5 55/64
Fourth Quarter............................................ 6 3/4 5 5/8
FISCAL YEAR ENDED MARCH 31, 1996:
First Quarter*............................................ $ 10 1/8 $ 5 3/4
Second Quarter............................................ 10 1/8 9 1/4
Third Quarter............................................. 10 1/8 8 3/4
Fourth Quarter............................................ 16 7 3/4
FISCAL YEAR ENDING MARCH 31, 1997:
First Quarter............................................. $ 21 3/4 $15
Second Quarter............................................ 17 1/2 10 1/4
Third Quarter (through October 14, 1996).................. 13 1/4 10 1/2
</TABLE>

- ------------------------
* For April 1 through April 30, 1995, the high and low bid prices of the Class
A Common Stock Class A Warrants and Class B Warrants were $5 and $3 1/2, $1
and $ 15/16, and $ 3/4 and $ 1/2, respectively.

The quotations in the above table reflect inter-dealer prices without retail
markups, markdowns or commissions. In addition, for all periods prior to May 1,
1995, the quotations do not represent actual transactions.

On October 14, 1996, the last reported sale prices for the Company's Class A
Common Stock, Class A Warrants and Class B Warrants were $7 3/4, $4 5/8 and
$1 3/4, respectively, on the Nasdaq National Market. The Company also has
outstanding Class E-1 Common Stock and Class E-2 Common Stock for which there is
no public market. See "Description of Securities." As of October 14, 1996, the
approximate number of holders of record of the Company's Class A Common Stock,
Class E-1 and Class E-2 Common Stock were 261, 323 and 323 respectively. The
Company believes that there are a substantial number of additional beneficial
holders of Class A Common Stock.

DIVIDEND POLICY

The Company has not declared or paid any cash dividends on its capital stock
since its inception and for the foreseeable future intends to follow a policy of
retaining all of its earnings, if any, to finance the development and continued
expansion of its business. There can be no assurance that dividends will ever be
paid by the Company. Any future determination as to payment of dividends will
depend upon the Company's financial condition, results of operations and such
other factors as the Board of Directors deems relevant. In addition, the
Company's credit facility with Silicon Valley Bank prohibits the Company's
payment of any dividends without the prior consent of such bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

15
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company at June 30,
1996, and as adjusted to reflect the sale of 11,000 Units offered by the Company
hereby and the application of the net proceeds of the Offering as set forth at
"Use of Proceeds." The following table should be read in conjunction with the
financial statements and related notes thereto appearing elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
<S> <C> <C>
Short-term debt.................................................................... $ 881,195 $ 400,000
------------- -------------
------------- -------------
Shareholders' equity:
Preferred Stock, no par value; 8,850,000 shares authorized; no shares
outstanding..................................................................... -- --
Class A Common Stock, no par value; 35,600,000 shares authorized; 4,748,758
shares outstanding; 6,840,554 shares outstanding, as adjusted (1)(2)............ 16,565,250 24,831,917
Class E-1 Common Stock, no par value; 2,200,000 shares authorized; 1,256,818
shares outstanding and as adjusted.............................................. 4,769,878 4,769,878
Class E-2 Common Stock, no par value; 2,200,000 shares authorized; 1,256,818
shares outstanding and as adjusted.............................................. 4,769,878 4,769,878
Class A Warrants, 4,120,149 warrants outstanding and as adjusted................. 2,295,328 2,295,328
Class B Warrants, 3,127,049 warrants outstanding and 4,172,049 warrants
outstanding, as adjusted (3).................................................... 453,304 1,386,637
Warrants to purchase Class A Common Stock........................................ 192,130 192,130
Unrealized holding gain on short-term investments................................ 2,491,250 2,491,250
Accumulated deficit.............................................................. (19,313,474) (19,313,474)
------------- -------------
Total shareholders' equity..................................................... 12,223,544 21,423,544
------------- -------------
Total capitalization......................................................... $ 12,223,544 $ 21,423,544
------------- -------------
------------- -------------
</TABLE>

- --------------------------
(1) Does not include (i) 723,796 shares of Class A Common Stock issuable upon
exercise of outstanding options as of October 14, 1996 granted under the
Company's 1992 Employee Stock Option Plan, 1995 Stock Option Plan and 1996
Stock Option Plans; (ii) 470,250 shares of Class A Common Stock issuable
upon exercise of the Over-Allotment Option (and the underlying Class B
Warrants); (iii) 313,500 shares of Class A Common Stock issuable upon
exercise of the Unit Purchase Option (and the underlying Class B Warrants);
(iv) 696,540 shares of Class A Common Stock issuable upon exercise of other
outstanding options and warrants to purchase Class A Common Stock; (v)
8,240,298 shares of Class A Common Stock issuable upon exercise of the
Company's outstanding publicly-held Class A Warrants and the underlying
Class B Warrants; (vi) 3,127,049 shares of Class A Common Stock issuable
upon exercise of the Company's outstanding publicly-held Class B Warrants;
(vii) 960,000 shares of Class A Common Stock issuable upon exercise of IPO
Unit Purchase Options (and the underlying Class A Warrants and Class B
Warrants) granted to the Underwriter and its designees in connection with
the IPO and (viii) 1,256,818 shares of each of Class E-1 Common Stock and
Class E-2 Common Stock. For a description of the Class A Warrants, Class B
Warrants, IPO Unit Purchase Options, Class E-1 Common Stock and Class E-2
Common Stock, see "Description of Securities." For a description of the
Company's stock option plans and options outstanding thereunder, see
"Management -- Stock Option Plans."

(2) As adjusted gives effect to the issuance of the shares of Class A Common
Stock included in the Units offered hereby.

(3) As adjusted gives effect to the issuance of the Class B Warrants included in
the Units offered hereby.

16
<PAGE>
SELECTED FINANCIAL DATA

The following table sets forth for the periods indicated, the selected
financial data of the Company and should be read in conjunction with the
Company's Financial Statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus. The selected financial data of the
Company as of March 31, 1994, 1995 and 1996 and for each of the fiscal years
then ended are derived from financial statements of the Company audited by Price
Waterhouse LLP, independent accountants. The balance sheet at March 31, 1996 and
the related statements of operations, shareholders' equity and cash flows for
the fiscal years ended March 31, 1995 and 1996 and notes thereto are included in
this Prospectus. The report of Price Waterhouse LLP, which also appears herein,
contains an explanatory paragraph that describes uncertainty as to the ability
of the Company to continue as a going concern. The statement of operations data
presented below for the three months ended June 30, 1995 and 1996 and the
balance sheet data as of June 30, 1996 are derived from unaudited financial
statements included elsewhere in this Prospectus. The unaudited financial
statements have been prepared by the Company on a basis consistent with the
Company's audited financial statements and include, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information. Operating results for the
three months ended June 30, 1996 are not necessarily indicative of the results
expected for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, JUNE 30,
------------------------------------- ------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Net sales.................................. $ 2,079,335 $ 1,249,403 $ 1,704,390 $ 112,564 $ 1,254,082
Cost of sales.............................. 1,753,352 1,298,420 3,324,757 450,353 1,028,611
----------- ----------- ----------- ----------- -----------
Gross profit (loss)........................ 325,983 (49,017) (1,620,367) (337,789) 225,471
Selling and marketing expenses............. 1,087,461 1,035,863 1,308,767 195,831 461,772
Research and development expenses.......... 678,279 1,035,705 1,213,471 255,959 126,779
General and administrative expenses........ 1,322,888 1,747,090 1,709,327 501,078 326,786
----------- ----------- ----------- ----------- -----------
Loss from operations....................... (2,762,645) (3,867,675) (5,851,932) (1,290,657) (689,866)
Interest (expense) income, net............. (434,851) (322,540) 99,037 94,449 (7,194)
----------- ----------- ----------- ----------- -----------
Loss before extraordinary items............ (3,197,496) (4,190,215) (5,752,895) (1,196,208) (697,060)
Extraordinary gain from extinguishment of
indebtedness.............................. -- 381,730 -- -- --
----------- ----------- ----------- ----------- -----------
Net loss................................... $(3,197,496) $(3,808,485) $(5,752,895) $(1,196,208) $ (697,060)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SELECTED PER SHARE DATA:
Net loss................................... $ (1.26) $ (0.27) $ (0.15)
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares outstanding (1).... 4,556,959 4,501,899 4,719,923
Pro forma loss before extraordinary item
(2)....................................... $ (2.45) $ (1.59)
Extraordinary gain from extinguishment of
indebtedness.............................. -- .15
----------- -----------
Pro forma net loss (2)..................... $ (2.45) $ (1.44)
----------- -----------
----------- -----------
Pro forma weighted average shares
outstanding (1)(2)........................ 1,288,751 2,584,722
</TABLE>

<TABLE>
<CAPTION>
AT MARCH 31, AT JUNE 30,
------------------------------------- -----------
1994 1995 1996 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 308,764 $ 5,888,237 $ 35,463 $ 135,881
Working capital (3)...................................... 1,287,587 6,756,149 5,818,492 4,449,812
Total assets............................................. 12,325,029 16,883,975 15,674,568 15,670,277
Total debt (4)........................................... 4,403,890 481,195 481,195 881,195
Shareholders' equity..................................... 6,022,174 15,002,260 13,797,046 12,223,544
</TABLE>

- ------------------------------
(1) Does not include 1,256,818 shares of each of Class E-1 or Class E-2 Common
Stock outstanding as of March 31, 1996 and as of June 30, 1996, which are
subject to cancellation under certain circumstances. See "Description of
Securities -- Common Stock" and Notes 2 and 16 of Notes to Financial
Statements.

(3) The decrease in working capital at June 30, 1996 is primarily attributable
to a decrease in the market value of short-term investments.

(4) Amounts for long-term debt at March 31, 1994 include $285,000 in mandatorily
redeemable warrants.

17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
Selected Financial Data and the Company's Financial Statements and related notes
thereto appearing elsewhere in this Prospectus. This Prospectus contains
forward-looking statements including, without limitation, statements concerning
future cost of sales, which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in these
forward-looking statements. Factors that may cause such differences include, but
are not limited to, those discussed in "Risk Factors."

GENERAL

The Company develops, manufactures and markets several lines of proprietary
medical lasers, fiberoptic delivery systems and associated products for a
variety of dental, ophthalmic and surgical applications. The Company commenced
operations in August 1991, after acquiring substantially all of the assets of
Pfizer Laser Systems ("Pfizer Laser"), a division of Pfizer HPG which is a
wholly-owned subsidiary of Pfizer, Inc. The assets acquired by the Company
included the proprietary rights to a broad base of laser and fiberoptic
technologies developed by Pfizer Laser.

Since its formation and until its IPO in December 1994, the Company
principally focused on, and its research and development activities related to,
growing markets in dentistry, ophthalmology, cosmetic procedures and certain
surgical specialties to be used in surgical centers and medical offices. To
implement this strategy, the Company developed the Pegasus Nd:YAG dental laser
system from existing technology and introduced this laser to the dental market
in February 1992. In June 1993, the Company introduced the Centauri Er:YAG laser
for ophthalmology and initiated clinical trials for hard tissue procedures in
dentistry. In December 1993, the Company acquired from Proclosure, Inc., a
Florida corporation ("Proclosure"), certain technology, assets and proprietary
rights relating to a 1.32m Nd:YAG laser system for tissue melding. From its
formation in 1991 through its IPO, the Company developed and received regulatory
approvals for 15 models of lasers and sold certain of those products for soft
tissue applications in dentistry and as part of clinical trials conducted by
third parties.

After the Company's IPO in December 1994, the Company increased its
inventory, acquired the distribution rights to two new dental lasers and, in
December 1995, expanded its dental sales force. In September and November 1995,
the Company acquired rights to market and distribute the Arago and MOD argon
lasers, respectively for dental applications, and in February 1996, the Company
introduced and began shipping its Aurora diode laser for soft tissue dental
applications.

While the Company has received clearance to market laser products covering a
variety of medical applications, to date the Company has focused its research,
development and marketing efforts on a limited number of products or
applications (principally specific dental and ophthalmic applications). As
future resources permit, the Company may introduce certain products for
applications for which it already has all necessary approvals or may seek
strategic alliances to develop, market and distribute such products.

The Company has recorded operating losses in each of the fiscal years since
its formation, resulting principally from substantial costs incurred in research
and development activities and obtaining regulatory approvals, together with the
absence of significant revenues to date primarily due to the Company's limited
marketing and financial resources, the Company's inability to obtain certain
critical components and lasers from time to time, and until recently, the
limited acceptance of lasers in the medical industry, in general. The report of
the Company's independent accountants includes an explanatory paragraph
describing substantial doubt concerning the ability of the Company to continue
as a going concern. The Company believes, however, that its presently available
short-term assets, expected revenues from operations and the net proceeds of the
Offering will provide sufficient working capital through the next 12 months. See
"-- Liquidity and Capital Resources."

18
<PAGE>
RESULTS OF OPERATIONS

QUARTER ENDED JUNE 30, 1996 COMPARED TO QUARTER ENDED JUNE 30, 1995

The Company's net sales for the quarter ended June 30, 1996 (the "1996
Quarter") increased 1,014.1% to $1,254,082 from $112,564 for the quarter ended
June 30, 1995 (the "1995 Quarter"). The increase is primarily attributable to
continued growth in sales in the dental market, principally from the Company's
three new products, which accounted for $855,654 of the increase. Sales of other
dental, surgical and ophthalmic products increased by 325.2% to $331,651 in the
1996 Quarter from $78,005 in the 1995 Quarter and included initial sales to
Mattan Corporation (Medical Laser Institute of America) ("Mattan") for its new
laser centers.

Cost of sales increased 128.4% to $1,028,611 in the 1996 Quarter from
$450,353 in the 1995 Quarter. This increase was directly attributable to the
increase in sales and included a fee of $87,545 to a third party pursuant to the
Company's manufacturing arrangement relating to the argon MOD laser. Cost of
sales related to sales to Mattan were 95% of the amount of the corresponding
sales due to the fact that the products sold were purchased from original
equipment manufacturers, instead of being manufactured by the Company. It is
intended that as additional centers are opened, the Company will commence
manufacturing of the lasers and cost of sales will only include manufacturing
costs. If production volumes increase in future periods, management anticipates
higher absorption of manufacturing costs and increased utilization of the
Company's manufacturing personnel, which could lead to positive gross margins
based upon management's current calculation of the Company's standard cost of
sales for fiscal 1996. There can be no assurance that the Company will, in
future periods, achieve positive gross margins, or that the assumptions on which
standard cost of sales is computed will be realized by the Company.

Selling and marketing expenses increased 135.8% to $461,772 in the 1996
Quarter from $195,831 for the 1995 Quarter. The increase was primarily
attributable to marketing and sales efforts related to the Company's dental
products. These expenses primarily included increased commissions and related
selling expenses, expenses of sales and marketing personnel, trade show
attendance and advertising expenses. Sales and marketing expenses also included
expenses relating to the initial showing of the Company's Er:YAG laser at the
annual meeting of the American Society of Cataract and Refractive Surgeons.

Research and development expenses decreased 50.5% to $126,779 in the 1996
Quarter from $255,959 in the 1995 Quarter. This net decrease resulted from a
$397,634 cash reimbursement received by the Company from a Small Business
Innovative Research ("SBIR") Grant which was partially offset by increased
clinical trial costs for certain ophthalmic applications and expenses incurred
in the development of the argon MOD laser.

General and administrative expenses decreased 34.8% to $326,786 in the 1996
Quarter from $501,078 in the 1995 Quarter. The decrease was primarily
attributable to a $58,637 reduction in annual report production and printing
expenses which have been delayed, and a $50,423 reduction in "out-of-pocket"
legal expenses associated with the Company's litigation with a former supplier
of optical fiber (the "Fiber Litigation").

Net interest income decreased 107.6%, to a net interest expense of $7,194 in
the 1996 Quarter from net interest income of $94,449 in the 1995 Quarter,
reflecting the decreased cash available for the Company to invest and an
increase in borrowings under the Company's credit facility with Silicon Valley
Bank (the "Credit Facility"). See "-- Liquidity and Capital Resources."

Net loss decreased 41.7% to $697,060 in the 1996 Quarter from $1,196,208 in
the 1995 Quarter. This decrease was primarily attributable to the increase in
sales and decreases in research and development and general and administrative
expenses, offset in part by increases in sales and marketing expenses.

19
<PAGE>
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1995

Net sales increased 36.4% to $1,704,390 in fiscal 1996 from $1,249,403 in
fiscal 1995. This increase was primarily attributable to an increase of $723,000
in sales to the dental market, related principally to the introduction of three
new products in the latter half of fiscal 1996, the Aurora diode laser, the
Arago argon laser and the MOD argon laser. This increase was partially offset by
a decrease in sales to the surgical market of approximately $200,000, largely
due to a decline in the demand for the Company's 10 and 20 watt CO(2) lasers,
which are nearing the end of their product life cycle. The Company's arrangement
with the supplier of the Arago argon laser terminates in November 1996, and to
the extent the Company is unable to extend this arrangement or to secure another
source for this laser, the Company's results of operations may be adversely
affected.

Cost of sales increased 156.1% to $3,324,757 in fiscal 1996 from $1,298,420
in fiscal 1995. This increase in the cost of sales was due primarily to (i) a
write-down of approximately $848,000 principally attributed to the Company's
CO(2) lasers and accessories obtained in the acquisition of Pfizer Laser, and
Nd:YAG lasers and accessories, which lasers were developed prior to March 31,
1992 and are nearing the end of their product life cycle, (ii) the
underabsorption of manufacturing costs due to low production volumes due in part
to the unavailability of certain key components which require long lead-times
for delivery, coupled with an increase in the number of manufacturing employees
during fiscal 1996 from 12 to 17 employees resulting in an increase in payroll
expense of approximately $280,000, and (iii) increased costs associated with
higher sales volumes in fiscal 1996. Cost of sales for fiscal 1996 also included
a fee of $122,000 to a third party pursuant to the Company's manufacturing
arrangement relating to the MOD argon laser.

Selling and marketing expenses increased 26.3% to $1,308,767 in fiscal 1996
from $1,035,863 in fiscal 1995. This increase was primarily attributable to
marketing efforts related to the Company's dental products, which included a
$219,000 expense related to the appointment of more than 25 new manufacturer's
representatives during the third quarter, and associated expenses including
training, promotional costs and commissions.

Research and development expenses increased 17.2% to $1,213,471 in fiscal
1996 from $1,035,705 in fiscal 1995. This increase resulted primarily from
increases in outside industrial and software design services of approximately
$305,000, and expenses of approximately $196,000 associated with the development
of new laser products. This increase was partially offset by a $175,000
reduction in clinical studies expense, due to the completion of the Company's
dental hard tissue clinical trials and a $250,000 payment received by the
Company under a SBIR grant.

General and administrative expenses decreased 2.2% to $1,709,327 in fiscal
1996 from $1,747,090 in fiscal 1995. This decrease was the result of a reduction
in legal expenses associated with the Fiber Litigation, partially offset by
increases associated with becoming a public company. In 1995, the Company
incurred legal expenses of approximately $400,000 in connection with the Fiber
Litigation. Future legal expenses related to the Fiber Litigation (not including
out-of-pocket expenses) are expected to be limited in accordance with the
Company's agreement with its legal counsel, although if the litigation is
successful, counsel will be entitled to certain contingency fees.

Net interest income increased to $99,037 in fiscal 1996 from net interest
expense of $322,540 in fiscal 1995, reflecting the investment of the Company's
remaining net proceeds from its IPO and the repayment in December 1994 of a
significant portion of the Company's outstanding debt.

Net loss increased 51.1% to $5,752,895 in fiscal 1996 from $3,808,485 in
fiscal 1995. This increase was principally attributable to increases in cost of
sales, selling and marketing expenses and research and development expenses.

FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1994

Net sales decreased 39.9% to $1,249,403 in fiscal 1995 from $2,079,335 in
fiscal 1994. Net sales during fiscal 1994 included substantial revenue from the
introduction of the Company's Er:YAG laser.

20
<PAGE>
Sales in fiscal 1995 of Nd:YAG lasers, Er:YAG lasers and other laser products
were adversely affected by the lack of working capital to fund the purchase of
inventory components (some of which require a three month lead time to supply)
and manufacturing operations, and the limited availability of optical fibers for
the Er:YAG laser. The decrease in sales of these products was partially offset
by a general increase in sales of the Company's other products.

Cost of sales decreased 25.9% to $1,298,420 in fiscal 1995 from $1,753,352
in fiscal 1994. This decrease was primarily attributable to reduced expenditures
of raw materials resulting from lower sales.

Selling and marketing expenses decreased 4.7% to $1,035,863 in fiscal 1995
from $1,087,461 in fiscal 1994.

Research and development expenses increased 52.7% to $1,035,705 in fiscal
1995 from $678,279 in fiscal 1994 primarily due to increased efforts directed
towards dental hard tissue clinical trials and the initial development efforts
associated with two potential products.

General and administrative expenses increased 32.1% to $1,747,090 in fiscal
1995 from $1,322,888 in fiscal 1994. This increase was primarily due to expenses
incurred in connection with the Fiber Litigation, which were partially offset by
reductions in management compensation.

Net interest expense decreased 25.8% to $322,540 in fiscal 1995 from
$434,851 in fiscal 1994.

Net loss increased 19.1% to $3,808,485 in fiscal 1995 from $3,197,496 in
fiscal 1994. This increase reflected the decreased level of sales and an
increase in research and development and general and administrative expenses
during fiscal 1995. The net loss for fiscal 1995 included a net extraordinary
gain of $381,730 from the extinguishment of indebtedness.

LIQUIDITY AND CAPITAL RESOURCES

The Company's operations have been financed through the proceeds from the
sale of the Company's equity securities, including the IPO, revenues from
operations, the proceeds from an SBIR grant and funding from the Credit Facility
with Silicon Valley Bank. The Company's principal capital requirements include
the financing of inventory, accounts receivable, research and development
activities, the development of an ophthalmic and a surgical sales force, the
development of marketing programs and the acquisition and/or licensing of
patents.

At June 30, 1996, the Company had a cash balance of $135,881 and working
capital of $4,449,812. This represents an increase from March 31, 1996 of
$100,418 in cash and cash equivalents. This increase in cash and cash
equivalents was largely due to borrowings under the Credit Facility and cash
received from the exercise of Class A Warrants, partially offset by cash used in
operations.

In December 1995, the Company entered into a strategic marketing alliance
with Mattan, a Canadian corporation whose stock is publicly traded on the
Alberta Stock Exchange. Pursuant to this alliance, the Company entered into a
Purchasing Agreement with Mattan which provides that the Company will supply all
laser equipment and associated disposables for all laser surgery centers to be
designed and opened by Mattan in Canada and the United States. In connection
with this alliance, the Company entered into a Share Exchange Agreement with
Mattan pursuant to which the Company issued 200,000 shares of the Company's
Common Stock to two parties affiliated with Mattan, in exchange for 1,150,000
shares of Mattan's Common Stock, which constituted approximately 12% of Mattan's
outstanding Common Stock as of the date of the transaction. The Company accounts
for this investment as an available-for-sale security pursuant to SFAS 115.

At June 30, 1996, the Company's indebtedness consisted of a $481,195 note
payable to Pfizer HPG (the "Pfizer Note") and $400,000 due to Silicon Valley
Bank on the Credit Facility. The Pfizer Note, which is secured by certain of the
Company's tangible and intangible assets, is due in three installments. The
first installment of $240,598, plus accrued interest was due in July 1996 and
additional $120,299 quarterly principal payments, plus accrued interest, are due
in October 1996 and

21
<PAGE>
January 1997. Upon completion of the Offering, any remaining unpaid principal
and accrued interest becomes immediately due and payable. Although the first
installment was not made in July 1996, the Company is attempting to negotiate
with Pfizer HPG for an extension of this payment date. There can be no assurance
that such extension will be granted or that Pfizer will not seek to enforce its
rights under the Pfizer Note.

The Company's Credit Facility with Silicon Valley Bank permits borrowings of
up to $1,000,000 based on the value of the 1,150,000 shares of common stock of
Mattan Corporation (the "Mattan Shares") held by the Company. Borrowings under
the Credit Facility are secured by the Mattan Shares, bear interest at the rate
of 1.0% per annum over the prime rate of interest, and are due and payable in
April 1997. In connection with the Credit Facility, the Company issued to such
lender warrants to purchase up to 9,756 shares of the Company's Class A Common
Stock at an exercise price equal to $10.25 per share. As of October 14, 1996,
the Company had drawn approximately $1,000,000 on this Credit Facility.

At March 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes totaling approximately $16,319,249 which will begin
to expire in fiscal 2007. Net operating loss carryforwards for state income tax
purposes totaling approximately $7,895,167 at March 31, 1996 begin to expire in
fiscal 1998. The Tax Reform Act of 1986 includes provisions which may limit the
net operating loss carryforwards available for use in any given year if certain
events occur, including significant changes in stock ownership. Utilization of
the Company's net operating loss carryforwards to offset future income may be
limited.

The Company's future capital requirements will depend on many factors,
including the progress of the Company's research and development activities, the
scope and results of preclinical studies and clinical trials, the costs and
timing of regulatory approvals, the rate of technology advances by the Company,
competitive conditions within the medical laser industry, the establishment of
manufacturing capacity and the establishment of collaborative marketing and
other relationships which may either involve cash infusions to the Company, or
require additional cash from the Company. Management believes that short-term
assets, cash generated through expected future revenues, the Credit Facility and
SBIR grants and the net proceeds of the Offering will be adequate to satisfy its
working capital needs for at least the next 12 months. After that period the
Company's ability to meet its working capital needs will be dependent on its
ability to achieve a positive cash flow from operations and profitable
operations, in addition to its ability to secure additional debt or equity
financing. No assurance can be given that the Company will be able to achieve a
positive cash flow from operations, profitable operations or secure financing on
acceptable terms.

SEASONALITY OF BUSINESS

To date, the Company's revenues have typically been significantly higher in
the second and fourth calendar quarters. This seasonality reflects the timing of
major medical and dental industry trade shows in these quarters, significantly
reduced sales during the summer and the effect of year end tax planning
influencing the purchasing of capital equipment for depreciation during the
fourth calendar quarter. The Company expects that this seasonality will continue
indefinitely.

GOVERNMENT GRANTS

The Company has been awarded a SBIR grant for approximately $750,000 for the
study of laser cataract emulsification. Approximately $698,000 of this amount
was drawn at October 14, 1996. The remainder of the grant can be drawn over the
next six months upon the achievement of specified criteria. The Company has also
applied for new Phase I research grants related to dentistry, orthopedics,
tissue melding and ophthalmology. No assurance can be given that the Company
will be awarded any of these potential government grants.

POTENTIAL FUTURE CHARGE TO INCOME RESULTING FROM CONVERSION OF ESCROW SHARES

The Commission has adopted a position with respect to arrangements such as
the one entered into among the Company and the holders of its outstanding Escrow
Shares which provides that in the

22
<PAGE>
event any shares are released from escrow to certain persons who are officers,
directors, employees or consultants of the Company, compensation expense will be
recorded for financial reporting purposes. Accordingly, the Company expects, in
the event of the release of the Escrow Shares from escrow, to recognize
substantial noncash charges to earnings during the periods in which the criteria
for release of the Escrow Shares are met, which would have the effect of
significantly increasing the Company's loss or reducing or eliminating earnings,
if any, at such time. The recognition of such compensation expense by the
Company may have a depressive effect on the market price of the Company's
securities.

The Escrow Shares will be automatically converted into Class A Common Stock
(at a conversion rate of one share of Class A Common Stock for each Escrow
Share) in the event that the Company meets certain criteria relating to the
market price of the Class A Common Stock or the achievement by the Company of
certain levels of "income," as defined. Different criteria relate to the Class
E-1 Common Stock and Class E-2 Common Stock. For these purposes, "income" means
the Company's net income before provision for income taxes, including earnings
from joint ventures, distribution agreements and licensing agreements, but
exclusive of any other earnings that are classified as an extraordinary item,
and exclusive of charges to income that may result from conversion of the Escrow
Shares into Class A Common Stock, as stated in the Company's financial
statements audited by the Company's independent accountants. See "Description of
Securities -- Common Stock."

If none of the pretax net income or market price levels are attained, the
Escrow Shares, as well as any dividends or other distributions made with respect
thereto, will be cancelled. The pretax net income and market price levels were
determined by negotiation between the Company and the Company's underwriter for
the IPO and should not be construed to imply or predict any future earnings by
the Company or any increase in the market price of its securities. There can be
no assurance that such earnings and market price levels will be attained or that
any or all of the Escrow Shares will be converted into Class A Common Stock.

23
<PAGE>
BUSINESS

OVERVIEW

The Company develops, manufactures and markets several lines of proprietary
medical lasers, fiberoptic delivery systems and associated products for a
variety of dental, ophthalmic and surgical applications principally for use in
surgical centers and medical offices. The Company's lasers and related products
use the controlled application of thermal, acoustic and optical energy to allow
the physician or dentist to perform selected minimally invasive procedures
which, compared to conventional techniques not involving the use of lasers,
vaporize or sever tissue with minimal blood loss and scarring, increase patient
comfort and reduce patient treatment time and treatment costs. To date, the
Company has received clearance to market 19 models of medical lasers, which are
covered by 19 United States patents, 13 pending United States patent
applications, 13 foreign patents and 41 pending foreign patents. While the
Company has clearance to market laser products for a variety of medical
applications, due to limited resources the Company has focused its marketing and
distribution efforts to date on a limited number of products and applications
(principally specific dental applications) which the Company believes have the
most potential for commercial success. As future resources permit, the Company
may introduce certain products for applications for which it already has all
necessary approvals or may seek strategic alliances to develop, market and
distribute such products.

MARKET OVERVIEW

The use of laser technology in dentistry, ophthalmology and surgery involves
the controlled application of laser light to hard or soft tissue causing an
optical, thermal, acoustic or plasma interaction with the tissue. When applied
to tissue, the laser light is partially absorbed. This process of absorption
converts the light to heat, which in turn alters the state of the tissue. The
degree of tissue absorption varies with the choice of wavelength and is an
important variable in the application of laser technology in treating various
tissues. The laser energy can also form a gas bubble in a water medium which
provides an acoustic cutting effect as it bursts. The Company often uses its
proprietary delivery systems to control the relative proportions of acoustic,
thermal and optical energy applied to tissue resulting in enhanced cutting
effects. These delivery systems include flexible fiberoptics, waveguides,
articulated arms and micromanipulators which are used on a disposable or limited
reuse basis which the Company intends will provide a recurring revenue stream
for the Company. The Company's strategy is to target specific applications in
the dental, ophthalmic and surgical markets, where management believes that the
Company's technology and products have competitive strengths.

DENTAL AND PERIODONTAL MARKET

The current market for laser equipment in dental procedures is comprised of
soft tissue procedures, composite curing and teeth whitening. If clearance or
approval is obtained, this market may be expanded to include hard tissue and
cavity prevention procedures.

SOFT TISSUE. It is estimated that over 60 million periodontal procedures
are performed by dentists and periodontists annually in the United States, many
of which the Company believes can be addressed with laser technology. In a
clinical study involving more than 900 procedures, periodontists used the
Company's lasers during a new minimally invasive surgical technique used in lieu
of traditional periodontal flap surgery, for which technique the Company has
filed a patent application which is pending. The results demonstrated a
reduction in bacteria, improved periodontal pocket depth, minimal or no pain
when using the laser even without anesthesia, little or no prescription
medication following surgery and a substantial reduction in surgical time. This
study also demonstrated that the dental laser can also be used to treat early
gum disease, postponing or in some cases eliminating the need for conventional
periodontal surgery. While the Company has clearance to market six lasers
(including the Aurora diode laser and Centauri Er:YAG laser) for soft tissue
dental procedures, the Company focuses its marketing efforts on its Aurora diode
laser in this area.

COMPOSITE CURING. Approximately 48% of all respondents in a recent survey
of dentists conducted by Clinical Research Associates, a dental market research
firm, use composites, an alternate

24
<PAGE>
material to amalgams (gold and silver) for cavity filling. Composites are
rapidly replacing amalgams as the material of choice for restoration of cavities
because they more closely match the color of teeth and because amalgams have
drawn increasing worldwide concern over safety due to the toxic gases which may
be released when the amalgams are removed from teeth. Composite fillings are
typically cured using a curing light which provides a broad spectrum of
wavelengths. The use of an argon laser for this application has been shown to
result in a stronger restoration than composites cured by traditional curing
lights. The Company's argon lasers can also be used to cure the resins used in
placing veneers or to bond orthodontic brackets. The Company has received
clearance to market the MOD argon laser for use in these applications.

TEETH WHITENING. In a recent survey conducted by Clinical Research
Associates, approximately 79% of dentists surveyed used light accelerated
bleaching materials with clinical success for teeth whitening. These materials
are traditionally applied at night over a six to eight week period to whiten a
patient's teeth while he or she sleeps. Lasers have been shown to facilitate the
use of these light sensitive materials in the dentist's office by accelerating
this process and resulting in an approximate three shade change in less than one
hour. In August 1996, the Company received clearance to market its MOD argon
laser for this application.

HARD TISSUE (CAVITY PREPARATION). The American Dental Association estimates
that more than 170 million hard tissue restorative procedures are performed each
year in the United States. The Company believes that the use of its dental laser
for certain of such procedures could reduce or eliminate the need for a high
speed dental hand drill, reduce the need for anesthesia and assist in the
prevention of dental caries. Potential dental laser applications for hard tissue
procedures include pit and fissure sealing, etching, caries removal and cavity
preparation. Based on user feedback from the Company's clinical sites, the
Company believes that the use of a laser in dentistry reduces the pain
associated with various traditional procedures performed with a dental drill.
Although no lasers are currently approved by the FDA for hard tissue procedures,
the Company has completed clinical trials to support its 510(k) application to
the FDA for clearance to market its Centauri Er:YAG laser on teeth. There can be
no assurance, however, that the FDA will not require the Company to submit a PMA
application for this use, or require the Company to conduct additional clinical
trials or that such product will ever be approved for this use.

CAVITY PREVENTION. Studies performed by an outside university on human
extracted teeth have demonstrated that lasers used in conjunction with fluoride
treatments can be highly effective in the prevention of cavity formation. The
Company is currently initiating clinical trials to use its lasers for cavity
prevention applications. The Company's clinical trials are at an early stage and
there can be no assurance that the Company will obtain clearance for these
applications.

OPHTHALMIC MARKET

Lasers have been used for the treatment of eye disorders for many years and
are widely accepted in the ophthalmic community. The original and most widely
accepted use of lasers in ophthalmology has been for posterior capsulotomy. The
Company does not promote its lasers for this market, which it believes is
approaching saturation, but instead focuses on intraocular procedures including
anterior capsulotomy, cataract removal, glaucoma treatment, corneal sculpting
and occuloplastic or cosmetic procedures. The Company has developed the Centauri
Er:YAG laser which is capable of performing all of these procedures, which are
typically performed using several different types of medical lasers, although to
date, the Centauri laser has only been cleared for use in anterior capsulotomies
and certain cosmetic procedures.

CATARACT REMOVAL PROCEDURES. According to the American Society of Cataract
and Refractive Surgeons, approximately two million cataract extraction
procedures are performed annually in the United States. The Company believes
that no lasers have been approved to date for this application, and that lasers
may result in less trauma and inflammation than traditional surgical methods,
providing more comfort to the patient. The Company's Centauri Er:YAG laser has
been cleared to market for anterior capsulotomy, a procedure which opens the
capsule of the eye prior to the removal

25
<PAGE>
of the cataract. The Company is also currently conducting clinical trials on the
Centauri laser for lens emulsification (the removal of the cataract itself), as
an alternative to phacoemulsification (the breakup of the cataract by ultrasonic
energy). The Company believes this patented technology for use in lens
emulsification may provide an easier and safer method of cataract removal.

TREATMENT OF GLAUCOMA. According to the National Institutes of Health, in
1995, approximately three million people in the United States suffered from
glaucoma, a disease of the eye characterized by increased intraocular pressure
within the eyeball and progressive loss of vision. Traditionally, glaucoma has
been treated with drug therapy. When drug therapy is ineffective, periodic
invasive surgery may be required. In these cases, lasers may be used to open the
sclera and relieve pressure in the eye. This procedure, which must be repeated
periodically, can be performed under local anesthesia with a self closing
incision on an outpatient basis. The Company is currently conducting clinical
trials to support investigational device exemption ("IDE") submittals for
clearance to market its Centauri Er:YAG laser for this procedure. If clearance
is obtained, as to which there can be no assurance, the Company's Er:YAG laser
could provide a viable alternative to the traditional invasive surgical
procedures.

CORNEAL SCULPTING. Medical Insight, Inc. estimated in 1993 that 170 million
people in the United States suffered from vision disorders including
nearsightedness (myopia), farsightedness (hyperopia) and astigmatism. The
Company believes that the recent approval of excimer lasers has resulted in
greater acceptance and recognition of laser refractive surgery in the ophthalmic
market. Medical lasers may be used for corneal sculpting (photorefractive
keratectomy), a procedure in which the laser is used to sculpt the cornea of the
eye to a desired curvature to correct the myopia, hyperopia or astigmatism. The
Company plans to seek FDA approval to market the Centauri laser for corneal
sculpting and has initiated animal studies for this application. No assurance
can be given, however, that FDA approval will be given for this application.

SURGICAL MARKET

Lasers have been approved for and are currently being used in a variety of
surgical applications including orthopedics, neurosurgery, urology,
gastroenterology, ophthalmology, cardiology, dermatology, gynecology and plastic
surgery. Although the Company's products are cleared to market in a number of
specialty areas within the surgical market, the Company has specifically
targeted tissue melding (tissue fusion) and cosmetic applications within the
surgical market.

TISSUE MELDING. The Company believes a significant number of wound closure
procedures may be addressed with surgical lasers in conjunction with or
independent of traditional sutures or staples. The Company believes that the
benefits of the use of surgical lasers for tissue melding, as compared to suture
and staples, include fluid-static seals, immediate strength of the closure and
reduced surgical time. The Company and its strategic partner have conducted
animal tests to support IDE submittals for the use of the Company's Polaris
Nd:YAG laser in the areas of arteries, veins, blood vessels and ducts, and are
currently conducting clinical studies for skin and hypospadias. The Company has
also completed clinical trials for vasovasotomy (reversal of vasectomies) which
demonstrated a success rate of approximately 89%. The Company is also beginning
Phase I clinical trials for the treatment of hypospadias, the lengthening of the
urethra to the end of the penis in infant boys, in which it is anticipated that
the laser's fluid-static seal may minimize post-surgical complications such as
the leakage of urine which requires secondary surgical procedures. The Company
has clearance for Phase II clinical trials for skin closure following
mastectomies and eyelid surgery at five clinical sites. Artery and vein melding
is being tested in animals by the Company's strategic partner in Japan in
preparation for clinical studies.

COSMETIC SURGICAL PROCEDURES. The Company entered into a Purchasing
Agreement and a Share Exchange Agreement dated December 20, 1995 with Mattan
Corporation, the parent corporation of Medical Laser Institute of America
("MLIA"), pursuant to which the Company made an investment in and formed an
alliance with MLIA. Mattan owns and operates or provides marketing support for a
series of medical laser cosmetic surgery centers, which centers focus on wrinkle
removal, treatment of

26
<PAGE>
varicose veins, acne scar removal, tattoo removal and refractive surgery.
Pursuant to these agreements, Mattan has agreed to purchase all laser equipment,
accessories and disposable laser products for use in its laser centers
exclusively from the Company until December 31, 2005. To the extent the Company
is unable to provide a requested laser to Mattan, the Company will act as
purchasing agent for Mattan and purchase the lasers from a third party for
resale to Mattan. During the 1996 Quarter, sales to Mattan accounted for $90,651
of the Company's revenues. Substantially all of such sales were resales of third
party products.

The Company has regulatory clearance to market its products for a variety of
additional applications, including urology, orthopedics, gynecology,
gastroenterology, podiatry, pulmonary and neurosurgery, among other areas. In
areas where the Company's technology is not being fully utilized, the Company
may seek agreements to supply its products under private label for other
manufacturers or may enter into strategic alliances to develop and market the
Company's lasers for other applications.

BUSINESS STRATEGY

The Company's strategy is to seek to increase its market penetration in the
dental, ophthalmic and surgical markets. Key elements of the Company's strategy
include the following:

FOCUS ON THE OFFICE AND SURGICAL CENTER MARKETS. Recognizing the cost
containment environment of the medical industry, the Company intends to focus on
clinical applications for lasers which may be performed in a surgical center or
medical office. Management believes that the Company's compact and portable
lasers offer cost efficiencies and can be used to take advantage of industry
trends which favor minimally invasive medical procedures.

INCREASE DOMESTIC MARKETING AND ACCEPTANCE OF LASER TECHNOLOGY. The Company
intends to expand its domestic marketing organization through additional sales
representatives and distributors to target the dental, ophthalmic and surgical
markets in the United States. The Company also intends to continue to implement
a doctor awareness and education program to address the individual doctor's
training, practice management and marketing needs. The Company believes
increased publicity and additional publications are essential to educate
dentists, physicians and patients about the clinical benefits of medical lasers.

EMPHASIZE EXPANSION IN INTERNATIONAL MARKETS. Foreign sales account for a
substantial portion of the Company's revenues and the Company intends to devote
additional resources to expand the worldwide marketing of its products,
particularly in the Pacific Rim and Europe. The Company anticipates substantial
growth opportunity in these markets and will seek to enter into marketing
arrangements with recognized distributors who will aggressively market and
service the Company's products in each region. Such expansion may include
potential acquisitions of businesses which have a marketing presence in Europe
and the Pacific Rim. There are no present negotiations or agreements with
respect to any acquisitions, and no assurance may be given that the Company will
be able to identify or consummate any such acquisitions.

EXPAND CLINICAL APPLICATIONS FOR PROPRIETARY LASER TECHNOLOGY. The Company
manufactures lasers which are multidisciplinary in their surgical applications
and multifunctional in the specific procedures for which they have been cleared.
The Company holds 19 United States patents and 13 foreign patents, and has
pending 13 United States patents and 41 foreign patents. The Company intends to
expand its proprietary laser technology by developing and marketing lasers for
selected additional applications, which may include corneal sculpting, hard
tissue (teeth and bone) cutting, teeth whitening procedures and tissue melding
applications, subject to FDA approval or clearance.

CAPITALIZE ON DISPOSABLE AFTERMARKET SALES. The Company manufactures a
variety of disposable fiberoptic delivery systems and sculpted fiberoptic
probes, optical tips, waveguides and catheters which are designed for
single-patient use. The unique design of the Company's lasers, including the
patented connecters, encourages the users of the Company's products to purchase
the compatible disposable products distributed by the Company. The Company
believes that the increasing demand

27
<PAGE>
for product sterility and cost containment will result in an increase in
disposable product sales and will provide a recurring revenue stream. The
Company intends to market these products to existing customers, as well as to
hospital administrators on a custom basis for other surgical lasers.

DEVELOP NEW MARKETS THROUGH STRATEGIC ALLIANCES. The Company will seek to
establish strategic alliances in order to expedite and lower the cost of
developing and bringing to market new products in current markets and existing
products in new markets. The Company believes a substantial potential market
exists for its laser technology and products both inside and outside the dental,
ophthalmic and surgical markets. Strategic alliances could accelerate the
Company's efforts to expand in several key areas including, but not limited to,
tissue melding, bone shaping, removal of bone cement and discectomy in
orthopedics, photo dynamic therapy, revascularization of the heart and
interstitial treatment of the prostate. Pursuant to this strategy, the Company
entered into an Exclusive Marketing Agreement dated July 26, 1994 with Nippon
Shoji Kaisha, Ltd. ("NSK") to distribute the Company's Polaris Nd:YAG laser for
tissue melding applications in Japan, China and Taiwan, subject to receipt of
regulatory approval.

Although the Company will continue to seek to increase its market
penetration in the dental, opthalmic and surgical markets, there can be no
assurance that the foregoing strategy will be commercially successful or that
the Company's products will be accepted by the medical or dental community, or
that a significant market for the Company's laser systems will be developed and
sustained.

LASER PRODUCTS

The Company's line of portable lasers are specifically designed for use in
outpatient surgical centers and medical offices. The Company believes that its
lasers are also well suited for the international market, particularly in
facilities with many surgical suites where easy transportation of equipment is
necessary. By employing techniques developed in the computer industry, the
Company has designed a laser system that (i) is modularly designed and uses
similar components for multiple laser systems thereby reducing their overall
cost, (ii) allows for efficient and inexpensive repair by replacing a board or
assembly in the field or through the mail, reducing the need for a field service
force, and (iii) can be easily moved from the office to surgical centers because
of its compact size and limited voltage requirements. The Company's Er:YAG
lasers are currently priced from $35,000 to $115,000 and its Nd:YAG lasers are
currently priced from $25,000 to $80,000. The Company's diode lasers are
currently priced from $20,000 to $30,000, its argon laser is priced from $8,000
to $20,000 and its CO(2) lasers are currently priced from $5,500 to $20,000. The
prices of lasers within these ranges depend upon each model's power capability
and the features offered.

PRINCIPAL LASER APPLICATIONS AND FDA STATUS

The following table presents, in summary form, the Company's principal
lasers and delivery systems, the primary applications for which the Company
intends to use them, and the FDA status of such products.

<TABLE>
<CAPTION>
PRODUCT MEDICAL APPLICATION FDA REGULATORY STATUS(1)
- ----------------------------- --------------------------------------------------------- ------------------------
<S> <C> <C>
Centauri (Er:YAG) Dental -- Soft Tissue.................................... Cleared to market
Dental -- Hard Tissue.................................... Clinical trials
completed
Pending 510(k)
Ophthalmology (e.g. Anterior Capsulotomy)................ Cleared to market
Ab-externo and Ab-interno Sclerostomy, Laser Lens
Emulsification.......................................... Clinical trials
Corneal Sculpting........................................ Preclinical animal
studies
General Surgery, Neurosurgery, Orthopedics,
Gastrointestinal and Genitourinary Procedures, Urology,
Gynecology and Oral Surgery............................. Cleared to market
Pegasus (Nd:YAG) 20W Dental -- Soft Tissue.................................... Cleared to market
</TABLE>

28
<PAGE>
<TABLE>
<CAPTION>
FDA REGULATORY
PRODUCT MEDICAL APPLICATION STATUS (1)
- ----------------------------- --------------------------------------------------------- ------------------------
Polaris (1.32m Nd:YAG) Tissue Melding........................................... Clinical trials
<S> <C> <C>
General Surgery, Ophthalmology, Arthroscopic Surgery,
Gastrointestinal and Genitourinary Procedures, Urology,
Gynecology and Oral Surgery............................. Cleared to market
Aurora (diode) Dental -- Soft Tissue.................................... Cleared to market
Dental and General Surgery, Ophthalmology, Arthroscopic
Surgery, Gastrointestinal and Genitourinary Procedures,
Urology, Dermatology, Plastic Surgery, Podiatry,
Neurosurgery, Gynecology, Pulmonary Surgery and Oral
Surgery................................................. Cleared to market
Arago and MOD (argon) Dental -- Composite and Resin Curing..................... Cleared to market
Dental -- Teeth Whitening (MOD only)..................... Cleared to market
</TABLE>

- ------------------------
(1) The Company has made modifications to certain of its products which the
Company believes do not require the submission of new 510(k) notifications.
However, there can be no assurance that the FDA will agree with the
Company's determinations and will not require the Company to discontinue
marketing one or more of the modified devices until the modifications have
been cleared by the FDA. There also can be no assurance that any such
clearance of modifications would be granted should clearance be necessary.
See "-- Government Regulation."

CENTAURI ER:YAG LASER

The Company's Centauri Er:YAG laser is a portable Er:YAG pulsed solid state
laser which generates high frequencies (up to 30Hz) at relatively low peak
power. These high frequencies allow faster cutting at lower energies. The 2.9
micron wavelength of the Er:YAG is highly absorbed by water, producing a cut
similar to the scalpel. The Er:YAG wavelength is delivered through a fiber optic
delivery system which enables the beams to be focused and angled. These
fiberoptic catheters are difficult to produce and the Company has invested
heavily in the technology to develop fibers which can handle adequate power. The
Company has experienced difficulties in securing a consistent source for these
fibers in the past, although it has recently procured two new sources for these
fibers. See "-- Legal Proceedings."

The Company's Centauri Er:YAG laser has many potential applications in
different medical specialties, including cutting hard tissue such as bone and
teeth, which could replace or minimize the use of noisy, high speed dental hand
drills, and removing ocular structures or performing microsurgery with minimal
thermal damage. Although presently marketed only for soft tissue dental
procedures and anterior capsulotomy, the Centauri laser also has clearances to
market for hemostasis (cessation of bleeding), excision and vaporization of
tissues in ophthalmology, general surgery, neurosurgery, orthopedics,
gastroenterology, urology, gynecology and oral surgery. See "-- Government
Regulation." The Centauri laser is highly effective in cataract ophthalmic
procedures because its wavelength is at the peak of the water absorption
spectrum and water comprises greater than 60% of ophthalmic tissues. Therefore,
the Centauri laser can emulsify cataracts, surgically excise tissue in the
treatment of glaucoma and can precisely remove layers of cornea similarly to an
excimer laser. This system, which currently is cleared for anterior capsulotomy
and other procedures in ophthalmology, is estimated to be available for
approximately one-third the price of refractive excimer lasers currently on the
market and requires substantially lower maintenance costs than excimer lasers
(an estimated annual expense of $10,000 as compared to approximately $70,000).
In addition, the multiple application Centauri Er:YAG laser is completely
portable, does not emit any toxic gases or cause any potentially mutagenic
effect which may result from the use of the excimer laser.

29
<PAGE>
The Company has recently introduced what it believes to be the industry's
first fully-integrated Er:YAG laser system for ophthalmic procedures. The new
system incorporates the Centauri Er:YAG laser and provides the option of either
a bi-manual or coaxial, uni-manual handpiece to accommodate an individual
physician's technique. The Company has also recently introduced a new
irrigation/ aspiration product for use in conjunction with the Centauri system,
which integrates with the laser in performing the cataract removal procedure,
and includes proprietary vacuum monitoring connectors that create a sterile
aspiration line.

While animal studies have been encouraging, there can be no assurance that
the FDA will approve the use of the Company's Centauri laser for corneal
sculpting, or that the laser will work effectively in clinical trials. Clinical
trials are estimated to continue for two to five years before approval can be
sought in the United States. There are several patents pending on this
technology and application, although no assurances can be given that these
patents will be approved or approved with the current claims.

POLARIS AND PEGASUS ND:YAG LASERS

The energy of Nd:YAG lasers is absorbed by blood in tissue and as a result
these systems are the preferred lasers to limit bleeding during surgery and for
procedures requiring fiberoptic delivery, such as laparoscopic surgery. The
Nd:YAG fiberoptic delivery system allows the surgeon to perform surgery through
small incisions, providing minimally invasive surgery to patients and usually
reducing treatment costs and the length of hospital stays.

The Company manufactures a variety of continuous wave solid state Nd:YAG
lasers which are designed for use in dentistry and a number of medical
specialties. The Company received its first clearance to market a continuous
wave Nd:YAG laser system for dental (soft tissue) applications and introduced
its 20 watt dental Pegasus Nd:YAG laser in February 1992. The Company also
manufactures 40, 60 and 100 watt Pegasus Nd:YAG lasers which have clearance to
market for various applications and procedures in general surgery, urology,
gastrointestinal procedures, pulmonary procedures, gastroenterology, gynecology
and ophthalmology.

These lasers also utilize the Company's disposable and reusable unique
TouchTIPS, AngleTIPS and sculptured fibers. By using the Pegasus laser with
TouchTIPS, the surgeon is allowed direct contact with tissue and the tactile
feeling of the scalpel or other surgical instruments. The Company believes that
the availability of these technologies permits the use of lower power laser
systems (20 watt in dental, 40-60 watt in surgery).

In December 1993, the Company entered into an Asset Purchase Agreement with
Proclosure pursuant to which the Company acquired from Proclosure the
proprietary rights, including several patents, to manufacture and sell the
Polaris laser, a 1.32 micron Nd:YAG laser (except in Japan, China and Taiwan),
together with specialized software and delivery systems, for tissue melding. The
Company is developing the Polaris laser for use in cosmetic skin closures,
vascular surgeries and minimally invasive surgical procedures normally performed
with sutures and staples. Although the use of the Polaris laser for tissue
melding is still in the development stage, and no clearance for this application
has been received, the Company believes that tissue melding offers clinical
advantages over traditional sutures and staples.

AURORA DIODE LASER

The Aurora diode laser is the Company's first semiconductor laser and, to
the Company's knowledge, is the first truly portable diode laser designed for
dentistry. The Aurora diode laser replaces the 20 watt Pegasus laser for
periodontal procedures, and is one-fourth the size and one-half of the cost of
that system. The diode wavelength is absorbed by blood in pigmentation and has
been cleared for use in multiple specialties such as general surgery,
ophthalmology, urology and plastic surgery. The Aurora laser, which was
introduced for soft tissue dental applications in February 1996, is designed to
utilize the Nd:YAG delivery systems, including TouchTIPS, AngleTIPS and
sculptured fibers, for soft tissue surgery with minimal bleeding or anesthesia.
This dental laser can also be used to treat early

30
<PAGE>
stage gum disease, postponing or in some cases eliminating the need for
periodontal surgery and providing the opportunity for overall cost savings. The
Company believes the Aurora laser compares favorably with competitive products
including pulsed Nd:YAG lasers, which cannot produce the required laser settings
for use with TouchTIPs, or in the new technique for the treatment of periodontal
disease, as well as with CO(2) lasers (which cannot be delivered through a
fiber), and argon lasers (which tend to be slower in cutting and may produce
charring).

ARAGO AND MOD ARGON LASERS

The Arago and the MOD are argon gas lasers which have been cleared to market
in dentistry to accelerate the composite curing process. Composites are rapidly
replacing amalgams (gold and silver) as the material of choice for the
restoration of cavities. The argon wavelength penetrates through the composite
and has been shown to result in a stronger restoration than composites cured by
traditional curing lights. The Company's argon lasers can also be used to cure
the resins used in placing veneers or bonding orthodontic brackets.

The argon laser can also be used to enhance teeth whitening procedures using
light activated bleaching materials which have traditionally been applied at
night over a six to eight week period. Lasers have been shown to facilitate the
use of these light activated products in a dentist's office by accelerating this
process and resulting in an approximate three shade change in less than one
hour. In August 1996, the Company received clearance to market its MOD argon
laser for this application. No assurance may be given, however, that the use of
the argon laser for teeth whitening will become a widely accepted practice in
the dental industry. The Company plans to bundle its lasers with light activated
whitening materials and co-market these products with the manufacturers of these
materials.

The MOD argon laser is manufactured by the Company pursuant to a letter
agreement dated August 24, 1996 with International Biolaser Corporation ("IBC").
Pursuant to this agreement, the Company has guaranteed certain debt of IBC to a
third party in the amount of approximately $201,000, plus future interest. The
Company has also entered into a letter agreement dated August 14, 1996 with
Lasermed, Inc., pursuant to which the Company maintains the non-exclusive right
to purchase a limited number of the portable lightweight Arago argon lasers.
This agreement terminates in November 1996. The Company will seek to extend this
agreement or, if no extension can be obtained on acceptable terms, to find an
alternative source for the argon laser, the Company's inability to extend the
agreement or find a suitable replacement product could have a material adverse
effect on the Company's business, results of operations and financial condition.

ALTAIR CO(2) LASERS

The CO(2) laser was the first available and the early standard in surgical
laser applications. The 10.6 micron wavelength generated by the CO(2) laser is
absorbed by water in tissue. The CO(2) laser acts like a surgical scalpel to
vaporize tissue with minimal blood loss and scarring. The risk of infection is
reduced by thermal sealing of blood and lymphatic vessels in the adjacent
tissues. The characteristics of the CO(2) laser have provided a wide variety of
medical specialists a modality of treatment that has significantly changed
conventional invasive surgery in a number of clinical specialties.

The Company's hand-held 10 and 20 watt CO(2) lasers acquired from Pfizer
Laser are marketed primarily for office use by podiatrists, dermatologists,
orthopedists, dentists and gynecologists. The laser weighs less than 40 pounds
and packs in a suitcase. The Company and Pfizer Laser have sold a number of
these lasers and the Company continues to provide service and support for these
products. To expand its CO(2) laser product line, the Company has designed 35
watt and 65 watt Altair CO(2) lasers for hospital based surgeries. These lasers
are portable, and laser energy may be delivered through a waveguide arm,
reusable or disposable handpieces or more maneuverable flexible waveguide
delivery systems.

31
<PAGE>
OTHER LASERS -- APPLICATIONS AND FDA STATUS

The Company has developed other solid state pulsed lasers including the
Sirius .532m Nd:YAG laser and the Orion Ho:YAG laser, and other applications for
its existing lasers, but is not actively marketing these lasers at the present
time. The following table sets forth in summary form, certain additional lasers
owned by the Company which are not currently marketed by the Company, and the
principal applications for which the Company has clearance to market such
lasers.

<TABLE>
<CAPTION>
PRODUCT MEDICAL APPLICATION FDA REGULATORY STATUS(1)
- ----------------------------- --------------------------------------------------------- ------------------------
<S> <C> <C>
Altair (CO(2)) and a CO(2) Orthopedics, General and Plastic Surgery, Dermatology,
laser acquired from Pfizer Podiatry, Ear, Nose and Throat, Gynecology, Pulmonary
HPG Procedures, Neurosurgery and Ophthalmology.............. Cleared to market
Dental -- Soft Tissue.................................... Cleared to market
Pegasus (Nd:YAG) 40W/60W General Surgery, Urology, Gastrointestinal Procedures,
Pulmonary Procedures, Gastroenterology, Gynecology and
Ophthalmology........................................... Cleared to market
Pegasus (Nd:YAG) 100W Oral, Arthroscopic and General Surgery, Gastroenterology,
Gastrointestinal and Genitourinary Procedures, Pulmonary
Procedures, Gynecology, Neurosurgery and
Ophthalmology........................................... Cleared to market
Sirius (.532m Nd:YAG) Dermatology, General and Plastic Surgery, Podiatry and
Orthopedic Applications................................. Cleared to market
Orion (Ho:YAG) General Surgery, Orthopedics, Ear, Nose and Throat,
Ophthalmology, Gastroenterology, Pulmonary Procedures
and Urology............................................. Cleared to market
Er:YAG/Nd:YAG combination Various specialties...................................... Cleared to market
</TABLE>

DELIVERY SYSTEMS AND DISPOSABLE PRODUCTS

An integral part of any laser system is the means of delivering laser energy
to the target tissue. Delivery systems commonly employed in laser surgery
include flexible fiberoptics, waveguides, articulated arms and
micromanipulators. The Company's proprietary delivery systems control the
relative proportions of acoustic, thermal and optical energy applied to tissue
resulting in enhanced cutting efforts. Flexible fibers are a preferred method of
delivery for most clinical procedures, but until recently were only available
for Nd:YAG and argon lasers. The end of a fiber may be shaped or used with a
detachable tip to control the mechanism of laser/tissue interaction, to give a
tactile feel, to provide certain mechanical effects and to angle or focus the
laser beam. The Company has also been granted a perpetual paid-up license to
manufacture, use and sell flexible waveguides to deliver CO(2) energy pursuant
to the Assignment and Modification Agreement dated July 26, 1991 among the
Company, Pfizer HPG and Medical Laser Technologies Limited.

While each laser system marketed by the Company consists of a laser and an
integral fiber, these fibers and other products, such as tubing sets, are used
by surgeons on a disposable or limited reuse basis for each clinical procedure.
The Company believes that expansion into this market could provide

32
<PAGE>
it with a recurring revenue stream. The Company manufactures a variety of
fiberoptic delivery systems, sculpted fiberoptic probes, optical tips (AngleTIPS
and TouchTIPS), waveguides and catheters which are designed for single-patient
use. The patented connectors and need for product sterility encourage the users
of the Company's lasers to purchase only products which are compatible with this
system. The Company believes it can sell these products on a custom basis to
hospital administrators for other surgical laser systems at a significant
discount to competitors' published prices, while maintaining gross margins
through vertical integration and the extensive use of molds and tooling. The
Company also assembles and distributes a full line of laser accessories,
including glasses, goggles, laser signs and smoke evacuators.

During fiscal 1994, 1995 and 1996, sales of laser accessories accounted for
approximately 10%, 19% and 14%, respectively, of the Company's revenues.

MARKETING, SALES AND SERVICE

MARKETING AND SALES

The Company markets its products to the dental market in the United States
directly to dentists and periodontists through its direct sales force consisting
of five area sales managers and its recently expanded distributor and
manufacturer's representative network consisting of more than 25 people. The
Company markets its products primarily through conventions, educational courses,
direct mail, telemarketing and other dental training programs. In March 1994,
the Company entered into a sales and marketing arrangement for its dental lasers
with Burkhart Dental Supply Company, a member of the American Dental
Cooperative, Inc., which is one of the largest distributors of dental equipment
and supplies in the United States. This agreement is terminable by either party
at any time. If this strategic alliance is successful, the Company believes this
relationship may be expanded to the other members of the American Dental
Cooperative, Inc. which markets dental products to a significant number of the
approximately 129,000 practicing dentists in the United States. Such alliance is
expected to assist the Company if the Company receives clearance to market the
Centauri laser for hard tissue applications.

Through an active program of educational courses and preceptorships, the
Company has trained dentists in ten countries during the past year using
industry recognized dentists and periodontists. In the past two years, more than
20 dental papers have been presented by the Company or clinicians using the
Company's products.

The Company markets its products in the ophthalmic market through two direct
sales managers who focus on sales to key ophthalmologists worldwide. The Company
has entered into distribution agreements with distributors in nine countries in
preparation for market introduction of the Centauri laser during calendar 1996.
The Company grants exclusive distribution rights in select territories to its
distributors who must maintain certain distribution minimums in order to retain
their exclusive rights. The Company plans to expand its ophthalmic sales force
both by enlarging its domestic sales force, either internally or through
acquisition, and by acquiring or engaging additional international manufacturing
representatives.

In the surgical market, the Company intends to form strategic alliances in
any specialty area where the partner has an established presence in the market
selling to either the physician or the hospital. The Company has entered into
such a strategic alliance with NSK, one of the leading suppliers of sutures in
the Pacific Rim, pursuant to an Exclusive Marketing Agreement. Under this
agreement, Proclosure granted to NSK, in exchange for a license fee, the
exclusive rights to market and distribute the Polaris Nd:YAG laser in Japan,
China and Taiwan. In addition, under this agreement, the Company granted to NSK
an option to manufacture the Polaris, which if exercised would require NSK to
pay the Company a $1.5 million fee and royalties. NSK has not yet indicated
whether it intends to manufacture these products. There can be no assurance that
the Company will receive any payments under this agreement.

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Sales in fiscal 1996 to one customer, Rockford Industries, Inc., a leasing
company, accounted for 10% of the Company's net sales for that year. Sales in
fiscal 1995 to LaserSight Centers, Inc. accounted for approximately 11% of the
Company's net sales for that year.

CUSTOMER SERVICE AND SUPPORT

The Company is seeking to create a group of loyal customers by focusing on
customer service, quality and reliability. In addition to its educational
courses, the Company performs a complete installation of its lasers and trains
the customers' staff in its proper use. Educational videos and papers are
available upon request. The Company conducts service training courses for the
representatives of its distributors. Prior to shipping, every laser is subjected
to an extensive battery of quality control tests. The Company provides a one
year warranty with all lasers and extended warranties are available at an
additional cost. The Company generally provides service within one business day
to all of its customers in the United States. An owner is either sent a loaner
laser by overnight carrier or a service representative visits the owner to
repair the unit. International service is provided either by the foreign
distributor or by return of the laser to the Company. The Company has
experienced and may continue to experience difficulties in providing prompt and
cost-effective service of its medical lasers in foreign countries.

COMPETITION

The Company is and will continue to be subject to competition in its
targeted markets, principally from businesses providing other traditional
surgical and nonsurgical treatments, including existing and developing
technologies or therapies, some of which include medical lasers manufactured by
competitors. In the dental market, the Company competes primarily with dental
drills, traditional curing lights and other existing technologies, and to a
lesser extent competitors' CO(2), argon, Er:YAG and Nd:YAG lasers. In the
ophthalmic market, the Company is subject to competition principally from the
(i) traditional surgical treatments using a needle to tear a circle in the
anterior capsule, (ii) phacoemulsification, an ultrasound device used to break
up cataracts in cataract removal procedures, (iii) corrective eyewear (such as
eyeglasses and contact lenses) and surgical treatments for refractive disorders
such as photorefractive keratectomy which is typically performed with an excimer
laser and radial keratotomy which is performed with a scalpel, and (vi) drug
therapy or surgical treatment of glaucoma. In the surgical market, wound closure
procedures are usually performed using sutures and staples, and traditional
cosmetic surgical procedures may be performed with a scalpel or a CO(2) laser.
The Company believes that for many applications its proprietary methods and
fiberoptic delivery systems provide clinical benefits over other currently known
technologies and competitors' laser products.

The medical laser industry in particular is also subject to intense
competition and rapid technological changes. The Company believes there are
approximately 30 competitors in different sectors of the medical laser industry.
The Company believes that the principal competitive factors in the medical laser
industry are the products' technological capabilities, proven clinical ability,
patent protection, price and scope of regulatory approval, as well as industry
expert endorsements. Many conventional laser systems target one particular
application, while the Company's Er:YAG system is designed to perform in
multiple therapeutic applications. The Company's self-contained units are
significantly smaller than competitive surgical models, have internal cooling
devices and are powered primarily by dedicated readily available 110 volt lines
instead of the 220 volt lines used by most surgical solid state lasers. The
specialized menu-driven system software utilized in the Company's lasers also
enhances safety and ease of use of the lasers.

The Company believes that its ability to compete successfully against
traditional treatments, competitive laser systems and treatments that may be
developed in the future will depend on its ability to create and maintain
advanced technology, develop proprietary products, obtain required regulatory
approvals and clearances for its products, attract and retain scientific
personnel, obtain patent or other proprietary protection for its products and
technologies, and manufacture and successfully market products either alone or
through other parties. Certain of the Company's competitors

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have substantially greater financial, technical and marketing resources than the
Company. There can be no assurance that such competition will not adversely
affect the Company's results of operations or its ability to maintain or
increase market share.

RESEARCH AND DEVELOPMENT

During the last two fiscal years, the Company has invested an aggregate of
approximately $2.5 million in research and development programs. The Company's
research and development programs have capitalized on the research and
development activities conducted by Pfizer Laser wherein that company identified
key military and aerospace technologies and adapted these technologies to
portable, efficient, solid-state laser products that were modular in nature.
This investment in research and development has resulted in the development of
19 models of lasers, more than 1,000 types of custom delivery systems and
approximately 20 types of surgical tips and accessories. Approximately 41% of
the Company's net sales for fiscal 1996 were derived from sales of three new
lasers introduced during the last six months of that year. Five more lasers or
related products are scheduled for introduction in fiscal 1997, subject to
receipt of clearance to market such products, for which no assurance may be
given.

In order to maintain its technological advantage, the Company must continue
to invest in new product development. The Company seeks to augment its funding
of research and development through government grants. The Company has been
awarded a Phase II SBIR grant of $750,000, of which approximately $698,000 has
been drawn to date and the remainder of which can be drawn over the next six
months to fund additional research and clinical trials regarding laser
emulsification of cataracts. The Company has also applied for new Phase I
research grants related to dentistry, orthopedics, tissue welding, and
ophthalmology. No assurance can be given that the Company will be awarded any of
these potential government grants.

The Company's current research is focused on expanding the clinical
applications of its existing products, reducing the size and cost of current
laser systems, developing custom delivery systems and developing new innovative
products. The Company's in-house research and development efforts have focused
on the development of a systems approach to medical laser products with
proprietary delivery systems designed to allow the laser to interact with tissue
by a number of different mechanisms (e.g., acoustic, ablative and thermal) for
unique laser/tissue effects. These disposable fiberoptic delivery systems,
developed specifically for niche surgical applications, demonstrate the
principal focus of the Company's research efforts. Examples of patented or
patent pending products resulting from these research efforts include:
TouchTIPS, AngleTIPS, Er:YAG fiberoptics and CO(2) waveguides. Clinical research
has also yielded several new surgical procedures.

PATENTS AND PATENT APPLICATIONS

Patent protection is an important part of the Company's business strategy,
and the Company's success depends, in part, on its ability to maintain patents
and trade secret protection and on its ability to operate without infringing on
the rights of third parties. The Company has sought to protect its unique
technologies and clinical advances through the use of the patent process. Patent
applications filed in the United States are frequently also filed in selected
foreign countries. The Company focuses its efforts on filing only for those
patents which the Company believes will provide it with key defensible features
instead of filing for all potential minor device features. The Company holds 19
U.S. patents and has other patent applications pending in the United States,
including divisional applications. In addition, the Company holds 13 foreign
patents including two utility model patents and has other foreign patent
applications pending. No assurance can be given that any additional U.S. or
foreign patents will be issued, that the scope of any patent protection will
exclude competitors or that any of the Company's patents will be held valid if
subsequently challenged. The Company also has a nonexclusive license to a number
of basic laser technologies which are commonly licensed on such basis in the
laser industry.

The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, to preserve trade secrets and to
operate without infringing the rights of

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others. The Company is aware of certain patents which, along with other patents
that may exist or be granted in the future, could restrict the Company's right
to market certain of its technologies without a license, including, without
limitation, patents relating to the Company's lens emulsification product and
ophthalmic probes for its Er:YAG laser. In the past, the Company has received
allegations that certain of the Company's laser products infringe other patents.
There has been significant patent litigation in the medical industry in general,
and in the medical laser industry in particular. Adverse determinations in
litigation or other patent proceedings in which the Company may become a party
could subject the Company to significant legal judgments or liabilities to third
parties, and could require the Company to seek licenses from third parties that
may or may not be economically viable. Patent and other intellectual property
rights disputes often are settled through licensing arrangements. No assurance
can be given that any licenses required under these or any other patents or
proprietary rights would be available on terms acceptable to the Company, if at
all. If the Company does not obtain such licenses, it could encounter delays in
product introductions while it attempts to design around such patents, or it
could find that the development, manufacture or sale of products requiring such
licenses could be enjoined. If the Company is found, in a legal proceeding, to
have infringed the patents or other proprietary rights of others, it could be
liable for significant damages. The Company also relies on unpatented trade
secrets, and no assurance can be given that others will not independently
develop or otherwise acquire substantially equivalent trade secrets.

GOVERNMENT REGULATION

FDA REGULATION

The lasers that are manufactured by the Company are regulated as medical
devices by the FDA under the FDC Act. Satisfaction of applicable regulatory
requirements may take several years and requirements vary substantially based
upon the type, complexity and novelty of such devices as well as the clinical
procedure. Pursuant to the FDC Act and the regulations promulgated thereunder,
the FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution, and promotion of medical devices. Noncompliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, denial or
withdrawal of premarket clearance or approval for devices, recommendations by
the FDA that the Company not be allowed to enter into government contracts, and
criminal prosecution. The FDA also has the authority to request recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.

The FDA classifies medical devices in commercial distribution into one of
three classes: Class I, II or III. This classification is based on the controls
the FDA deems necessary to reasonably ensure the safety and effectiveness of
medical devices. Class I devices are subject to general control (E.G., labeling,
premarket notification and adherance to GMPs) and Class II devices are subject
to general and special controls (E.G., performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, Class III
devices are those which must receive premarket approval by the FDA to ensure
their safety and effectiveness (E.G., life-sustaining, life-supporting and
implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed devices). Lasers typically are
classified as Class II devices, but the FDA may classify certain indications or
technologies into Class III and require a PMA.

If a manufacturer or distributor of a medical device can establish that a
proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to a pre-1976 Class III medical device for which the
FDA has not called for a PMA, the manufacturer or distributor may seek FDA
clearance for the device by filing a Section 510(k) premarket notification. If a
manufacturer or distributor of a medical device cannot establish that a proposed
device is substantially equivalent to another legally marketed device, the
manufacturer or distributor will have to seek premarket approval for the
proposed device. A 510(k) notification and the claim of substantial equivalence
will likely have to be supported by various types of data and materials,
possibly including test results or the results of clinical studies in humans. A
PMA would have to be submitted and be supported by extensive data, including
preclinical and clinical study data, to prove the safety and

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effectiveness of the device. There can be no assurance that some of the
Company's products will not require the more rigorous and time consuming PMA
approval, including laser uses for vasovasotomy or other tissue melding, dental
hard tissue, cavity prevention, cosmetic surgery, sclerostomy and lens
emulsification, among others.

If human clinical studies of a proposed device are required, whether for a
510(k) or a PMA, and the device presents a "significant risk," the manufacturer
or the distributor of the devices will have to file an IDE application with the
FDA prior to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and mechanical
laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. Submission of an IDE does not give assurance
that FDA will approve the IDE and, if it is approved, there can be no assurance
that the FDA will determine that the data derived from these studies support the
safety and efficacy of the device or warrant the continuation of clinical
studies. Sponsors of clinical studies are permitted to charge for those devices
distributed in the course of the study provided such compensation does not
exceed recovery of the costs of manufacture, research, development and handling.
Clinical studies of nonsignificant risk devices may be performed without prior
FDA approval, but various regulatory requirements still apply, including the
requirement for approval by an IRB, conduct of the study according to applicable
portions of the IDE regulations, and prohibitions against commercialization of
an investigational device.

The manufacturer or distributor may not place the device into interstate
commerce until an order is issued by the FDA granting premarket clearance for
the device. The FDA has no specific time limit by which it must respond to a
510(k) premarket notification. The FDA has recently been requiring more rigorous
demonstration of substantial equivalence in connection with 510(k) notifications
and the review time can take four to 12 months or longer for a 510(k). If a PMA
submission is filed, the FDA has by statute 180 days to review it; however, the
review time is often extended significantly by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee may also evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's good manufacturing practice requirements
prior to approval of a PMA.

Devices are cleared by 510(k) or approved by PMA only for the specific
intended uses claimed in the submission and agreed to by the FDA. Labeling and
promotional activities are also subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. Marketing or promotion of products
for medical applications other than those that are cleared or approved could
lead to enforcement action by the FDA.

There can be no assurance that the Company will be able to obtain necessary
regulatory approvals or clearances for its products on a timely basis or at all,
and delays in receipt of or failure to receive such approvals or clearances, the
loss of previously received approvals or clearances, limitations on intended use
imposed as a condition of such approvals or clearances, or failure to comply
with existing or future regulatory requirements would have a material adverse
effect on the Company's business, financial condition and results of operations.
FDA or other governmental approvals of products developed by the Company in the
future may require substantial filing fees which could limit the number of
applications sought by the Company and may entail limitations on the indicated
uses for which such products may be marketed. In addition, approved or cleared
products may be subject to additional testing and surveillance programs required
by the FDA and other regulatory agencies, and product approvals and clearances
could be withdrawn for failure to comply with regulatory standards or by the
occurrence of unforeseen problems following initial marketing.

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REGULATORY STATUS OF PRODUCTS

The Company has received 510(k) clearance to market the following lasers in
an aggregate of more than 100 specialty areas: CO(2) (four models: 10W, 20W,
35W, 65W); Nd:YAG (four models: 20W, 40W, 60W, 100W); Ho:YAG (one model); Er:YAG
(two models); 1.32m Nd:YAG (two models: 15W, 25W); .532m Nd:YAG (one model);
Argon (two models); diode (four models); Nd:YAG/Er:YAG combination laser (one
model). Each of these lasers has clearances in multiple specialty areas. The
Company also has received 510(k) clearance to market sculptured fibers, contact
tip fibers, bare fibers, TouchTIPS, AngleTIPS and focusing tips for all cleared
wavelengths of the Company's lasers as well as argon lasers. If a device for
which the Company has already received 510(k) premarket clearance is changed or
modified in design, components, method of manufacture or intended use, such that
the safety or effectiveness of the device could be significantly affected, a new
510(k) premarket notification is required before the modified device can be
marketed in the United States. The Company has made modifications to certain of
its products which the Company believes do not require the submission of new
510(k) notifications. However, there can be no assurance that the FDA will agree
with the Company's determinations and not require the Company to discontinue
marketing one or more of the modified devices until they have been cleared by
the FDA. There can also be no assurance that any such clearance of modifications
would be granted should it become necessary.

The Company currently is conducting preclinical animal studies and clinical
trials, both under approved IDEs and as nonsignificant risk studies. There can
be no assurance that the results of any of these clinical studies will be
successful or that the FDA will not require the Company to discontinue any of
these studies in the interest of the public health or due to any violations of
the FDA's IDE regulations. There can be no assurance that the Company will
receive approval from the FDA to conduct any of the significant risk studies for
which the Company seeks IDE approval, or that the FDA will not disagree with the
Company's determination that any of its studies are "nonsignificant risk"
studies and require the Company to obtain approval of an IDE before the study
can continue.

ADDITIONAL REGULATORY REQUIREMENTS

Any products manufactured or distributed by the Company pursuant to a 510(k)
premarket clearance notification or PMA are or will be subject to pervasive and
continuing regulation by the FDA. The FDC Act also requires the Company to
manufacture its products in registered establishments and in accordance with
cGMP regulations, which include testing, control and documentation requirements.
The Company must also comply with Medical Device Reporting ("MDR") requirements
that a firm report to the FDA any incident in which its product may have caused
or contributed to a death or serious injury, or in which its product
malfunctioned and, if the malfunction were to recur, would be likely to cause or
contribute to a death or serious injury. The Company's facilities in the United
States are subject to periodic inspections by the FDA. The FDA may require
postmarketing surveillance with respect to the Company's products. The export of
medical devices is also subject to regulation in certain instances.

All lasers manufactured by the Company are subject to the Radiation Control
for Health and Safety Act administered by the Center for Devices and
Radiological Health of the FDA. The law requires laser manufacturers to file new
product and annual reports and to maintain quality control, product testing and
sales records, to incorporate certain design and operating features in lasers
sold to end users pursuant to a performance standard, and to comply with
labeling and certification requirements. Various warning labels must be affixed
to the laser, depending on the class of the product under the performance
standard.

In addition, the use of the Company's products may be regulated by various
state agencies. For instance, the Company is required to register as a medical
device manufacturer with certain state agencies. In addition to being subject to
inspection by the FDA, the Company also will be routinely inspected by the State
of California for compliance with cGMP regulations and other requirements.

Although the Company believes that it currently complies and will continue
to comply with the applicable regulations regarding the manufacture and sale of
medical devices, such regulations are

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always subject to change and depend heavily on administrative interpretations.
There can be no assurance that future changes in law, regulations, review
guidelines or administrative interpretations by the FDA or other regulatory
bodies, with possible retroactive effect, will not adversely affect the
Company's business, financial condition and results of operations. In addition
to the foregoing, the Company is subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. There can be no assurance that
the Company will not be required to incur significant costs to comply with such
laws and regulations in the future, or that such laws or regulations will not
have a material adverse effect upon the Company's ability to conduct business.

Furthermore, the introduction of the Company's products in foreign countries
may require obtaining foreign regulatory clearances, and additional safety and
effectiveness standards are required in certain other countries. The Company
believes that only a limited number of foreign countries currently have
extensive regulatory requirements. These countries include the European Union
countries, France, Germany, Canada, Mexico and Japan. Domestic manufacturing
locations of American companies doing business in certain foreign countries,
including European Union countries, may be subject to inspection. The time
required for regulatory approval in foreign countries varies and can take a
number of years. During the period in which the Company will be attempting to
obtain the necessary regulatory approvals, the Company expects to market its
products on a limited basis in certain other countries that do not require
regulatory approval. There can be no assurance that the Company's products will
be cleared or approved by the FDA or other governmental agencies for additional
applications in the United States or in other countries or that countries that
do not now require regulatory approval will not require such approval in the
future.

MANUFACTURING AND MATERIALS

Manufacturing consists of component assembly and systems integration of
electronic, mechanical and optical components and modules. The Company's product
costs are principally related to the purchase of raw materials while labor and
overhead have been reduced due to the use of customized tooling and automated
test systems. The Company believes that these manufacturing systems improve
quality and manufacturing reliability resulting in lower overall manufacturing
costs, and that these systems will allow the Company to expand production
rapidly.

The Company purchases certain raw materials, components and subassemblies
included in the Company's products from a limited group of qualified suppliers
and does not maintain long-term supply contracts with any of its key suppliers.
While multiple sources of supply exist for most critical components used in the
laser and fiberoptic delivery systems, the disruption or termination of these
sources could have a material adverse effect on the Company's business and
results of operations. Vendor delays or quality problems could also result in
production delays of up to six months as several components have long production
lead times. These long lead times, as well as the need for demonstration units,
require a significant portion of working capital to fund inventory growth. The
Company has in the past experienced and may continue to experience shortages in
raw materials and certain supplies. See "Risk Factors -- Dependence on
Suppliers."

The Company owns the molds used to produce certain proprietary parts of its
laser products and owns the software used in the operation of its laser systems.
The Company designs and assembles its own fiberoptic delivery systems and laser
accessory equipment such as laser carts, smoke evacuation devices and associated
disposable supplies. The Company believes that its manufacturing practices are
in accordance with cGMP regulations.

PRODUCT LIABILITY AND INSURANCE

Since the Company's products are intended for use in the treatment of human
medical conditions, the Company is subject to an inherent risk of product
liability and other liability claims which may involve significant claims and
defense costs. The Company currently has product liability insurance with
coverage limits of $5.0 million per occurrence and $5.0 million in the aggregate
per year. Product

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liability insurance is expensive and subject to various coverage exclusions, and
in the future may not be available in acceptable amounts, on acceptable terms,
or at all. Although the Company does not have any outstanding product liability
claims, in the event the Company were to be held liable for damages exceeding
the limits of its insurance coverage or outside of the scope of its coverage,
the business and results of operations of the Company could be materially
adversely affected. The Company's reputation and business could also be
adversely affected by product liability claims, regardless of their merit or
eventual outcome.

FACILITIES

The Company leases approximately 28,000 square feet in one facility in
Irvine, California pursuant to a lease which expires in December 2000. This
facility contains the Company's executive offices, service center and
manufacturing space. The Company is required to lease an additional 13,000
square feet in the same facility commencing in January 1999, or on such earlier
date that the adjoining tenant's lease terminates. While the Company believes
that its manufacturing and administrative facilities are adequate to satisfy the
Company's needs through at least 2000, it may need to lease additional clean
room facilities in the future.

EMPLOYEES

As of October 14, 1996, the Company employed 41 people, two of whom are
employed on a part-time basis. None of these employees are represented by a
union. Eight employees perform sales, marketing and customer support activities.
The remaining employees perform manufacturing, financial, administration,
regulatory, research and development and quality control activities. The Company
believes that its relationship with its employees is good.

LEGAL PROCEEDINGS

In March 1994, the Company instituted litigation in the U.S. District Court,
Central District of California, against Infrared Fiber Systems, Inc., a Delaware
corporation ("IFS") which contracted to supply optical fiber to the Company for
the Company's Er:YAG laser. Two of IFS's senior officers are also named as
defendants. The Company's complaint in this matter alleges that IFS and two of
its officers made misrepresentations to the Company and that IFS breached its
agreement to supply fibers and certain warranties concerning the quality of the
fiber to be provided. The Company is seeking damages and an injunction requiring
IFS to subcontract the production of optical fiber to a third party, as provided
in the supply agreement. In April 1994, IFS filed a general denial and a cross-
complaint against the Company alleging breach of contract and intentional
interference with prospective economic advantage, seeking compensatory damages
"in excess of $500,000," punitive damages and a judicial declaration that the
contract has been terminated and that IFS is free to market its fibers to
others. In September 1996, IFS filed a new cross-complaint alleging the same
causes of action and seeking substantially the same relief in the Orange County
California Superior Court. The Company has filed an answer to the complaint,
denying the allegations and asserting several affirmative defenses.

IFS has agreed to license certain fiber technologies, to which the Company
claims exclusive license rights, to Coherent, Inc. ("Coherent"), a competitor of
the Company. Coherent joined the above federal litigation on behalf of IFS,
seeking a declaration that IFS had the legal right to enter into this license
and supply the fiber covered by that agreement, and then subsequently filed a
new complaint in the Orange County California Superior Court for declaratory
relief, seeking an order that the Company's original agreement with IFS applies
only to a specific type of optical fiber. The Company has answered this
complaint.

In May 1995, the Company instituted litigation concerning this dispute in
the Orange County, California Superior Court against Coherent, Westinghouse
Electric Corporation ("Westinghouse") and an individual employee of Westinghouse
who was an officer of IFS from 1986 to 1993, when the events involved in the
federal action against IFS took place and while Westinghouse owned a substantial
minority interest in IFS. The complaint charges that Coherent conspired with IFS
in the wrongful conduct which is the subject of the federal lawsuit described
above and interfered with the Company's

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contracts and relations with IFS and with prospective contracts and advantageous
economic relations with third parties. The complaint asserts that Westinghouse
is liable for its employee's wrongful acts as an IFS executive while acting
within the scope of his employment at Westinghouse. The lawsuit seeks injunctive
relief and compensatory damages. In October 1995, the federal action was stayed
by order of the court in favor of the California state court action, in which
the pleadings have been amended to include all claims asserted by the Company in
the federal action.

In July 1996, the court in the California state court action granted
demurrers by Westinghouse and the employee of Westinghouse to all causes of
action against them, as well as all but one of the Company's claims against
Coherent. As a result, the claims that are the subject of the granted demurrers
have been dismissed, subject to the Company's right to appeal. The Company has
decided that it will file an appeal of these decisions. No trial date has been
set as to the remaining outstanding causes of action.

In September 1996, the Company instituted litigation in the Salt Lake City,
Utah State Court against IBC. The Company's complaint alleges, among other
things, conversion, breach of contract and breach of fiduciary duty by IBC as a
result of actions taken by IBC with respect to the collection of accounts
receivable due to the Company. The Court in this matter subsequently issued a
temporary restraining order against IBC, prohibiting it from, among other
things, taking actions to collect receivables generated by the Company's sale of
its products. IBC has filed a cross complaint against the Company, alleging that
the Company breached the August 24, 1996 agreement between the parties, and
seeking monetary damages. Management of the Company believes, based in part on
discussions with counsel, that IBC's cross complaint is without merit and
intends to vigorously defend the action.

41
<PAGE>
MANAGEMENT

The following table sets forth certain information regarding the Company's
directors and executive officers.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Colette Cozean, Ph.D............... 38 Chairman of the Board, Chief Executive Officer, President
and Director of Research
T. Daniel Caruso, Jr............... 53 Senior Vice President, Sales and Marketing
Ronald E. Higgins.................. 54 Vice President, Regulatory Affairs and Quality Assurance,
and Secretary
James S. Polentz................... 53 Vice President, Finance and Chief Financial Officer
Richard Roemer..................... 62 Vice President, Operations and Industrial Lasers
Patrick J. Day..................... 69 Director (1)
Grace Ching-Hsin Lin............... 46 Director (1)(2)
E. Donald Shapiro.................. 64 Director (1)(2)
</TABLE>

- ------------------------
(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

The business experience, principal occupations and employment, as well as
the periods of service, of each of the directors and executive officers of the
Company during at least the last five years are set forth below.

DIRECTORS AND OFFICERS

COLETTE COZEAN, PH.D. is a founder of the Company and has been Chairman of
the Board of Directors, President and Director of Research of the Company since
it began operations in August 1991 and became the Chief Executive Officer in
1994. From April 1987 to August 1991, Dr. Cozean served as Director of Research
and Development, Regulatory Affairs and Clinical Programs at Pfizer Laser and in
such capacities managed the development of the laser technologies which were
acquired by the Company from Pfizer Laser. Prior to April 1987, Dr. Cozean held
various research positions at Baxter Edwards, a division of Baxter Healthcare
Corporation ("Baxter"), and American Technology and Ventures, a division of
American Hospital Supply Company ("American Hospital"). Baxter and American
Hospital are manufacturers and suppliers of advanced medical products. Dr.
Cozean holds several patents, has published many articles and has served as a
member of the National Institutes of Health grant review committee. Dr. Cozean
holds a Ph.D. in biomedical engineering and an M.S. in Electrical Engineering
from Ohio State University, a B.S. in biomedical engineering from the University
of Southern California, and a B.A. in physical sciences from Westmont College.

T. DANIEL CARUSO, JR. has been Vice President, Sales and Marketing of the
Company since July 1992 and became a Senior Vice President in May 1996. From
July 1989 to April 1992, Mr. Caruso was Vice President, Sales and Marketing at
Hycor Biomedical, a laboratory diagnostics company. From March 1988 to July
1989, Mr. Caruso was President and Chief Executive Officer of Physicians Home
Infusion Care, a home health care company. Mr. Caruso has a B.S. in Biology and
Chemistry and an M.B.A. in marketing from the University of Southern California.

RONALD E. HIGGINS is a founder and the Vice President, Regulatory Affairs
and Quality Assurance of the Company, a position he has held since January 1995.
From the founding of the Company in August 1991 to January 1995, Mr. Higgins was
Vice President, Operations. From September 1989 to August 1991, Mr. Higgins was
Manager of Regulatory Affairs and Quality Assurance at Pfizer Laser. From
January 1987 to September 1989, Mr. Higgins was Director of Regulatory Affairs
at Cardio Pulmonics, a medical device company. Mr. Higgins holds a B.S. in
Zoology from the University of Utah and has completed post graduate work in the
areas of biochemistry, educational training, regulatory affairs, manufacturing
and engineering.

42
<PAGE>
JAMES S. POLENTZ joined the Company as Chief Financial Officer in April
1994. From October 1992 to April 1994, Mr. Polentz served as the Chief Financial
Officer with Spector Entertainment Group, a telecommunications service company.
From March 1991 through July 1992, Mr. Polentz served as the Vice President,
Finance and Chief Financial Officer for Commstruct International, Inc., a
telecommunications company. A subsidiary of Commstruct International, US
Commstruct, Inc., filed a petition under Chapter 11 of the United States
Bankruptcy Code within six months after the date Mr. Polentz left the employ of
Commstruct International, Inc. Mr. Polentz is a certified public accountant and
has a B.S. in Accounting from the University of Southern California and an
M.B.A. from California State University.

RICHARD ROEMER has been Vice President, Operations and Industrial Lasers of
the Company since February 1995. From 1994 to 1995, Mr. Roemer was an
independent consultant for the Company. From 1988 to 1994, Mr. Roemer was a
consultant to and general manager of California Labs, JMED, Inc. and Pineridge
Capital, which are manufacturers of laser-based medical products. Prior to 1988,
Mr. Roemer founded the laser group of Melles Griot and served as the Chief
Operating Officer of the laser division of Hughes Aircraft Corporation. Mr.
Roemer holds a B.S. degree in Mechanical Engineering from Rutgers University.

PATRICK J. DAY has served as a director of the Company since August 1991.
Mr. Day is a Certified Public Accountant and owns a CPA firm which he
established in 1967. He has served as a director for several organizations
including the First Presbyterian Church of Hollywood and many private companies.
Mr. Day is the father of Dr. Cozean, the Company's Chairman of the Board, Chief
Executive Officer and President. Mr. Day has a B.A. in accounting from the
University of Idaho.

GRACE CHING-HSIN LIN has served as a director of the Company since February
1992, representing a group of original investors in the Company. Ms. Lin has
been an agent providing real estate consulting services for Security Trust
Realty since April 1988 and an owner of South Pacific Investment, an investment
management company, since 1989.

E. DONALD SHAPIRO joined the Board of Directors in August 1994. Since 1983,
Mr. Shapiro has served as the Joseph Solomon Distinguished Professor of Law at
New York Law School where he served as both Dean and Professor of Law from 1973
to 1983. He is Supernumerary Fellow of St. Cross College at Oxford University,
England. Mr. Shapiro received a J.D. degree at Harvard Law School. He currently
serves on the Boards of Directors for several public companies including Loral
Space and Communications, Ltd., Eyecare Products PLC, Kranzco Realty Trust,
Group Health Incorporated, Vasomedical Corporation, MacroChem Corporation,
United Industrial, Telepad, Inc. and Food Entertainment, Inc. He also serves on
the Board of Directors of Bank Leumi NY. Mr. Shapiro is special counsel to the
law firm of Herzfeld and Rubin, which firm is representing the Company in the
litigation described in "Business -- Legal Proceedings." Mr. Shapiro is not a
partner of such firm and receives no compensation calculated by reference to
such firm's profits.

KEY CONSULTANTS

ROBERT J. FREIBERG, PH.D. is currently a Technical Advisor to the Company
and from August 1991 has provided consulting services to the Company. From 1986
to 1991, Dr. Freiberg served in various capacities for Pfizer Laser, most
recently holding the position of Director of Engineering and Manufacturing
Operations. From 1983 to 1986, Dr. Freiberg was Director of Minimally Invasive
Surgery Products for American Technology and Ventures, a division of American
Hospital. Dr. Freiberg has also managed projects/departments at Hughes Research
Laboratory, United Technologies and TRW. In addition to holding several patents,
Dr. Freiberg identified and developed emerging medical technologies for American
Hospital. Dr. Freiberg holds a Ph.D., M.S. and B.S. in physics from the
University of Illinois and Rensselaer Polytechnic Institute. The Company pays
Mr. Freiberg $85 per hour for services rendered to the Company.

RICHARD P. KRATZ, M.D. became affiliated with the Company in April 1994 as a
Medical Director. Dr. Kratz is a clinical professor of ophthalmology at the
University of California, Irvine and a clinical professor emeritus at the
University of Southern California. Dr. Kratz is on the Board of Directors for

43
<PAGE>
the University of California, Irvine, Beckman Laser Institute & Medical Clinic
and a member of the Board of Directors of the American Board of Eye Surgeons,
and is on the editorial boards for OCULAR SURGERY NEWS, OCULAR SURGERY NEWS
INTERNATIONAL and the EUROPEAN JOURNAL OF IMPLANT AND REFRACTIVE SURGERY. Dr.
Kratz received a M.D. from the University of Southern California. Dr. Kratz has
published numerous papers and frequently lectures on topics in ophthalmology,
including cataract surgery. Other than stock options granted at fair market
value to Dr. Kratz from time to time at the discretion of the Company's Board of
Directors, Dr. Kratz does not receive any other compensation for services
rendered to the Company.

MEDICAL ADVISORY BOARDS

The Company is advised by three Medical Advisory Boards (the "Advisory
Boards") covering ophthalmology, dentistry and surgery, respectively. Each of
the Advisory Boards is comprised of up to fifteen members who are active
primarily in the Company's target markets and who are selected to provide a
balance of university deans, researchers and clinicians, different
subspecialties, and laser users of multiple wavelengths, users of the Company's
systems and users who do not use lasers in their practice at all. The Advisory
Board's function is to review clinical, regulatory, new product development and
marketing programs and proposals for the Company. Members of these boards often
serve as clinical investigators, course lecturers and perform research resulting
in published papers. Other than stock options granted at fair market value from
time to time at the discretion of the Company's Board of Directors, the Chairmen
of the Medical Advisory Boards do not receive any other compensation for
services rendered to the Company. Each Advisory Board is headed by a Chairman.
Currently, the Chairmen of the Company's Advisory Boards are as follows:

D. MICHAEL COLVARD, M.D., OPHTHALMOLOGY. Dr. Colvard is the founder of the
Center for Ophthalmic Surgery in Encino, California, and has been responsible
for its Outpatient Surgery Center for the past ten years. Dr. Colvard has also
been a clinical faculty member at the University of Southern California since
1991 and has published widely in the field of ophthalmology. Dr. Colvard
maintains a medical practice and is engaged by a major ophthalmic company to
review its clinical trials, procedures and results. Dr. Colvard also served as
the Medical Director for the Company during its first two years. The Company has
entered into an Assignment Agreement with Dr. Colvard, pursuant to which Dr.
Colvard assigned to the Company certain technology relating to the Er:YAG laser
for use on ocular structures. While this agreement provides for the payment of
royalties under certain circumstances to Dr. Colvard of 1.0% to 2.5% on sales of
the Er:YAG intraocular and refractive lasers, fiberoptic intraocular catheters
and intraocular probes, no royalties have been earned as of the date of this
Prospectus.

G. LYNN POWELL, D.D.S., DENTISTRY. Dr. Powell has been on the faculty at
the University of Utah since 1982, where he currently serves as the Assistant
Dean for Dental Education in the School of Medicine and Professor in the
Department of Pathology. He is a patent holder who has performed extensive
research in the field of dentistry serving as primary investigator on several
funded grants and is author or co-author of over 45 papers in journals, a
majority of which relate to the use of lasers in dentistry. He serves as a
reviewer for three dental and laser journals, has lectured nationally as well as
internationally and routinely presents his work at research meetings. Dr. Powell
is the current President of the International Society for Lasers in Dentistry.
Dr. Powell received his D.D.S. from the University of Washington and was on the
full time faculty in Restorative Dentistry for ten years.

WARREN SCOTT GRUNDFEST, M.D., GENERAL SURGERY. Dr. Grundfest, a Fellow of
the American College of Surgeons, has been the Director, Laser Research and
Technology Development Program at Cedars-Sinai Medical Center in Los Angeles
since 1985. He is also the holder of the Dorothy and E. Phillip Lyon Chair in
Laser Research at such hospital, as well as being an Assistant Director of
Surgery. In addition, he is an Assistant Clinical Professor of Surgery at the
UCLA School of Medicine, and the co-editor of the Journal of Laparoendoscopic
Surgery. Dr. Grundfest has published more than 100 papers, 30 book chapters and
conducted multiple courses in the fields of laser applications in medicine,
microendoscopy and minimally invasive surgery. His laboratory has been involved
in the development

44
<PAGE>
of minimally invasive surgery, from angioscopy to laparoscopic transcystic duct
common bile duct exploration. Dr. Grundfest consults for a variety of
governmental agencies including the FDA and the National Institutes of Health.

BOARD COMMITTEES AND DESIGNATED DIRECTORS

The Board's Audit Committee consists of Ms. Lin and Messrs. Day and Shapiro.
The Audit Committee meets periodically with management and the Company's
independent accountants to review the results and scope of the audit and other
services provided by the Company's independent auditors and the need for
internal auditing procedures and the adequacy of internal controls.

The Compensation Committee of the Board of Directors consists of Ms. Lin and
Mr. Shapiro. The Compensation Committee establishes salaries, incentives and
other forms of compensation for officers, directors and certain key employees
and consultants (including the Chairmen of the Advisory Boards), administers the
Company's various incentive compensation and benefit plans, including the
Company's 1992 Employee Stock Option Plan, 1995 Employee Stock Option Plan and
the 1996 Stock Option Plans and recommends policies relating to such plans.

Until October 2001, the Company has agreed, if requested by the Underwriter,
to nominate two designees of the Underwriter to the Company's Board of
Directors. The Underwriter has designated Mr. Shapiro, a current director of the
Company, pursuant to this provision. The Underwriter has not yet indicated
whether it will nominate a second designee.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the annual
compensation paid by the Company for the fiscal years indicated to the Chief
Executive Officer and executive officers of the Company whose compensation
exceeded $100,000 during the fiscal year ended March 31, 1996.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------------
ANNUAL COMPENSATION (1) SECURITIES
FISCAL ----------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- ------------------------------------- --------- -------------- ------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
Colette Cozean, Ph.D. ............... 1996 $ 112,200 $ -- 140,000 $ 19,800(5)
Chairman of the Board, 1995 $ 97,500 $ 37,500 358,650(4) $ 4,800(6)
Chief Executive Officer, President 1994 $ 97,500(2) $ -- -- $ 5,376(6)
and Director of Research
T. Daniel Caruso, Jr. ............... 1996 $ $ --(3) 109,522 $ --
Senior Vice President, 90,625
Sales and Marketing
Ronald E. Higgins ................... 1996 $ 92,625 $ --(3) 90,000 $ --
Vice President, Regulatory
Affairs and Quality
Assurance and Secretary
</TABLE>

- ------------------------
(1) Excludes perquisites and other personal benefits, securities and properties
otherwise categorized as salary or bonuses which in the aggregate, for each
of the named persons did not exceed the lesser of either $50,000 or 10% of
the total annual salary reported for such person. The Company has also
entered into Employment Agreements with each of the named persons which
provide for two to four months of severance benefits upon their termination
of employment. Based upon salary levels as of October 14, 1996, such
severance benefits range from approximately $15,000 to $33,000 for each of
the named persons.

(2) Includes $19,500 which was deferred until January 1995.

45
<PAGE>
(3) Bonuses for fiscal 1996 have not yet been determined, but the Company
anticipates paying such bonuses in October 1996. The Company estimates that
such bonuses will be between approximately $8,000 and $16,000 for each of
Messrs. Caruso and Higgins.

(4) The exercise price for these options is $5.00 per share. One-half of such
options will vest in five equal annual installments commencing on August 8,
1995. The remaining options will vest on the earlier of August 8, 2005, or
when the Company attains certain financial criteria. Vesting of these
options is accelerated in the event of certain acquisitions of the Company.

(5) Represents the full amount of premiums paid by the Company ($15,000) for a
split-dollar life insurance policy in the amount of $2 million on the life
of Dr. Cozean, and an auto allowance for Dr. Cozean ($4,800).

(6) Represents an auto allowance for Dr. Cozean.

OPTIONS GRANTED IN LAST FISCAL YEAR

The following table sets forth certain information concerning stock options
granted to the named executive officers during the fiscal year ended March 31,
1996:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PERCENT OF TOTAL
COMMON STOCK OPTIONS GRANTED EXERCISE OR
UNDERLYING TO EMPLOYEES BASE PRICE EXPIRATION
NAME OPTIONS DURING 1996 PER SHARE (1) DATE
- ------------------------------------------- -------------- ------------------- ------------- ----------
<S> <C> <C> <C> <C>
Colette Cozean, Ph.D....................... 140,000(2) 20.2% $ 4.625 02/23/06
T. Daniel Caruso, Jr....................... 60,000(3) 13.7% $ 4.625 02/23/06
35,000(4) $ 5.625 06/01/05
Ronald E. Higgins.......................... 45,000(3) 11.6% $ 4.625 02/23/06
35,000(4) $ 5.625 06/01/05
</TABLE>

- ------------------------
(1) The options were granted at an exercise price at least equal to the fair
market value of the Class A Common Stock on the date of grant. The exercise
price may be paid by delivery of cash or already owned shares, subject to
certain conditions.

(2) Such options vest in four equal annual installments commencing March 31,
1996.

(3) Such options vest in three equal annual installments commencing March 31,
1997.

(4) 15,000 of the options held by each of Messrs. Caruso and Higgins vest on
September 21, 1997. The remaining 20,000 options held by each of Messrs.
Caruso and Higgins vest on the earlier of June 1, 2005, or when the Company
attains certain financial criteria.

46
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES

The following table sets forth certain information regarding stock options
exercised by the named executive officers during the fiscal year ended March 31,
1996, as well as the number of exercisable and unexercisable in-the-money stock
options and their values at fiscal year end. An option is in-the-money if the
fair market value for the underlying securities exceeds the exercise price of
the option.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES MARCH 31, 1996 AT MARCH 31, 1996 (1)
ACQUIRED ON VALUE ----------------------- ------------------------
EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------- ----------- ----------------------- ------------------------
<S> <C> <C> <C> <C>
Colette Cozean, Ph.D......... -- -- 70,865/427,785 $270,011/$1,590,096
T. Daniel Caruso, Jr......... -- -- 2,500/102,500 $9,063/$372,188
Ronald E. Higgins............ -- -- 2,500/87,500 $9,063/$312,188
</TABLE>

- ------------------------
(1) Represents the last sale price of underlying securities at fiscal year end
as reported by the Nasdaq National Market, less the exercise price of the
options.

DIRECTOR COMPENSATION

All directors are elected annually and hold office until the next annual
meeting of the shareholders and until their successors are duly elected and
qualified. The Company pays to all nonemployee directors $1,000 per Board
meeting attended, $1,000 per committee meeting attended which is not in
conjunction with a Board meeting, $500 per committee meeting attended in
conjunction with a Board meeting, and $500 per telephonic Board or committee
meeting. Directors are also reimbursed for their out-of-pocket expenses incurred
in attending meetings of the Board of Directors and its committees. Mr. Shapiro
also receives a fee of $1,000 per month as compensation for additional
consulting services relating to the Company's pending litigation matter and to
new business issues. The Company may also periodically award options or warrants
to its Directors. On November 30, 1994, the Company granted to each nonemployee
director warrants to purchase, at an exercise price of $5.00 per share, (i)
45,000 shares of Class A Common Stock, which warrants vest on the earlier of
August 8, 2005 or when the Company attains certain financial conditions (subject
to earlier vesting upon certain acquisitions of the Company, and subject to the
requirement that the director remains on the Board through the vesting date);
and (ii) 20,000 shares of Class A Common Stock, which warrants vested
immediately upon grant. On February 23, 1996, the Company also granted to Mr.
Day, the only nonemployee director of the Company not on the Board's
Compensation Committee, an option to purchase 10,000 shares at an exercise price
of $4.63 per share.

The Company's 1996 Stock Option Plan provides that each person who was or is
a member of the Compensation Committee of the Board on February 23, 1996,
February 23, 1997 and February 23, 1998 will be issued on each such date, under
that plan, options to purchase 10,000 shares of the Company's Class A Common
Stock. These options will have an exercise price equal to the fair market value
of the Company's Class A Common Stock on the trading day prior to the grant date
and a term of ten years. These options are issued subject to approval by the
Company's shareholders at the 1996 Annual Meeting of Shareholders, and will
terminate if such approval is not given.

The Company's Articles of Incorporation and indemnification agreements
entered into between the Company and certain of the Company's directors and
officers require the Company to indemnify such officers and directors to the
fullest extent permitted by applicable law against liabilities incurred in
connection with their duties as officers and directors of the Company. Such
indemnification rights may extend to liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable.

47
<PAGE>
STOCK OPTION PLANS

Each of the Company's Stock Option Plans is administered by the Board of
Directors which has sole discretion and authority, consistent with the
provisions of the plans, to determine which eligible participants will receive
options, the time when options will be granted, the terms of options granted and
the number of shares which will be subject to options. The Board may also
appoint a committee (the "Committee") to administer the plans and, subject to
applicable law, to exercise all of the powers of the Board under the plans.

1992 STOCK OPTION PLAN AND 1995 STOCK OPTION PLAN

The Company's 1992 Stock Option Plan and 1995 Stock Option Plan each provide
for the granting of "incentive stock options," within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended ("Incentive Stock Options"),
and nonstatutory options. The exercise price of Incentive Stock Options must be
not less than the fair market value of a share of Class A Common Stock on the
date the option is granted (110% with respect to optionees who own at least 10%
of the outstanding Common Stock). Under the 1992 Stock Option Plan, options
covering an aggregate of 54,264 shares of the Company's Common Stock may be
granted and under the 1995 Stock Option Plan options covering an aggregate of
225,000 shares of the Company's Class A Common Stock may be granted, in each
case to directors, employees and consultants of the Company, except that
Incentive Stock Options may not be granted to nonemployee directors or
nonemployee consultants. The 1992 Stock Option Plan terminates in August 2002,
and the 1995 Stock Option Plan terminates in 2005. As of October 14, 1996 there
were options to purchase an aggregate of 31,896 shares of Class A Common Stock
and 1,678 shares of each of Class E-1 and Class E-2 Common Stock outstanding
under the 1992 Stock Option Plan, at an exercise price ranging from $1.00 to
$11.06, which were held by 17 former and current employees, and 177,250 options
outstanding under the 1995 Stock Option Plan at an exercise price of $5.625 per
share, held by 30 employees and consultants.

FEBRUARY 1996 STOCK OPTION PLAN AND 1996 STOCK OPTION PLAN

In February 1996, the Board of Directors adopted two option plans, the
February 1996 Stock Option Plan and the 1996 Stock Option Plan which provide for
the grant of options covering an aggregate of 550,000 shares and 500,000 shares,
respectively, of the Company's Class A Common Stock to employees and directors
of, and consultants to the Company. Both plans terminate in February 2006. The
1996 Stock Option Plan provides for the granting of Incentive Stock Options and
nonstatutory stock options. The 1996 Stock Option Plan provides that each person
who was or is a member of the Company's Compensation Committee of the Board of
Directors on February 23, 1996, February 23, 1997 and February 23, 1998 will be
issued on each such date, options to purchase 10,000 shares of the Company's
Common Stock. These options will have a term of ten years and an exercise price
equal to the fair market value of the Company's Class A Common Stock on the
trading day prior to the grant date. As of October 14, 1996, there were options
to purchase an aggregate of 20,000 shares of the Company's Class A Common Stock
outstanding under the 1996 Stock Option Plan, at an exercise price of $4.625 per
share, which options were held by two directors of the Company. The February
1996 Stock Option Plan provides for the grant of nonstatutory options to certain
key employees and consultants to the Company, but does not permit grants to
nonemployee directors of the Company. The February 1996 Stock Option Plan is
administered by the Compensation Committee of the Board of Directors. As of
October 14, 1996, there were options to purchase an aggregate of 494,650 shares
of Class A Common Stock outstanding under the February 1996 Stock Option Plan,
at an exercise price of $4.625 per share, which options were held by 49
employees, directors and consultants.

Except for formula grants under the 1996 Stock Option Plan, the Board of
Directors (or a committee thereof) has the authority to determine the time or
times at which options granted under the Stock Option Plans become exercisable,
provided that options expire no later than ten years from the date of grant
(five years with respect to optionees who own at least 10% of the outstanding
Class A Common Stock). Options are nontransferable, other than by will and the
laws of descent and distribution, and generally may be exercised only by an
employee while employed by the Company or within 60 days after termination of
employment (one year for termination resulting from death or disability).

48
<PAGE>
PRINCIPAL SHAREHOLDERS

The following table sets forth certain information as of October 14, 1996,
and as adjusted to reflect the sale of 11,000 Units by the Company in this
Offering, regarding the beneficial ownership of the Company's Common Stock by:
(i) all persons known by the Company to beneficially own more than 5% of the
Company's Common Stock, (ii) each director and executive officer of the Company,
and (iii) all directors and executive officers as a group. The following table
treats the Common Stock, the Class E-1 Common Stock and the Class E-2 Common
Stock as a single class.

<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND COMMON STOCK
NATURE OF ------------------------
BENEFICIAL BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNERSHIP OFFERING OFFERING
- -------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Colette Cozean, Ph.D. (2)....................................................... 247,320 3.4% 2.6%
Patrick J. Day (3).............................................................. 232,981 3.2 2.5
E. Donald Shapiro (4)........................................................... 108,000 1.5 1.1
Ronald E. Higgins (5)........................................................... 100,320 1.4 *
Grace Chin-Hsin Lin (6)......................................................... 52,801 * *
T. Daniel Caruso, Jr. (7)....................................................... 52,767 * *
James S. Polentz (8)............................................................ 5,000 * *
Richard Roemer.................................................................. -- *
All directors and executive officers
as a group (8 persons) (9)..................................................... 799,189 10.5% 8.2%
</TABLE>

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

* Less than 1%.

(1) The address of each of Dr. Cozean, Ms. Lin and Messrs. Day, Caruso, Higgins
and Shapiro is 3 Morgan, Irvine, California 92718. Unless otherwise noted,
the Company believes that all persons named in the table have sole
investment and voting power with respect to all shares of Class A Common
Stock beneficially owned by such person, subject to community property laws
where applicable.

(2) Includes 49,144 shares of Class A Common Stock, 43,514 shares of Class E-1
Common Stock and 43,514 shares of Class E-2 Common Stock held by Dr. Cozean
and 1,594 shares of Class A Common Stock, 1,412 shares of Class E-1 Common
Stock and 1,412 shares of Class E-2 Common Stock held by Dr. Cozean as
custodian for her two minor children. Also includes 106,730 shares of Class
A Common Stock subject to options exercisable within 60 days.

(3) Includes 54,263 shares of Class A Common Stock, 48,047 shares of Class E-1
Common Stock and 48,047 shares of Class E-2 Common Stock. Also includes
48,992 shares of Class A Common Stock, 16,816 shares of Class E-1 Common
Stock and 16,816 shares of Class E-2 Common Stock subject to warrants and
options exercisable within 60 days.

(4) Includes 108,000 shares of Class A Common Stock subject to Class A Warrants
and other warrants and options exercisable within 60 days.

(5) Includes 34,400 shares of Class A Common Stock, 30,460 shares of Class E-1
Common Stock and 30,460 shares of Class E-2 Common Stock. Also includes
5,000 shares of Class A Common Stock subject to options exercisable within
60 days.

(6) Includes 6,330 shares of Class A Common Stock, 5,605 shares of Class E-1
Common Stock and 5,605 shares of Class E-2 Common Stock held by Linco
Investments, a limited partnership in which Ms. Lin's husband serves as a
general partner, and 1,899 shares of Class A Common Stock, 1,681 shares of
Class E-1 Common Stock and 1,681 shares of Class E-2 Common Stock held by
the pension plan for Ms. Lin's husband. Also includes 30,000 shares of Class
A Common Stock subject to warrants and options exercisable within 60 days.

49
<PAGE>
(7) Includes 13,722 shares of Class A Common Stock, 12,150 shares of Class E-1
Common Stock and 12,150 shares of Class E-2 Common Stock. Also, includes
8,517 shares of Class A Common Stock, 3,114 shares of Class E-1 Common Stock
and 3,114 shares of Class E-2 Common Stock subject to options exercisable
within 60 days.

(8) Consists of 5,000 shares of Class A Common Stock subject to options
exercisable within 60 days.

(9) Includes 161,352 shares of Class A Common Stock, 142,869 shares of Class E-1
Common Stock and 142,869 shares of Class E-2 Common Stock. Also includes
304,236 shares of Class A Common Stock, 19,486 shares of Class E-1 Common
Stock and 19,486 shares of Class E-2 Common Stock subject to warrants and
options exercisable within 60 days.

CERTAIN TRANSACTIONS

As of September 30, 1994, the Company owed an aggregate of approximately
$226,000 to its officers for unreimbursed expenses and deferred salaries.
Included in that amount was $52,000 owed to an immediate family member of an
officer of the Company for consulting services rendered to the Company. All of
these amounts were paid in December 1994 and January 1995. In addition, between
June and September 1994, the Company borrowed an aggregate of $55,000 and
$25,000 from Messrs. Patrick J. Day (a director) and Irving M. Frankman (a
former director), respectively, pursuant to short-term promissory notes bearing
interest at 10% per annum (18% upon the occurrence of an event of a default).
These loans have been repaid in full.

In March 1994, the Company's Board of Directors agreed to extend Mr. Day's
outstanding warrants to purchase 100,000 shares of Series A Preferred Stock for
two years. In December 1994, the Company exchanged these warrants for warrants
to purchase 9,044 shares of Class A Common Stock, and 8,008 shares of each of
Class E-1 and Class E-2 Common Stock for an aggregate purchase price of
$100,000. In May 1996, the Company's Board of Directors agreed to extend such
warrants until March 31, 1997.

In connection with the Company's private placement in August 1994, Mr.
Shapiro, a director of the Company, purchased $100,000 principal amount of
promissory notes and 70,000 warrants (which converted by their terms in December
1994 into Class A Warrants) for an aggregate purchase price of $100,000. These
promissory notes were repaid in full in December 1994.

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DESCRIPTION OF SECURITIES

The following description of the Company's capital stock and selected
provisions of its Articles of Incorporation and Bylaws is a summary and is
qualified in its entirety by the Company's Articles of Incorporation and Bylaws,
copies of which have been filed with the Securities and Exchange Commission as
exhibits to the Registration Statement of which this Prospectus is a part.

UNITS

Each Unit consists of 190 shares of the Company's Class A Common Stock and
95 of the Company's Class B Warrants. See "-- Common Stock; Class A Common
Stock," "-- Redeemable Warrants; Class B Warrants," and "Underwriting -- Pricing
the Offering."

COMMON STOCK

The Company is authorized to issue 35,600,000 shares of Class A Common
Stock, no par value, 2,200,000 shares of Class E-1 Common Stock, no par value,
and 2,200,000 shares of Class E-2 Common Stock. The Class A Common Stock, Class
E-1 Common Stock and the Class E-2 Common Stock have equal voting rights and are
entitled to share equally in dividends from sources available therefor when, as
and if declared by the Board of Directors, subject to certain escrow conditions
pertaining to dividends declared with respect to the Class E-1 and Class E-2
Common Stock. See "Dividend Policy."

CLASS A COMMON STOCK

Shareholders have no preemptive rights and no right to convert their Class A
Common Stock into any other securities. The holders of Common Stock are entitled
to one vote for each share held of record on all matters submitted to a vote of
the shareholders, except that holders of Class A Common Stock are entitled to
cumulative voting with respect to the election of directors upon giving notice
as required by law. In cumulative voting, the holders of Class A Common Stock
are entitled to cast for each share held the number of votes equal to the number
of directors to be elected. In the event of a liquidation, dissolution or
winding up of the Company, holders of Class A Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding Preferred Stock. There are no redemption or
sinking fund provisions applicable to the Class A Common Stock. All outstanding
shares are, and all shares to be sold and issued as contemplated hereby will be,
fully paid and nonassessable and legally issued. The Board of Directors is
authorized to issue additional shares of Class A Common Stock within the limits
authorized by the Company's charter and without shareholder action. As of
October 14, 1996 there were 4,750,554 shares of Class A Common Stock
outstanding.

CLASS E-1 COMMON STOCK

The Company is authorized to issue 2,200,000 shares of Class E-1 Common
Stock, no par value. As of October 14, 1996, there were outstanding 1,256,818
shares of Class E-1 Common Stock and 1,256,818 shares of Class E-2 Common Stock
(the "Escrow Shares"). The Escrow Shares are not transferrable (but may be
voted), and each Escrow Share will automatically convert into one share of Class
A Common Stock and be released to the owners thereof upon the achievement of the
objectives described below. On June 30, 2000, all Escrow Shares not previously
converted into Class A Common Stock will be cancelled. This arrangement was
required by the representative of the underwriters for the Company's initial
public offering as a condition of such offering.

All of the shares of Class E-1 Common Stock will be automatically converted
into Common Stock in the event that: (a) the Company's net income before
provision for income taxes, including earnings from joint ventures, distribution
agreements and licensing agreements, but exclusive of any other earnings that
are classified as an extraordinary item, and exclusive of any charges to income
that may result from the conversion of the Escrow Shares into Class A Common
Stock (as stated in the Company's financial statements audited by the Company's
independent accountants) ("Minimum Pretax Income") amounts to at least
$5,500,000 for the fiscal year ending March 31, 1997; (b) the Minimum Pretax
Income amounts to at least $6,850,000 for the fiscal year ending March 31, 1998;

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(c) the Minimum Pretax Income amounts to at least $8,425,000 for the fiscal year
ending March 31, 1999; (d) the Minimum Pretax Income amounts to at least
$9,900,000 for the fiscal year ending March 31, 2000; or (e) the Closing Price
of the Company's Class A Common Stock for any 30 consecutive business days shall
average in excess of $19.25 during the period commencing June 1996 and ending in
November 1997 (subject to adjustment in the event of any reverse stock splits or
similar events). The Closing Price shall be the closing sale price as reported
by the Nasdaq National Market. To the extent any additional shares are issued,
including the shares issued in the Offering, all of the Minimum Pretax Income
amounts referenced above will be increased proportionately.

CLASS E-2 COMMON STOCK

The Company is authorized to issue 2,200,000 shares of Class E-2 Common
Stock, no par value. All of the shares of Class E-2 Common Stock will be
automatically converted into Class A Common Stock in the event that: (a) the
Minimum Pretax Income amounts to at least $11,800,000 for the fiscal year ending
March 31, 1997; (b) the Minimum Pretax Income amounts to at least $14,750,000
during the fiscal year ending March 31, 1998; (c) the Minimum Pretax Income
amounts to at least $20,475,000 during the fiscal year ending March 31, 1999;
(d) the Minimum Pretax Income amounts to at least $26,750,000 during the fiscal
year ending March 31, 2000; or (e) the Closing Price of the Company's Common
Stock for any 30 consecutive business days shall average in excess of $24.00
during the period commencing June 1996 and ending November 1997. To the extent
any additional shares are issued, including the shares issued in the Offering,
all of the Minimum Pretax Income amounts referenced above will be increased
proportionately.

Any money, securities, rights or property distributed in respect of the
Escrow Shares, including any property distributed as dividends or pursuant to
any stock split, merger, recapitalization, dissolution or total or partial
liquidation of the Company, shall be held by the Company in escrow until
conversion of the Escrow Shares. If none of the foregoing earnings or market
price levels are attained, the Escrow Shares, as well as any dividends or other
distributions made with respect thereto, will be cancelled. The earnings and
market price levels set forth above were determined by negotiation between the
Company and the representative of the underwriter in the Company's initial
public offering and should not be construed to imply or predict any future
earnings by the Company or any increase in the market price of its securities.
There can be no assurance that such earnings and market price levels will be
attained or that any or all of the Escrow Shares will be converted into Class A
Common Stock. However, the conversion to Class A Common Stock of all or any
portion of the Escrow Shares may result in a charge to earnings to the extent
that such shares are held by management or employees. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Potential Future Charge to Income."

PREFERRED STOCK

The Company's authorized preferred stock consists of 20,000,000 shares, no
par value (the "Preferred Stock"), of which 11,150,000 shares have been
cancelled or already designated. The Board of Directors has the authority,
without further action by the shareholders, to issue from time to time up to
8,850,000 shares of Preferred Stock in one or more series and to fix the
dividend rights and terms, conversion rights, voting rights (whole, limited or
none), redemption rights and terms, liquidation preferences, sinking funds and
any other rights, preferences, privileges and restrictions applicable to each
such series of Preferred Stock. The purpose of authorizing the Board of
Directors to determine such rights and preferences is to eliminate delays
associated with a shareholder vote on specific issuances. The issuance of the
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting power of the holders of Class A Common Stock and, under
certain circumstances, could make it more difficult for a third party to gain
control of the Company. Such issuance of Preferred Stock could also adversely
affect the distributions on and liquidation preference of the Class A Common
Stock by creating more series of Preferred Stock with distribution or
liquidation preferences senior to the Class A Common Stock. The Company has no
present plan to issue any shares of Preferred Stock.

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REDEEMABLE WARRANTS

The Company has outstanding redeemable Class A Warrants and Class B Warrants
(collectively, the "Warrants") which are currently listed on the Nasdaq National
Market. These Warrants were or will be issued pursuant to Warrant Agreements
(the "Warrant Agreements") among the Company, the Underwriter and American Stock
Transfer and Trust Company as warrant agent, and are or will be evidenced by
warrant certificates in registered form. The exercise prices of the Warrants
were determined by negotiation between the Company and the Underwriter at the
time of the IPO and should not be construed to predict or imply that any price
increases will occur in any of the Company's securities.

The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the respective expiration dates (or earlier redemption dates),
accompanied by payment of the full exercise price (by certified or bank check
payable to the order of the Company) for the number of shares with respect to
which the Warrants are being exercised. Holders of the Warrants do not have any
voting or other rights of a shareholder of the Company. Upon notice to the
holders of the Warrants, the Company has the right to unilaterally reduce the
exercise price or extend the expiration date of the Warrants. The Warrants
provide for the adjustment of the exercise price and for a change in the number
of shares issuable upon exercise to protect the holders of the Warrants against
dilution in the event of a stock dividend, stock split, combination or
reclassification of the Class A Common Stock or upon issuance of additional
shares of Class A Common Stock at prices lower than the market price then in
effect other than issuances upon exercise of options granted to employees,
directors and consultants to the Company.

CLASS A WARRANTS

Each Class A Warrant entitles the registered holder to purchase one share of
Common Stock and one redeemable Class B Warrant at an exercise price of $6.50 at
any time prior to November 30, 1999. As of October 14, 1996, the Company has
outstanding 4,120,149 Class A Warrants. The Company has the right to redeem all
of the Class A Warrants at a price of $0.05 per Class A Warrant upon not less
than 30 days' prior written notice at any time after November 30, 1997, provided
that before any such redemption can take place, the last sale price of the
Company's Class A Common Stock in the over-the-counter market shall have
averaged in excess of $9.10 per share for 30 consecutive business days ending
within 15 days of the date of the notice of redemption. During the 30-day notice
period, a holder shall have the option to exercise his Class A Warrants. This
right of redemption shall not apply to the Class A Warrants that are components
of the IPO Unit Purchase Options.

CLASS B WARRANTS

Each Class B Warrant entitles the registered holder to purchase one share of
Common Stock at an exercise price of $8.00 per share at any time prior to
November 30, 1999. As of October 14, 1996, the Company had outstanding 3,127,049
Class B Warrants. The Company has a right to redeem all of the Class B Warrants
at a price of $.05 per Class B Warrant upon not less than 30 days' prior written
notice at any time after November 30, 1997, provided that before any such
redemption can take place, the last sale price of the Company's Class A Common
Stock in the over-the-counter market shall have averaged in excess of $11.20 per
share for 30 consecutive business days ending within 15 days prior to the date
of the notice of redemption. During the 30-day notice period, a holder shall
have the option to exercise his Class B Warrants. This right of redemption shall
not apply to the Class B Warrants that are components of the IPO Unit Purchase
Options or the Unit Purchase Option to be granted in connection with this
Offering.

IPO UNITS

The Company also has outstanding IPO Units which are currently listed on the
Nasdaq SmallCap Market. Each IPO Unit consists of (i) one share of Class A
Common Stock, (ii) one Class A Warrant and (iii) one Class B Warrant. The Class
A Common Stock, Class A Warrants and Class B Warrants were separately
transferable immediately upon issuance.

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IPO UNIT PURCHASE OPTIONS

In connection with the Company's IPO, the Company granted to the Underwriter
and three finders IPO Unit Purchase Options to purchase up to an aggregate of
240,000 units. These units issuable upon exercise of the IPO Unit Purchase
Options will be identical to the publicly traded IPO Units except that the Class
A Warrants and the Class B Warrants included in the IPO Unit Purchase Options
will not be subject to redemption by the Company, except if at the time the
Warrants are called for redemption, the IPO Unit Purchase Options have been
exercised and the underlying warrants are outstanding. The IPO Unit Purchase
Options are exercisable at any time prior to November 30, 1999 at an exercise
price of $7.00 per IPO Unit subject to adjustment in certain events to protect
against dilution. The IPO Unit Purchase Options cannot be transferred, sold,
assigned or hypothecated until November 30, 1997, except in the case of a
transfer to any officer of the underwriter for the IPO or a member of that
selling group.

LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS

The Company's Bylaws provide that the Company will indemnify its directors
and officers to the fullest extent permitted by California law. The Company is
also empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and certain others 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 indemnity agreements with each of its directors and
executive officers and certain key consultants.

In addition, the Company's Articles of Incorporation provides that, to the
fullest extent permitted by California law, the Company's directors will not be
liable for monetary damages for breach of the directors' fiduciary duty of care
to the Company or its shareholders. This provision in the Articles of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
nonmonetary relief would remain available under California law. Each director
will continue to be subject to liability for breach of the director's duty of
loyalty to the Company, for acts or omissions involving intentional misconduct
or knowing and culpable violations of law, for acts or omissions that involve
the absence of good faith on the part of the director, 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 Company or its
shareholders when the director was aware or should have been aware of a risk of
serious injury to the Company or its shareholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Company or its shareholders, for improper
transactions between the director and the Company, for improper distributions to
shareholders and loans to directors and officers or for acts or omissions by the
director as an officer. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.

There is no pending litigation or proceeding involving a director or officer
of the Company concerning which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or officer.

The Company believes the foregoing provisions are necessary to attract and
retain qualified persons as directors and officers.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.

TRANSFER AND WARRANT AGENT

The Company's transfer agent for the IPO Units, Class A Common Stock, the
Class A Warrants and the Class B Warrants is American Stock Transfer & Trust
Company, New York, New York.

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
(excluding outstanding options and warrants) an aggregate of 6,840,554 shares of
Class A Common Stock. Of these shares, all of the shares issued in the Offering
and 3,708,997 shares outstanding immediately prior to the Offering will be
freely transferable without restriction under the Securities Act. 1,041,557
shares of Class A Common Stock outstanding immediately prior to the Offering are
"restricted securities" (the "Restricted Shares") within the meaning of Rule 144
promulgated under the Securities Act and may not be sold in the absence of a
registration under the Securities Act unless an exemption from registration is
available, including an exemption contained in Rule 144.

In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who has beneficially owned
"restricted securities," as that term is defined in Rule 144, for at least two
years (including, in the case of a nonaffiliate holder, any period of ownership
of preceding nonaffiliate holders) is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Class A Common Stock of the Company, or (ii) the
average weekly trading volume in Class A Common Stock during the four calendar
weeks preceding such sale, provided that certain public information about the
Company, as required by Rule 144, is then available and the seller complies with
the manner of sale and notification requirements of the rule. A person who is
not an affiliate and has not been an affiliate within three months prior to the
sale and has, together with any previous owners who were not affiliates,
beneficially owned restricted securities for at least three years is entitled to
sell such shares under Rule 144(k) without regard to any of the volume
limitations described above. Approximately 861,932 of the Restricted Shares are
presently eligible for sale upon compliance with Rule 144(k).

As of October 14, 1996, 11,367,347 shares of Class A Common Stock were
issuable upon exercise in full of the outstanding Warrants and their underlying
securities, all of which have been registered under the Securities Act and will
be freely tradeable upon issuance. An additional 2,380,336 shares of Class A
Common Stock are issuable upon exercise of other stock options and warrants
outstanding as of October 14, 1996. Of these shares, 1,147,006 shares have been
registered under the Act (or carry registration rights) and 718,680 shares of
Class A Common Stock are issuable upon exercise of the remaining options and
warrants and may be resold pursuant to Rule 701 under the Securities Act. Rule
701 under the Securities Act provides an exemption from the registration
requirements of the Securities Act for offers and sales of securities issued
pursuant to certain compensatory benefit plans or written contracts of a company
not subject, at the time of issuance, to the reporting requirements of Section
13 or 15(d) of the Exchange Act. Securities issued pursuant to Rule 701 are
defined as restricted securities for purposes of Rule 144. However, 90 days
after the issuer becomes subject to the reporting provisions of the Exchange
Act, the Rule 144 resale restrictions, except for the broker's transaction
requirements, are inapplicable for nonaffiliates. Affiliates are subject to all
Rule 144 restrictions after this 90-day period, but without the Rule 144 holding
period requirement. The officers and directors of the Company (who hold an
aggregate of 161,352 shares of Class A Common Stock) have agreed not to sell or
otherwise transfer any shares of Class A Common Stock, or any securities
convertible into or exercisable for shares of Class A Common Stock, for at least
13 months following the effective date of the Registration Statement of which
this Prospectus forms a part without the consent of the Underwriter.

The Company is unable to predict the effect, if any, that future sales of
shares of Class A Common Stock, or the availability of shares for future sale
will have on the market price of the Class A Common Stock prevailing from time
to time. Sales of substantial amounts of Class A Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
the prevailing market prices of the Class A Common Stock. See "Principal
Shareholders," "Description of Securities" and "Underwriting."

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UNDERWRITING

D.H. Blair Investment Banking Corp., the Underwriter, has agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase the 11,000
Units offered hereby from the Company on a "firm commitment" basis, if any are
purchased. It is expected that Blair & Co. will distribute, as a selling group
member, substantially all of the Units offered hereby. It is also expected that
Blair & Co. will continue to make a market in the Company's securities following
the Offering. Blair & Co. is substantially owned by family members of J. Morton
Davis. Mr. Davis is the sole stockholder of the Underwriter.

The Underwriter has advised the Company that it proposes to offer the Units
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers who are members of the NASD at such prices
less concessions of not in excess of $34.00 per Unit, of which not more than
$17.00 per Unit may be reallowed to other dealers who are members of the NASD.
After commencement of the Offering, the public offering price, the concession
and reallowance may be changed by the Underwriter.

The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase from the Company at the
public offering price, less underwriting discounts, up to 1,650 additional Units
solely for the purpose of covering over-allotments, if any.

The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay the Underwriter a nonaccountable expense allowance of 3% of
the gross proceeds derived from the sale of the Units offered hereby, including
any Units purchased pursuant to the Over-Allotment Option.

All of the Company's current officers and directors, as well as certain
shareholders of the Company, have agreed not to sell, assign, transfer or
otherwise dispose of any of their shares of the Company's securities for a
period of 13 months following the consummation of the Offering without the prior
written consent of the Underwriter. See "Shares Eligible for Future Sale."

The Company has agreed, if requested by the Underwriter, to nominate two
designees of the Underwriter to the Company's Board of Directors for a period of
five years from the date of this Prospectus. Such designees may be a director,
officer, partner, employee or affiliate of the Underwriter. The Underwriter has
designated Mr. Donald Shapiro, a current director of the Company, pursuant to
this provision, but has not determined whether it will continue to exercise this
right in the future or whether it will nominate a second designee. Mr. Shapiro
is not affiliated with the Underwriter.

Until the fifth anniversary of the closing of the Offering, in the event
that the Underwriter originates a financing or a merger, acquisition or
transaction to which the Company is a party, the Underwriter will be entitled to
receive a finder's fee in consideration for the origination of such transaction.
The fee is based on a percentage of the consideration paid in the transaction,
ranging from 7% of the first $1,000,000 to 2.5% of any consideration in excess
of $9,000,000.

The Company has agreed not to solicit Warrant exercises other than through
the Underwriter, unless the Underwriter refuses or fails to make such
solicitation. Upon any exercise of the Class B Warrants after the first
anniversary of the date of this Prospectus, the Company will pay the Underwriter
a fee of 5% of the aggregate exercise price (the "Warrant Fee"), if (i) the
market price of the Company's Class A Common Stock on the date the Warrants are
exercised is greater than the then exercise price of the Warrants; (ii) the
exercise of the Warrants was solicited by a member of the NASD; (iii) the
warrant holder designates in writing that the exercise of the Warrant was
solicited by a member of the NASD; (iv) the Warrants are not held in a
discretionary account; (v) disclosure of compensation arrangements was made both
at the time of the offering and at the time of exercise of the Warrants; and
(vi) the solicitation of exercise of the Warrant was not in violation of Rule
10b-6 promulgated under the Exchange Act; provided, however, that to the extent
Warrants are exercised prior to the first anniversary of the date of this
Prospectus, the Underwriter shall only be entitled to

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receive the Warrant Fee with respect to the Warrants issued at the time of the
IPO. For purposes of determining which Warrants have been exercised, it will be
assumed that the first 6,605,000 Class B Warrants (which include the 3,845,000
Class B Warrants originally issuable upon exercise of the Class A Warrants)
exercised were those issued at the time of the IPO.

Rule 10b-6 may prohibit Blair & Co. from engaging in any market making
activities with regard to the Company's securities for the period from nine
business days (or such other applicable period as Rule 10b-6 may provide) prior
to any solicitation by the Underwriter of the exercise of Warrants until the
later of the termination of such solicitation activity or the termination (by
waiver or otherwise) of any right that the Underwriter may have to receive a fee
for the exercise of Warrants following such solicitation. As a result, Blair &
Co. may be unable to provide a market for the Company's securities during
certain periods while the Warrants are exercisable.

The Company has agreed to sell to the Underwriter and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 1,100 Units
(the "Option Units") substantially identical to the Units being offered hereby,
except that the Warrants included therein are subject to redemption by the
Company at any time after the Unit Purchase Option has been exercised and the
underlying warrants are outstanding. See "Description of Securities--Unit
Purchase Options." The Unit Purchase Option is exercisable during the three year
period commencing two years from the date of this Prospectus at an exercise
price of $1,200 per Unit (120% of the initial public offering price) subject to
adjustment in certain events to protect against dilution. After the expiration
date of the Warrants, the Unit Purchase Option will be exercisable only with
respect to the Class A Common Stock component of the Option Units. The Unit
Purchase Option is not transferable for a period of two years from the date of
this Prospectus, except to officers of the Underwriter or to members of the
selling group. Subject to certain procedural requirements and limitations
relating to underwritten offerings, the Company has agreed upon request to
register under the Securities Act securities issuable upon exercise of the
Underwriter's Unit Purchase Option on two separate occasions during the four
year period commencing one year from the date of this Prospectus. The initial
such registration is to be at the Company's expense and the second registration
is to be at the expense of the holders. The Unit Purchase Option includes a
provision permitting the holders to elect a cashless exercise. The Company has
also granted certain "piggyback" registration rights to holders of the Unit
Purchase Option.

The Company has agreed to pay $35,000 to a former underwriter of the
Offering as reimbursement for expenses incurred by such underwriter in
connection with the Offering.

The public offering price of the Units offered hereby and the exercise
prices and other terms of the Warrants have been determined by negotiation
between the Company and the Underwriter and are not necessarily related to the
Company's asset value, net worth, financial condition or any other established
criteria of value. Among the factors considered in determining such prices and
terms, in addition to prevailing market conditions, are the history of and the
prospects for the industry in which the Company competes, the present state of
the Company's development and its future prospects, an assessment of the
Company's management and the Company's capital structure.

The Underwriter has informed the Company that sales of the Units offered
hereby to discretionary accounts will not exceed 2% of the total number of Units
offered.

The Underwriter acted as placement agent for the Company's private placement
in August 1994 and received a 10% commission and 3% nonaccountable expense
allowance aggregating $201,500. The Underwriter also acted as the underwriter of
the Company's initial public offering in December 1994 and received an 8%
commission and 3% nonaccountable expense allowance, as well as the IPO Unit
Purchase Options, in connection with such offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co., a selling group member which will
distribute substantially all of the Units offered hereby. The investigation
appears to be broad in scope, involving numerous aspects of

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the Underwriter's and Blair & Co.'s compliance with the federal securities laws
and compliance with the federal securities laws by issuers whose securities were
underwritten by the Underwriter or Blair & Co., or in which the Underwriter or
Blair & Co. made over-the-counter markets, persons associated with the
Underwriter or Blair & Co., such issuers and other persons. The Company has been
advised by the Underwriter that the investigation has been ongoing since at
least 1989 and that it is cooperating with the investigation. The Underwriter
cannot predict whether this investigation will ever result in any type of formal
enforcement action against the Underwriter or Blair & Co., or, if so, whether
any such action might have an adverse effect on the Underwriter or the
securities offered hereby. The Company has been advised that Blair & Co. will
make a market in the securities following this offering. An unfavorable
resolution of the Commission's investigation could have the effect of limiting
such firm's ability to make a market in the Company's securities, which could
affect the liquidity or price of such securities.

PRICING THE OFFERING

The number of shares of Class A Common Stock and Class B Warrants included
in each Unit has been determined by the Underwriter based on the current market
price of the Class A Common Stock, but also reflecting the Underwriter's
determination of the number of the shares per Unit needed to successfully market
the Units in light of the size of the Offering relative to the previously
outstanding number of shares of Class A Common Stock.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Rutan & Tucker, LLP, Costa
Mesa, California. Certain statements in this Prospectus under the captions "Risk
Factors -- Dependence on Patents and Proprietary Technology" and "Business --
Patents," specifically the second sentence under the former caption and the
fifth sentence under the latter caption, which relate to United States patent
and proprietary rights have been passed upon by the Company's patent counsel,
Knobbe, Martens, Olson & Bear, LLP, Newport Beach, California. Certain other
legal matters in connection with the sale of Common Stock offered hereby will be
passed upon for the Underwriter by Bachner, Tally, Polevoy & Misher LLP, New
York, New York.

EXPERTS

The financial statements of the Company as of March 31, 1996 and for each of
the two fiscal years in the period ended March 31, 1996 included in this
Prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to the Company's ability to continue as a going
concern as described in Note 4 to the financial statements) of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.

AVAILABLE INFORMATION

The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, with respect to the Common Stock being
offered pursuant to this Prospectus. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information, reference is hereby made to the
Registration Statement and the exhibits and financial statements filed as a part
thereof. Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. All of these documents may be
inspected without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies may be obtained therefrom at
prescribed rates.

58
<PAGE>
The Company is subject to certain informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files periodic
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 or at the Regional Offices of the
Commission at 210 South Dearborn Street, Room 1204, Chicago, Illinois 60604;
5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648; and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, copies of such reports, proxy statements and other information
concerning the Company may also be inspected and copied at the library of the
Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006, upon which
the Common Stock of the Company is listed.

The Company intends to furnish its security holders with annual reports
containing audited financial statements and such interim unaudited reports as it
deems appropriate.

59
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Balance Sheet at March 31, 1996 and June 30, 1996 (unaudited).............................................. F-3
Statement of Operations for the Years Ended March 31, 1995 and 1996 and for the Three Months Ended June 30,
1995 and 1996 (unaudited)................................................................................. F-4
Statement of Shareholders' Equity for the Years Ended March 31, 1995 and 1996 and for the Three Months
Ended June 30, 1996 (unaudited)........................................................................... F-5
Statement of Cash Flows for the Years Ended March 31, 1995 and 1996 and for the Three Months Ended June 30,
1995 and 1996 (unaudited)................................................................................. F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Shareholders of
Premier Laser Systems, Inc.

In our opinion, the accompanying balance sheet and the related statements of
operations, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of Premier Laser Systems, Inc. at March 31,
1996, and the results of its operations and its cash flows for each of the two
years in the period ended March 31, 1996, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the
financial statements, the Company has suffered recurring losses from operations
which raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 4. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

PRICE WATERHOUSE LLP

Costa Mesa, California
May 17, 1996, except as to
Note 18, which is as
of June 25, 1996

F-2
<PAGE>
PREMIER LASER SYSTEMS, INC.

BALANCE SHEET

<TABLE>
<CAPTION>
MARCH 31,
1996
--------------- JUNE 30,
1996
---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 35,463 $ 135,881
Short-term investments (Note 6).............................................. 4,547,377 3,372,260
Accounts receivable, net of allowance for doubtful accounts of $154,677 and
$126,327.................................................................... 508,315 1,114,200
Inventories (Note 7)......................................................... 2,185,355 2,466,839
Prepaid expenses and other current assets.................................... 419,504 807,365
--------------- ---------------
Total current assets..................................................... 7,696,014 7,896,545
Property and equipment, net (Note 8)......................................... 493,942 476,510
Intangibles, net (Note 9).................................................... 7,353,462 7,211,072
Other assets (Note 6)........................................................ 131,150 86,150
--------------- ---------------
$ 15,674,568 $ 15,670,277
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 1,208,219 $ 2,313,391
Accrued liabilities (Note 10)................................................ 188,108 252,147
Notes payable to related party (Notes 11, 12 and 19)......................... 481,195 481,195
Notes payable other (Note 18)................................................ -- 400,000
--------------- ---------------
Total current liabilities................................................ 1,877,522 3,446,733
--------------- ---------------
Commitments and contingencies (Note 14)
Shareholders' equity (Notes 5 and 16):
Preferred stock -- 8,850,000 shares authorized, no shares issued and
outstanding
Common stock -- Class A -- no par value, 35,600,000 shares authorized;
4,702,808 and 4,748,758 shares issued and outstanding at March 31, 1996 and
June 30, 1996, respectively................................................. 16,317,376 16,565,250
Common stock -- Class E-1 -- no par value, 2,200,000 shares authorized;
1,256,818 shares issued and outstanding at March 31, 1996 and June 30,
1996........................................................................ 4,769,878 4,769,878
Common stock -- Class E-2 -- no par value, 2,200,000 shares authorized;
1,256,818 shares issued and outstanding at March 31, 1996 and June 30,
1996........................................................................ 4,769,878 4,769,878
Class A warrants............................................................. 2,321,057 2,295,328
Class B warrants............................................................. 376,774 453,304
Warrants to purchase Class A common stock.................................... 192,130 192,130
Unrealized holding gain on short-term investments............................ 3,666,367 2,491,250
Accumulated deficit.......................................................... (18,616,414) (19,313,474)
--------------- ---------------
Total shareholders' equity............................................... 13,797,046 12,223,544
--------------- ---------------
$ 15,674,568 $ 15,670,277
--------------- ---------------
--------------- ---------------
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE>
PREMIER LASER SYSTEMS, INC.

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------ -----------------------------
1995 1996 1995 1996
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 1,249,403 $ 1,704,390 $ 112,564 $ 1,254,082
Cost of sales...................................... 1,298,420 3,324,757 450,353 1,028,611
-------------- -------------- -------------- -------------
Gross profit (loss)................................ (49,017) (1,620,367) (337,789) 225,471
Selling and marketing expenses..................... 1,035,863 1,308,767 195,831 461,772
Research and development expenses.................. 1,035,705 1,213,471 255,959 126,779
General and administrative expenses................ 1,747,090 1,709,327 501,078 326,786
-------------- -------------- -------------- -------------
Loss from operations........................... (3,867,675) (5,851,932) (1,290,657) (689,866)

Interest income (expense), net..................... (322,540) 99,037 94,449 (7,194)
-------------- -------------- -------------- -------------
Loss before extraordinary items................ (4,190,215) (5,752,895) (1,196,208) (697,060)
Extraordinary gain from extinguishment of
indebtedness...................................... 381,730 --
-------------- -------------- -------------- -------------
Net loss....................................... $ (3,808,485) $ (5,752,895) $ (1,196,208) $ (697,060)
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Loss per share:
Net loss......................................... $ (1.26) $ (0.27) $ (0.15)
-------------- -------------- -------------
-------------- -------------- -------------
Weighted average number of shares outstanding.... 4,556,959 4,501,899 4,719,923
-------------- -------------- -------------
-------------- -------------- -------------
Pro forma loss per share (unaudited):
Loss before extraordinary items.................. $ (1.59)
Extraordinary gain from extinguishment of
indebtedness.................................... .15
--------------
Net loss......................................... $ (1.44)
--------------
--------------
Weighted average number of shares outstanding.... 2,584,722
--------------
--------------
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE>
PREMIER LASER SYSTEMS, INC.

STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK COMMON STOCK
CLASS A CLASS E-1 CLASS E-2
------------------------ ----------------------- ----------------------- CLASS A
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS
---------- ------------ ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994................. 1,432,636 $ 5,372,022 1,268,488 $ 4,756,528 1,268,488 $ 4,756,528
Exercise of common stock options...... 4,936 2,848 3,011 1,081 3,011 1,081
Common stock issued in lieu of cash
payments............................. 1,635 13,046 1,447 11,552 1,447 11,552
Common stock forfeited due to
cessation of employment.............. (7,798) (20,124) (6,905) (17,818) (6,905) (17,818)
Warrants issued in connection with
private placement units..............
Repurchase of common stock............ (17,681) (6,910) (15,752) (6,119) (15,752) (6,119)
Initial public offering of units, net
proceeds............................. 2,400,000 7,633,504 $ 1,622,222
Conversion of warrants................ 186,000
Conversions of certain related party
notes and associated accrued
interest............................. 7,072 28,448 6,260 24,596 6,260 24,596
Conversion of debentures and
associated accrued interest.......... 321,099 1,284,397 272,934
Exercise of over-allotment option..... 360,000 1,128,947 239,901
Net loss..............................
---------- ------------ ---------- ----------- ---------- ----------- -----------
Balance, March 31, 1995............... 4,501,899 15,436,178 1,256,549 4,769,820 1,256,549 4,769,820 2,321,057
Common stock issued for investment in
Mattan (Note 6)...................... 200,000 881,010
Exercise of stock options............. 909 188 269 58 269 58
Unrealized holding gain on short-term
investments..........................
Net loss..............................
---------- ------------ ---------- ----------- ---------- ----------- -----------
Balance, March 31, 1996................. 4,702,808 16,317,376 1,256,818 4,769,878 1,256,818 4,769,878 2,321,057
Unaudited information:
Exercise of Class A Warrants.......... 45,950 247,874 (25,729)
Change in unrealized holding gain.....
Net loss..............................
---------- ------------ ---------- ----------- ---------- ----------- -----------
Balance, June 30, 1996 (unaudited)...... 4,748,758 $ 16,565,250 1,256,818 $ 4,769,878 1,256,818 $ 4,769,878 $ 2,295,328
---------- ------------ ---------- ----------- ---------- ----------- -----------
---------- ------------ ---------- ----------- ---------- ----------- -----------

COMMON UNREALIZED
CLASS B STOCK HOLDING ACCUMULATED
WARRANTS WARRANTS GAIN DEFICIT TOTAL
--------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1994................. $ 192,130 $ (9,055,034) $ 6,022,174
Exercise of common stock options...... 5,010
Common stock issued in lieu of cash
payments............................. 36,150
Common stock forfeited due to
cessation of employment.............. (55,760)
Warrants issued in connection with
private placement units.............. 186,000 186,000
Repurchase of common stock............ (19,148)
Initial public offering of units, net
proceeds............................. $ 286,274 9,542,000
Conversion of warrants................ (186,000)
Conversions of certain related party
notes and associated accrued
interest............................. 77,640
Conversion of debentures and
associated accrued interest.......... 48,165 1,605,496
Exercise of over-allotment option..... 42,335 1,411,183
Net loss.............................. (3,808,485) (3,808,485)
--------- ---------- ------------ ------------- ------------
Balance, March 31, 1995............... 376,774 192,130 (12,863,519) 15,002,260
Common stock issued for investment in
Mattan (Note 6)...................... 881,010
Exercise of stock options............. 304
Unrealized holding gain on short-term
investments.......................... $ 3,666,367 3,666,367
Net loss.............................. (5,752,895) (5,752,895)
--------- ---------- ------------ ------------- ------------
Balance, March 31, 1996................. 376,774 192,130 3,666,367 (18,616,414) 13,797,046
Unaudited information:
Exercise of Class A Warrants.......... 76,530 298,675
Change in unrealized holding gain..... (1,175,117) (1,175,117)
Net loss.............................. (697,060) (697,060)
--------- ---------- ------------ ------------- ------------
Balance, June 30, 1996 (unaudited)...... $ 453,304 $ 192,130 $ 2,491,250 $ (19,313,474) $ 12,223,544
--------- ---------- ------------ ------------- ------------
--------- ---------- ------------ ------------- ------------
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE>
PREMIER LASER SYSTEMS, INC.

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------ -----------------------
1995 1996 1995 1996
----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $(3,808,485) $(5,752,895) $(1,196,208) $ (697,060)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 812,196 814,401 201,362 208,892
Extraordinary gain from extinguishment of debt............. (381,730)
Amortization of debt discount.............................. 119,230
Exchange of product for clinical studies................... (158,250) (28,468)
Amortization of clinical program expense................... 227,000 31,367 7,842 94,000
Issuance of stock options and stock in lieu of consulting
payments.................................................. 36,150
Common stock forfeited upon cessation of employment........ (55,760)
Provision for doubtful accounts receivable................. (151,751) (9,625) (28,350)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable............... 142,591 (92,716) 32,947 (577,535)
Increase in inventories.................................. (21,880) (14,665) (403,185) (281,484)
Decrease (increase) in prepaid expenses and other current
assets.................................................. (320,569) 22,468 29,497 (453,393)
(Increase) decrease in other assets...................... 230,793 (6,150) 45,000
Increase (decrease) in accounts payable.................. (411,197) 594,654 (297,102) 1,104,649
(Decrease) increase in accrued liabilities............... 28,907 (598,847) (95,678) 64,039
----------- ----------- ----------- ----------
Net cash used in operating activities.................. (3,402,754) (5,312,384) (1,730,150) (549,710)
----------- ----------- ----------- ----------
Cash flows from investing activities:
Purchases of property and equipment.......................... (45,785) (219,723) (3,232) (17,666)
Note receivable pursuant to strategic alliance agreement
(Note 6).................................................... (125,000)
Patent expenditures.......................................... (204,838) (195,971) (54,348) (31,404)
----------- ----------- ----------- ----------
Net cash used in investing activities...................... (250,623) (540,694) (57,580) (49,070)
----------- ----------- ----------- ----------
Cash flows from financing activities:
Proceeds from exercise of Class A Warrants................... 299,198
Proceeds from exercise of common stock options............... 304
Proceeds from issuance of common stock prior to initial
public offering............................................. 5,010
Proceeds from issuance of common stock warrants.............. 186,000
Proceeds from initial public offering and exercise of over-
allotment option............................................ 10,953,183
Cash paid for repurchase of common stock..................... (19,148)
Proceeds from issuance of notes payable...................... 1,519,000 400,000
Cash paid for repurchase of mandatorily redeemable
warrants.................................................... (285,000)
Principal payments on notes payable.......................... (3,126,195)
----------- ----------- ----------- ----------
Net cash provided by financing activities.................. 9,232,850 304 699,198
----------- ----------- ----------- ----------
Net (decrease) increase in cash................................ 5,579,473 (5,852,774) (1,787,730) 100,418
----------- ----------- ----------- ----------
Cash and cash equivalents, beginning of period................. 308,764 5,888,237 5,888,237 35,463
----------- ----------- ----------- ----------
Cash and cash equivalents, end of period....................... $ 5,888,237 $ 35,463 $ 4,100,507 $ 135,881
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

(INFORMATION AS OF JUNE 30, 1996 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

1. ORGANIZATION AND NATURE OF OPERATIONS
Premier Laser Systems, Inc. (the Company) was incorporated in July 1991 and
commenced operations in August 1991 after acquiring substantially all of the
assets and certain liabilities of Pfizer Laser Systems (Pfizer), a division of
Pfizer Hospital Products Group, Inc. The Company designs, develops, manufactures
and markets several lines of lasers for surgical and other medical purposes,
laser waveguides and fiber optic devices, disposables and associated accessory
products for the medical market.

The financial statements as of March 31, 1996 and for each of the two years
in the period ended March 31, 1996 give effect to the Company's recapitalization
and reverse stock splits discussed in Note 16.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

The Company recognizes revenue upon shipment of product to customers, and
when no significant contractual obligations remain outstanding.

CASH EQUIVALENTS

Cash equivalents represent short-term, highly liquid investments that have
original maturities of three months or less and are readily convertible to cash.
Such investments consist primarily of U.S. Treasury Notes and commercial paper.
Cost of such investments is equal to the related fair value at March 31, 1996.

SHORT-TERM INVESTMENTS

In fiscal 1995, the Company adopted SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS 115, the Company's
investments are classified as "available-for-sale" securities and are reported
at fair market value. Any unrealized holding gains or losses are reported as a
separate component of stockholders' equity. Realized gains and losses are
reported on the specific identification method and are reported in the statement
of operations. The Company's marketable securities portfolio at March 31, 1996
consists of its investments in the common stock of Mattan Corporation (see Note
6).

INVENTORIES

Inventories are stated at the lower of cost or market and include material,
labor, and related manufacturing overhead. The Company determines cost using the
first-in, first-out (FIFO) method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Expenditures for replacements and
improvements are capitalized and expenditures for repairs, maintenance and
routing replacements are charged to operating expense as incurred. When assets
are sold or otherwise disposed of, the cost and related accumulated depreciation
are eliminated from the accounts and any resulting gain or loss is included in
operations.

Depreciation of furniture, machinery and equipment is calculated on a
straight-line basis over the estimated useful lives of the assets ranging from
three to eight years.

INTANGIBLES

Intangible assets consists primarily of patents, technology rights and
license agreements. The costs assigned to acquired intangible assets, based in
part upon independent appraisals, are being

F-7
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JUNE 30, 1996 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortized on a straight-line basis over the estimated useful lives of the assets
ranging from 2 to 15 years. Periodically, the Company evaluates the
recoverability of intangibles based on estimated undiscounted future cash flows
from operating activities compared with the carrying values of the intangibles.

DEFERRED OFFERING COSTS

Costs incurred directly related to the Company's proposed secondary public
offering totalling $444,910 at June 30, 1996 have been capitalized and included
in other current assets. Upon successful completion of this offering, these
costs will be offset against the proceeds received and charged to shareholders'
equity.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred. A substantial
portion of the research and development expense is related to developing new
products, improving existing products or processes, and clinical research
programs.

The Company enters into agreements with certain doctors to exchange a
portion of a product's sales price for completion of certain portions of
clinical studies necessary for obtaining product approval by the U.S. Food and
Drug Administration. Typically, the amounts consist of a portion of the product
sales price which is equal to the fair value of the services to be rendered by
the doctor. Pursuant to the agreements, in the event the doctor is unable to
complete the agreed upon clinical study, the doctor is required to remit cash
payment for the entire amount. The amounts are capitalized as prepaid research
and development expense and amortized upon completion of certain milestones of
the clinical study. These studies are generally completed within one year.
Research and development expenses included in prepaid expenses totaled $204,000
at March 31, 1996.

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), ACCOUNTING FOR INCOME TAXES.
SFAS 109 requires the liability method for accounting for income taxes. This
method mandates the recognition of deferred tax liabilities and assets for
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities.

NET LOSS PER SHARE

Net loss per share was computed based on the weighted average number of the
Company's common shares outstanding during fiscal 1996 and excludes all shares
of Class E-1 and Class E-2 Common Stock, discussed in Note 16, outstanding, or
subject to option, because all such shares of stock are subject to escrow and
the conditions for the release of shares from escrow have not been satisfied.
Common stock equivalents were not considered in the net loss per share
calculation because the effect on the net loss would be antidilutive.

PRO FORMA NET LOSS PER SHARE (UNAUDITED)

Net loss per common share was computed based on the weighted average number
of the Company's common shares outstanding during the fiscal year ended March
31, 1995 after giving retroactive adjustment for the recapitalization discussed
in Note 16 and the conversion of the Company's debentures into units (as defined
in Note 5) which occurred upon completion of the Company's initial public
offering (see Note 5). The effect on net loss per common share of the conversion
of the Company's debentures was to reduce historical net loss by $67,995 and to
increase weighted average

F-8
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JUNE 30, 1996 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shares outstanding by 321,099 shares for the fiscal year ended March 31, 1995.
Class E-1 and E-2 common stock shares, discussed in Note 16, were excluded from
the net loss per share calculation because the conditions for release of shares
from escrow have not been satisfied. Other common stock equivalents were not
considered in the net loss per share calculation because the effect on the net
loss per share would be antidilutive. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, all stock options and warrants
granted and common shares issued within one year of the Company's initial public
offering and not in escrow have been included as outstanding for the six months
ended September 30, 1994 (the date of the most recent financial statements
included in the Company's initial public offering prospectus) using the treasury
stock method.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), effective for years beginning after December 15, 1995, which establishes
a fair value-based method of accounting for stock-based compensation plans. The
statement allows companies to continue to use the intrinsic value-based
approach, supplemented by footnote disclosure of the pro forma net income and
earnings per share of the fair value-based approach. The Company intends to
follow this method allowed by SFAS 123.

USE OF ESTIMATES BY MANAGEMENT

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Significant estimates and assumptions include those made surrounding
inventory valuation and the realizability of certain intangible assets. The
Company's inventory and intangibles largely relate to technologies which have
yet to gain wide spread market acceptance. Management believes no loss will be
incurred on the disposition of its inventory and that the remaining economic
life of the Company's tangible assets is reasonable. If wide spread market
acceptance of the Company's products is not achieved, the carrying amount of
inventory and intangible assets could be materially reduced.

INTERIM RESULTS (UNAUDITED)

The accompanying balance sheet at June 30, 1996, and the statements of
operations and cash flows for the three month periods ended June 30, 1995 and
1996, and the statement of shareholders' equity for the three month period ended
June 30, 1996 are unaudited. In the opinion of management, these statements have
been prepared on the same basis as the audited financial statements and include
all adjustments, consisting of only normal recurring adjustments, necessary for
the fair statement of results of the interim periods. The data disclosed in
these notes to the financial statements for those periods are also unaudited.

F-9
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JUNE 30, 1996 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

3. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flows information:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1995 1996
----------- ---------
<S> <C> <C>
Cash paid for:
Interest................................................. $ 550,962 $ 52,129
Income taxes............................................. 800 800
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES

In fiscal 1996, the Company issued 200,000 shares of Class A Common Stock in
connection with the acquisition of 1,150,000 shares of Mattan Corporation's
common stock. The value of the Mattan Corporation common stock shares was
$881,010 on the date of the transaction (see Note 6).

Concurrent with the completion of the Company's initial public offering,
certain notes payable to shareholders totaling $66,500 and convertible
debentures totaling $1,500,000, plus related accrued interest, were converted
into 7,072 shares of Class A Common Stock and 6,260 shares of each Class E-1 and
E-2 Common Stock, and 321,099 Units, respectively.

4. BASIS OF PRESENTATION
The Company has suffered recurring losses from operations and may continue
to incur losses for the foreseeable future due to the significant costs
anticipated to be incurred in connection with manufacturing, marketing and
distributing its laser products. In addition, the Company intends to conduct
continuing research and development activities, including regulatory submittals
and clinical trials to develop additional applications for its laser technology.
The Company operates in a highly competitive environment and is subject to all
of the risks inherent in a new business enterprise. The Company is presently
attempting to borrow funds and/or complete a public offering of its common stock
to provide working capital for operations in the near term. The outcome of such
efforts to raise working capital cannot be assured. The ultimate timeframe in
which a sufficient level of product or market acceptance can be achieved is
uncertain. As such, there is substantial doubt about the Company's ability to
continue as a going concern.

The Company's financial statements have been prepared on the basis of
accounting principles applicable to a going concern. Accordingly, they do not
purport to give effect to adjustments, if any, that may be necessary should the
Company be required to realize its assets and liquidate its liabilities,
contingent liabilities and commitments in other than the normal course of
business at amounts different from those disclosed in the financial statements.

5. INITIAL PUBLIC OFFERING
On December 7, 1994, the Company completed an initial public offering
consisting of 2,400,000 Units of the Company's securities, each unit consisting
of one share of Class A Common Stock, one redeemable Class A Warrant and one
redeemable Class B Warrant (the "Units"). The Company realized net proceeds of
$9,542,000 from this offering. Each Class A Warrant consists of the right to
purchase one share of Class A Common Stock and one Class B Warrant at any time
through the fifth anniversary date of the initial public offering at an exercise
price of $6.50. Each Class B Warrant consists of the right to purchase one share
of Class A Common Stock from the date of issuance through the fifth anniversary
date of the initial public offering's effective date at an exercise price of
$8.00.

F-10
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JUNE 30, 1996 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

5. INITIAL PUBLIC OFFERING (CONTINUED)
On January 12, 1995, the underwriter in the initial public offering
exercised its over-allotment option to purchase 360,000 Units at the initial
public offering price, resulting in net proceeds of $1,411,183 to the Company.

6. STRATEGIC ALLIANCES
In December 1995, the Company entered into a strategic marketing alliance
with Mattan Corporation (Mattan), a Canadian corporation whose stock is publicly
traded on the Alberta Stock Exchange. The purchasing agreement (the Agreement)
stipulates that the Company will supply all laser equipment and associated
disposables for all laser surgery centers to be designed and opened by Mattan in
Canada and the United States. It is anticipated that these surgery centers will
be operated under the name of Medical Laser Institute of America. In connection
with this alliance, the Company also entered into a share exchange agreement
pursuant to which the Company issued 200,000 shares of the Company's Class A
Common Stock, to certain parties affiliated with Mattan, who purchased 1,150,000
shares of Mattan's common stock, representing approximately 12% of Mattan's
common stock, for approximately $881,010 on the Company's behalf. Prior to March
31, 1996, the Mattan affiliates sold the 200,000 shares of the Company's Class A
Common Stock and released the shares of the Mattan common stock to the Company.
The Company accounts for this investment as an available-for-sale security
pursuant to SFAS 115 (See Note 2). At March 31, 1996, the fair value of this
investment totaled approximately $4,547,377 and the related unrealized holding
gain totaled approximately $3,666,367.

In October 1995, the Company entered into a strategic business alliance with
International Biolaser Corporation (IBC). This agreement specifies that the
Company will manufacture IBC's CO(2) and argon lasers and that such products
will be jointly marketed by the two companies. Pursuant to the agreement, the
Company advanced $125,000 to IBC in exchange for a convertible note payable due
in October 1997, bearing interest at 10% per annum and secured by substantially
all of IBC's intangible assets. This note payable is convertible, at the
Company's sole option, into an 80% ownership interest in IBC only after IBC has
repaid certain pre-existing indebtedness. See Note 19 for further discussion
regarding amendments to the Company's agreement with IBC.

7. INVENTORIES
Inventories consist of the following:

<TABLE>
<CAPTION>
MARCH 31, 1996 JUNE 30, 1996
-------------- --------------
<S> <C> <C>
Raw materials........................................... $ 938,560 $ 940,100
Work-in-progress........................................ 276,998 211,099
Finished goods.......................................... 969,797 1,315,640
-------------- --------------
$ 2,185,355 $ 2,466,839
-------------- --------------
-------------- --------------
</TABLE>

F-11
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JUNE 30, 1996 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:

<TABLE>
<CAPTION>
MARCH 31, 1996 JUNE 30, 1996
-------------- --------------
<S> <C> <C>
Machinery, equipment, molds and tooling................. $ 1,032,188 $ 1,049,854
Furniture, fixtures and office equipment................ 433,286 433,286
-------------- --------------
1,465,474 1,483,140
Less: accumulated depreciation........................ 971,532 1,006,630
-------------- --------------
$ 493,942 $ 476,510
-------------- --------------
-------------- --------------
</TABLE>

9. INTANGIBLES
Intangibles consist of the following:

<TABLE>
<CAPTION>
MARCH 31, 1996 JUNE 30, 1996
-------------- --------------

<S> <C> <C>
Patents and technology rights........................... $ 9,413,088 $ 9,444,492
License agreements...................................... 255,000 255,000
Other................................................... 201,000 201,000
-------------- --------------
9,869,088 9,900,492
Less: accumulated amortization.......................... 2,515,626 2,689,420
-------------- --------------
$ 7,353,462 $ 7,211,072
-------------- --------------
-------------- --------------
</TABLE>

10. ACCRUED LIABILITIES
Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
MARCH 31, 1996 JUNE 30, 1996
-------------- --------------
<S> <C> <C>
Accrued payroll, vacation and related taxes............. $ 96,132 $ 92,358
Accrued other........................................... 91,976 159,789
-------------- --------------
$ 188,108 $ 252,147
-------------- --------------
-------------- --------------
</TABLE>

11. RELATED PARTY TRANSACTIONS
As discussed in Note 1, the Company commenced operations after acquiring
substantially all of the assets and certain liabilities of Pfizer in August
1991. At March 31, 1996, notes payable to Pfizer totaled $481,195 (see Note 12).

Consulting fees aggregating $12,000 and $26,000 for the fiscal years ended
March 31, 1996 and 1995, respectively, were paid to a consultant of the Company,
directly related to an officer of the Company.

12. NOTES PAYABLE TO RELATED PARTY AND EXTRAORDINARY GAIN
Prior to the completion of the initial public offering described in Note 5,
the Company's notes payable to Pfizer amounted to $2,517,390. Pursuant to an
agreement between the Company and Pfizer, the Company paid $1,386,195 of the
notes payable to Pfizer immediately subsequent to the closing of the initial
public offering and Pfizer forgave $650,000 of the total indebtedness. The
remaining balance of $481,195, bearing interest at 10% per annum at March 31,
1996, and related accrued interest are payable in quarterly installments
commencing July 8, 1996 with the first principal payment totaling $240,598, plus
accrued interest, and the remaining two quarterly principal payments totaling
$120,299, plus accrued interest. If the Company completes a private or public

F-12
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JUNE 30, 1996 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

12. NOTES PAYABLE TO RELATED PARTY AND EXTRAORDINARY GAIN (CONTINUED)
equity offering which raises net proceeds of at least $3 million, the note
payable balance outstanding at the time of that offering becomes immediately due
and payable. The note payable to Pfizer is secured by certain of the tangible
and intangible assets of the Company. See further discussion concerning this
note payable under Note 19.

In June 1994, notes payable to third parties of $1,500,000 were converted
into convertible debentures. These debentures and related accrued interest were
converted into 321,099 Units concurrent with the closing of the initial public
offering. Also concurrent with the close of the offering, notes payable to
shareholders totaling $66,500 plus related accrued interest were converted into
7,072 shares of Class A Common Stock and 6,260 shares of each Class E-1 and E-2
Common Stock.

In August 1994, the Company completed a private placement of debt units,
whereby $1,550,000 of notes payable bearing interest at 10% per annum (the
"Bridge Notes") and warrants to purchase 1,085,000 shares of Class A common
stock were issued. In connection with this private placement, the Company
incurred placement costs of $201,500 and issued the notes at a discount totaling
$186,000. These notes payable were also paid in full in December 1994.

In connection with the debt forgiven by Pfizer and the extinguishment of the
bridge notes, the Company recognized a net extraordinary gain on extinguishment
of debt totaling $381,730.

13. GRANTS
In September, 1995, the Company obtained a Small Business Innovative
Research Grant totaling approximately $750,000 for the study of laser
emulsification. Pursuant to the terms of the grant, the Company is eligible to
receive reimbursement for research and development costs incurred in connection
with the laser emulsification study up to $750,000 upon the achievement of
certain deliverables, as defined. During fiscal 1996, the Company received
approximately $250,000 under the grant. The amounts received under the grant
were offset against research and development costs incurred in the study.

14. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

The Company leases its facilities and certain equipment under noncancellable
operating leases. Total rental expense for operating leases was $348,059 and
$387,055 for the fiscal years ended March 31, 1996 and 1995, respectively. At
March 31, 1996, future minimum lease payments under noncancellable operating
leases are as follows:

<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
- -----------------------------------------------------------
<S> <C>
1997................................................... $ 241,536
1998................................................... 244,634
1999................................................... 247,811
2000................................................... 252,448
2001................................................... 250,488
-------------
$ 1,236,917
-------------
-------------
</TABLE>

Pursuant to the Company's facility lease, effective January 1997, the
Company becomes guarantor of a lease agreement between the Company's lessor and
a third party lessee. The guaranteed future minimum lease payments relating to
the third party are $108,456, $111,624, and $85,500 for the years ended March
31, 1997, 1998 and 1999, respectively.

F-13
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JUNE 30, 1996 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company entered into employment agreements with three members of its
executive management team. These agreements provide for two to four months of
severance benefits upon termination of employment. Based upon salary levels as
of March 31, 1996, such severance benefits range from approximately $15,000 to
$33,000 for each of the above members of management.

CONTINGENCIES

The Company entered into an agreement with Infrared Fiber Systems, Inc.
(IFS), as a supplier of certain fiberoptics that expires in the fiscal year
ending March 31, 2002 and requires the supplier to sell exclusively to the
Company fiberoptics for medical and dental applications as long as the Company
purchases defined minimum amounts.

In March 1994, the Company initiated litigation against IFS. The Company's
complaint alleges that IFS and two of its officers misrepresented IFS' ability
to supply optical fibers, and that IFS breached its supply agreement and certain
warranties. In April 1994, IFS filed a cross-complaint alleging breach of
contract and intentional interference with prospective economic advantage,
seeking declaratory relief that the contract has been terminated and that IFS is
free to market its fibers to others. In July 1994, Coherent, Inc., a major
shareholder of IFS and a manufacturer of medical lasers which employ IFS optical
fibers, joined the lawsuit for the express purpose of defending their rights to
the IFS optical fibers. In May 1995, the Company instituted litigation
concerning this dispute in the Orange County, California Superior Court against
Coherent, Westinghouse Electric Corporation ("Westinghouse") and an individual
employee of Westinghouse who was an officer of IFS from 1986 to 1993, when the
events involved in the federal action against IFS took place and while
Westinghouse owned a substantial minority interest in IFS. The complaint charges
that Coherent conspired with IFS in the wrongful conduct which is the subject of
the federal lawsuit and interfered with the Company's contracts and relations
with IFS and with prospective contracts and advantageous economic relations with
third parties. The complaint asserts that Westinghouse is liable for its
employee's wrongful acts as an IFS executive while acting within the scope of
his employment at Westinghouse. The lawsuit seeks injunctive relief and
compensatory damages. In October 1995 the federal action was stayed by order of
the court in favor of the California state court action, in which the pleadings
have been amended to include all claims asserted by the Company in the federal
action. No trial date has been set. The Company believes that the likely
liability of the Company, if any, arising from this litigation would not have a
materially adverse impact upon the Company.

The Company is involved in various disputes and other lawsuits from time to
time arising from its normal operations. The litigation process is inherently
uncertain and it is possible that the resolution of the IFS litigation, disputes
and other lawsuits may adversely affect the Company. It is the opinion of
management, that the outcome of such matters will not have a material adverse
impact on the Company's financial position, results of operations, or cash
flows.

15. INCOME TAXES
The Company incurred losses totaling $5,752,895 and $3,808,485 for fiscal
years ended March 31, 1996 and 1995, respectively. As a result, no provision for
income taxes has been charged to continuing operations during these periods.

F-14
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JUNE 30, 1996 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

15. INCOME TAXES (CONTINUED)
Deferred tax assets at March 31, 1996 are comprised as follows:

<TABLE>
<S> <C>
Accounts receivable reserves........................... $ 62,084
Research and development expenditures capitalized for
tax purposes.......................................... 410,247
Research and development federal tax credits........... 187,436
Depreciation of property and equipment................. 40,289
Net operating loss carryforwards....................... 6,033,150
Other.................................................. 852,876
-----------
Gross deferred tax assets.............................. 7,586,082
Deferred tax asset valuation allowance................. (7,586,082)
-----------
$ --
-----------
-----------
</TABLE>

The net change in the valuation allowance for deferred tax assets was an
increase of approximately $2,634,142 from the balance at March 31, 1995. The
change primarily relates to additional net operating loss carryforwards
generated as well as changes in other deferred assets in fiscal 1996, which were
fully reserved for at March 31, 1996.

At March 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes totaling approximately $16,319,249 which begin to
expire in fiscal 2007. Operating loss carryforwards for state income tax
purposes totaling approximately $7,895,167 at March 31, 1996 begin to expire in
fiscal 1998. Pursuant to provisions in the Tax Reform Act of 1986, the net
operating loss carryforwards and research and development credits available for
use in any given year may be limited as a result of the significant changes in
stock ownership attributable to the initial public offering.

16. SHAREHOLDERS' EQUITY

COMMON STOCK AND RECAPITALIZATION

On June 11, 1994, the Company effected a recapitalization pursuant to an
Amendment of its Articles of Incorporation. In this recapitalization: (i) the
Company authorized for issuance three new classes of Common Stock, designated as
Class A Common Stock, Class E-1 Common Stock and Class E-2 Common Stock, of
which 35,600,000 shares of Class A Common Stock were authorized, 2,200,000
shares of Class E-1 Common Stock were authorized and 2,200,000 shares of Class
E-2 Common Stock were authorized; (ii) the Company authorized for issuance a new
class of Preferred Stock (having rights, preferences and privileges to be
determined in the future) of which 8,850,000 shares were authorized for
issuance; (iii) the Common Stock outstanding immediately prior to the
recapitalization was reclassified as Class A Common Stock; and (iv) each share
of Common Stock outstanding immediately prior to the recapitalization was
converted, through a reverse stock split, into 0.1292 shares of Class A Common
Stock.

Following the above Amendment of the Articles of Incorporation, the Company
declared a stock split effected as a stock dividend to the holders of its Common
Stock, providing for the issuance of approximately 0.1144 shares of Class E-1
Common Stock and 0.1144 shares of Class E-2 Common Stock for each share of
Common Stock held immediately prior to the recapitalization.

As a result of this recapitalization and stock split, each share of the
Company's outstanding Series A Preferred Stock and Series B Preferred Stock was
converted into 0.1292 shares of Class A Common Stock, 0.1144 shares of Class E-1
Common Stock and 0.1144 shares of Class E-2 Common

F-15
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JUNE 30, 1996 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

16. SHAREHOLDERS' EQUITY (CONTINUED)
Stock. Conversion of Series A and Series B Preferred Stock into Class A Common
Stock, Class E-1 Common Stock and Class E-2 Common Stock was effected upon the
closing of the Company's initial public offering.

On October 20, 1994, the Company voted to effect a 7:1 reverse stock split
pursuant to an amendment of its Articles of Incorporation. As a result thereof,
the shares of Series A Common Stock, E-1 Common Stock, and E-2 Common Stock,
discussed above, were reduced in number by a factor of 0.7.

STOCK OPTION PLANS AND WARRANTS

The Company has adopted several stock option plans that authorize the
granting of options to employees, officers and/or consultants to purchase shares
of the Company's Class A Common Stock. The stock option plans are administered
by the Board of Directors or a committee appointed by the Board of Directors,
which determines the terms of the options, including the exercise price, the
number of shares subject to option and the exercisability of the option. The
options are generally granted at the fair market value of the shares underlying
the options at the date of the grant and expire within ten years of the grant
date.

In addition to options granted pursuant to the stock option plans, the
Company has issued to certain Board of Directors members, consultants and former
notes payable holders warrants to purchase shares of the Company's Class A
Common Stock.

A summary of the activity related to stock options and warrants for the
fiscal years ended March 31, 1995 and 1996 is as follows:

<TABLE>
<CAPTION>
WARRANT/OPTION
PRICE PER
SHARES SHARE
----------- --------------
<S> <C> <C>
Outstanding at March 31, 1994......................... 228,590 $ 1.00-17.69
Granted............................................... 1,733,650 5.00- 6.50
Exercised............................................. (1,535) 1.00- 1.77
Cancelled............................................. (50,872) 8.85
----------- --------------
Outstanding and exercisable at March 31, 1995......... 1,909,833 1.00-17.69
Granted............................................... 706,305 4.63- 5.63
Exercised............................................. (909) 1.00
Cancelled............................................. (31,236) 1.00-11.06
----------- --------------
Outstanding at March 31, 1996......................... 2,583,993 $ 1.00-17.69
----------- --------------
----------- --------------
</TABLE>

Warrants to purchase 89,357 shares of the Company's common stock issued in
connection with the acquisition of certain patents and technology rights during
fiscal 1994 will expire by December 31, 1998 and the warrants to purchase 9,044
shares of common stock issued to a related party will expire by March 31, 1997.

Effective December 30, 1993, the Company issued warrants to purchase 50,872
shares of common stock, under the 1993 Limited Warrant Plan, with an exercise
price of $8.85 per share for services rendered by consultants in connection with
the acquisition of technology rights. In January 1995, the warrant holders
exercised their right to receive a cash payment of $285,000, an amount equal to
the liability owed to the consultants on the date of issuance in exchange for
and cancellation of the warrants.

F-16
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JUNE 30, 1996 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

16. SHAREHOLDERS' EQUITY (CONTINUED)
In connection with the initial public offering in December, 1994 and
exercise of the underwriter's over-allotment option, the Company issued
2,760,000 of each of Class A Warrants and Class B Warrants. Both the Class A and
Class B Warrants will expire in November 1999.

The Company has the right, commencing three years from the November 30,
1994, the effective date of the initial public offering, to redeem the Class A
and Class B Warrants at a price of $.05 per warrant subject to certain
conditions regarding the bid price of the Class A Common Stock.

CLASS E-1 AND CLASS E-2 COMMON STOCK

The Company's Class E-1 Common Stock and Class E-2 Common Stock are held in
escrow, are not transferable, can be voted and will be converted into Class A
Common Stock only upon the occurrence of specified events. All the Class E-1
Common Stock shares will be automatically converted into Class A Common Stock
shares in the event that: (1) the Company's net income before provision for
income taxes, as defined, amounts to at least $4,800,000 for the years ending
March 31, 1995 or 1996, or at least $5,500,000, $6,850,000, $8,425,000,
$9,900,000 for the fiscal years ending March 31, 1997 through 2000,
respectively, provided that if additional shares are issued earnings must
increase proportionately; or (2) the closing price, as defined, of the Company's
Class A Common Stock shall average in excess of $15.00 for any 30 consecutive
trading days during the 18 months following the November 30, 1994 effective date
of the Company's initial public offering or average in excess of $19.25 for any
30 consecutive trading days during the period commencing with the nineteenth
month after November 30, 1994 and ending 36 months from that date. If none of
the above events occur, the Class E-1 Common Stock shares will be cancelled by
the Company on June 30, 2000. All of the Class E-2 Common Stock shares will be
automatically converted into Class A Common Stock shares in the event that: (1)
the Company's net income before provision for income taxes, as defined, amounts
to at least $8,625,000 for the years ending March 31, 1995 or 1996 or at least
$11,800,000, $14,750,000, $20,475,000 or $26,750,000 for the years ending March
31, 1997 through 2000, respectively, provided that if additional shares are
issued earnings must increase proportionally; or (2) the closing price, as
defined, of the Company's Class A Common Stock shall average in excess of $19.75
for any 30 consecutive trading days during the 18 months following the November
30, 1994 effective date of the Company's initial public offering or average in
excess of $24.00 for any 30 consecutive trading days during the period
commencing with the nineteenth month after November 30, 1994 and ending 36
months from November 30, 1994. If none of the above events occur, the Class E-2
Common Stock shares will be cancelled by the Company on June 30, 2000.

The Company will, in the event of the release of the Class E-1 Common Stock
and Class E-2 Common Stock, recognize during the period in which the earnings
thresholds are met or such minimum bid prices are achieved, a substantial
noncash charge to earnings equal to the fair value of such shares on the date of
their release, which would have the effect of significantly increasing the
Company's loss or reducing or eliminating earnings, if any, at such time.

17. CONCENTRATION OF CREDIT RISK AND FOREIGN SALES
The Company generates revenues principally from sales in the medical field.
As a result, the Company's accounts receivable are concentrated primarily in
this industry. In addition, sales to one customer represented 10% of the
Company's sales in fiscal 1996 and 11% to a different customer in

F-17
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JUNE 30, 1996 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

17. CONCENTRATION OF CREDIT RISK AND FOREIGN SALES (CONTINUED)
fiscal 1995. Sales in foreign countries accounted for approximately 63% and 40%
of the Company's total sales in fiscal 1995 and 1996, respectively. A summary of
sales in geographic locations for the fiscal years ended March 31, 1995 and 1996
is as follows:

<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
United States................................................... $ 465,400 $ 1,014,327
Europe.......................................................... 210,386
Asia............................................................ 583,500 190,458
Other Foreign................................................... 200,503 289,219
------------- -------------
$ 1,249,403 $ 1,704,390
------------- -------------
------------- -------------
</TABLE>

The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. Generally, letters of credit are obtained
on international sales. The Company maintains reserves for potential credit
losses and such losses have been within management expectations.

18. SUBSEQUENT EVENTS
On June 3, 1996, the Company entered into a loan agreement (the Loan
Agreement) with a bank which allows the Company to borrow the lesser of $1
million or 40% of the market value of the 1,150,000 shares of Mattan Corporation
common stock (the Mattan shares) held by the Company. Borrowings outstanding
under this loan agreement bear interest at the bank's prime rate (8.25% at June
3, 1996) plus 1%, are secured by the Mattan shares and are due and payable in
November 1996 (see Note 19 below). The Loan Agreement also provides for the
issuance of warrants to purchase 9,756 shares of the Company's Class A Common
Stock at $10.25 per share to the bank.

19. SUBSEQUENT EVENTS (UNAUDITED)
The Company has not made the first installment payment under the Pfizer note
payable discussed in Note 12 which was due in July 1996. The Company is
attempting to negotiate with Pfizer for an extension of this payment date. There
can be no assurance that such extension will be granted on this note or that
Pfizer will not seek to enforce its rights on this note.

Effective August 24, 1996, the Company and IBC amended their agreement (Note
6). Pursuant to the terms of this amendment the Company will (i) act as
guarantor of approximately $201,000 of indebtedness owed by IBC to a third party
and (ii) receive all proprietary rights, intellectual property and technology
from IBC used in the manufacturing of argon MOD lasers.

On October 9, 1996, the Company amended the Loan Agreement extending the
expiration date of the agreement to April 1997.

F-18
<PAGE>
INSIDE BACK COVER
CORPORATE COMMITMENTS
From Research and Development To Customer Satisfaction, Premier Laser Systems,
Inc. ...
Four photographs, including corporate headquarters
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR SOLICITATION OF ANY OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 14
Price Range of Securities...................... 15
Dividend Policy................................ 15
Capitalization................................. 16
Selected Financial Data........................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business....................................... 24
Management..................................... 42
Principal Shareholders......................... 49
Certain Transactions........................... 50
Description of Securities...................... 51
Shares Eligible for Future Sale................ 55
Underwriting................................... 56
Legal Matters.................................. 58
Experts........................................ 58
Available Information.......................... 58
Index to Financial Statements.................. F-1
</TABLE>

[LOGO]

11,000 UNITS

EACH UNIT CONSISTING OF
190 SHARES OF CLASS A COMMON STOCK
AND 95 REDEEMABLE CLASS B WARRANTS

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

PROSPECTUS

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

D.H. BLAIR INVESTMENT
BANKING CORP.

OCTOBER 15, 1996

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