PREMIER LASER SYSTEMS INC, 10KSB/A, 1996-07-29

PREMIER LASER SYSTEMS INC
10KSB/A, 1996-07-29
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
(MARK ONE)
/X / ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996.
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/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to _____________.

Commission file number 0-25242
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PREMIER LASER SYSTEMS, INC.
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

California 33-0472684
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

3 Morgan, Irvine, California 92618
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(Address of principal (Zip Code)
executive offices)

Issuer's telephone number (714) 859-0656
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Securities registered under Section 12(b) of the Exchange Act:

Name of each exchange on
Title of Each Class which registered
Not Applicable
- -------------------------------------- ---------------------------------------
- -------------------------------------- ---------------------------------------

Securities registered under Section 12(g) of the Securities Act:
Class A Common Stock
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(Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- ----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / /
State issuer's revenues for its most recent fiscal year: $1,704,390
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State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold; or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.):
$43,202,838 at May 17, 1996
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NOTE.--If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by nonaffiliates on the basis of reasonable
assumptions, if the assumptions are stated.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS.) Check
whether the issuer has filed all documents and reports require to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes No
---- ----
(APPLICABLE ONLY TO CORPORATE REGISTRANTS.) State the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date. 4,717,258 shares of Class A Common Stock, 1,256,818 shares
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of Class E-1 Common Stock, and 1,256,818 shares of Class E-2 Common Stock, as of
- --------------------------------------------------------------------------------
May 15, 1996
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DOCUMENTS INCORPORATED BY REFERENCE. If the following documents are
incorporated by reference, briefly describe them and identify the part of the
Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) of the Securities Act of 1933 ("Securities Act"): None
--------------------------
- --------------------------------------------------------------------------------
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes No X
---- -----

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PART I

ITEM 1. DESCRIPTION OF BUSINESS.

OVERVIEW

Premier Laser Systems, Inc. (the "Company," or "Registrant") 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 18 U.S.
patents, additional pending U.S patent applications, 11 foreign patents and 41
pending foreign patents. The Company currently markets certain of these lasers
for dentistry, ophthalmology and surgery.

The Company commenced operations in August 1991 after acquiring
substantially all of the assets of Pfizer Laser, a division of Pfizer Hospital
Products Group ("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. In 1987,
Pfizer Laser received the first approval to market a laser for soft tissue
applications in dentistry. Pfizer Laser's first products were low-power 10 and
20 watt Carbon Dioxide ("CO(2)") lasers sold for use in physician's offices and
outpatient surgery centers. The Company developed its Pegasus-TM-
Neodymium:Yttrium Aluminum Garnet ("Nd:YAG") laser system from existing
technology and introduced this product to the dentistry market in February 1992.
In June 1993, the Company introduced the Erbium:Yttrium Aluminum Garnet
("Er:YAG") laser for ophthalmology and initiated clinical trials for hard tissue
(teeth) applications in dentistry. In December 1993, the Company acquired from
Proclosure, Inc. ("Proclosure"), certain technology, assets and proprietary
rights relating to a laser system for tissue fusion. In September 1995, the
company acquired co-exclusive marketing rights to two new dental lasers, and in
February 1996, the Company introduced and began shipping its aurora diode laser
for soft tissue dental applications.

Although the Company has received clearances from the United States Food
and Drug Administration (the "FDA") to market its laser products for a variety
of medical applications, due to limited financial resources the Company has
initially focused its marketing efforts on CO(2) lasers which had been
commercially introduced by Pfizer Laser, and subsequently on those specific
applications for the Nd:YAG and Er:YAG lasers which the Company believes have
the most promise for commercial success. As resources permit, the Company plans
to commence marketing efforts with respect to other medical applications which
it believes may also be commercially successful.

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

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fiberoptics, waveguides, articulated 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 FDA
clearance or approval is obtained, this market may be expanded to include hard
tissue and cavity prevention procedures.

SOFT TISSUE. The dental laser can be used for certain periodontal
procedures and to treat early gum disease, postponing or in some cases
eliminating the need for conventional periodontal surgery and providing the
opportunity for overall cost savings. While the Company has clearance to market
six lasers for soft tissue dental procedures, the Company focuses its marketing
efforts on its Aurora diode laser in this area. The Company's Aurora diode
laser and Centauri Er:YAG laser have been cleared to market for these soft
tissue dental procedures.

COMPOSITE CURING. Composites are rapidly replacing amalgams (gold and
silver) 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
the 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 bond
orthodontic brackets. The Company's Arago and MOD argon lasers have received
FDA clearance for use in these applications.

TEETH WHITENING. A large number of dentists use light accelerated
bleaching materials 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 approximately three shade change in less than one hour. The
Company is currently conducting a marketing study with its Arago argon laser for
this application and has a 510(k) application pending before the FDA.

HARD TISSUE (CAVITY PREPARATION). Potential dental laser applications
for hard tissue procedures (i.e., procedures on teeth) 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. No assurance can be given, 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.

CAVITY PREVENTION. The Company is currently conducting research and is
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
assurances that FDA clearance will be obtained for these applications.

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OPHTHALMIC MARKET

Laser systems 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 laser systems 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 by 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. The Company believes that no medical
lasers have been approved to date for cataract extraction procedures, and that
medical 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 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). This
patented technology for use in lens emulsification may provide an easier and
safer method of cataract removal.

TREATMENT OF GLAUCOMA. Glaucoma, a disease of the eye characterized by
increased intraocular pressure within the eyeball and progressive loss of
vision, has traditionally 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 prior to seeking clearance to market its Centauri
Er:YAG laser for this procedure. If clearance is obtained, concerning 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. 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 approval to market
the Centauri laser for corneal sculpting and has initiated animal studies for
this application. No assurance can be given, however, that approval will be
given for this application.

SURGICAL MARKET

Laser systems 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

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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 infants, in which it is anticipated that the
laser's fluid-static seal may minimize post-surgical complications such as the
leakage of urine which results in 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 market for cosmetic laser surgery is
growing rapidly worldwide. The Company entered into a Purchasing Agreement and
a Share Exchange Agreement dated December 20, 1995 with Mattan Corporation
("Mattan"), 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 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.

The Company has regulatory clearance to market its products for a
variety of additional applications, including in 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.

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.

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The following table presents in summary form, the Company's lasers and
delivery systems, the principal applications for which the Company intends to
use them, and the FDA status of such products.
FDA REGULATORY
PRODUCT MEDICAL APPLICATION STATUS (1)

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) Dental - Soft Tissue . . . . . . . Cleared to market
20W
Polaris (1.32 Tissue Melding. . . . . . . . . . Clinical trials
micron Nd:YAG)
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 Dental - Composite Curing . . . . . Cleared to market
(argon)
Dental - Teeth Whitening . . . . . Pending 510(k)
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(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

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source for these fibers in the past, although it has recently procured two new
sources for these fibers. See "--Manufacturing and Materials" and "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 FDA 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 sixty percent 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 $10,000 per year as compared to approximately $70,000). In
addition, the multipurpose Centauri Er:YAG laser is completely portable, does
not emit any toxic gases or cause any potential mutagenic effect which may
result from the use of the excimer laser.

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 FDA 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 (which has
in large part been superseded by the Company's newer diode laser system). The
Company also manufactures 40, 60 and 100 watt Pegasus Nd:YAG lasers which have
FDA 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 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
(20W in dental, 40-60W 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

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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 including fluid-static seals, immediate strength of the
closure and reduced surgical time.

AURORA DIODE LASER

The Aurora diode laser is the Company's first semiconductor laser and 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. The dental laser can also be used
to treat early 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 periodontal
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 (Multi Operatory Dentalaser) are 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 approximately three shade change in less than
one hour. The Company currently has a pending 510(k) for this application. No
assurance may be given, however, that the Company will be granted clearance to
market this laser for teeth whitening or 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 October 19, 1995 with IBC which creates a joint marketing
relationship for the sale of these products. Pursuant to this agreement, the
Company has loaned IBC $125,000 and has the right to designate one member of
IBC's Board of Directors. The Company has also entered into a Distribution
Agreement Letter of Intent dated March 8, 1996 with Lasermed, pursuant to which
the Company acquired the co-exclusive right to market the portable lightweight
Arago argon laser. This agreement terminates in August 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,

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concerning which no assurance can be given. 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 more than 2,000
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.

OTHER LASERS

The Company has developed other solid state pulsed lasers including the
Sirius .532 micron Nd:YAG laser, Orion Ho:YAG laser and the Arcturus
alexandrite: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.

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FDA REGULATORY
PRODUCT MEDICAL APPLICATION STATUS (1)

Altair (CO(2)) and a Orthopedics, General and
CO(2) laser acquired Plastic Surgery, Dermatology,
from Pfizer HPG Podiatry, Ear, Nose and Throat,
Gynecology, Pulmonary Procedures;
Neurosurgery and
Ophthalmology. . . . . . . . . . Cleared to market
Dental - Soft Tissue . . . . . . . Cleared to market
Pegasus (Nd:YAG) General Surgery, Urology,
40W/60W Gastrointestinal Procedures,
Pulmonary Procedures,
Gastroenterology, Gynecology
and Ophthalmology . . . . . . . . Cleared to market

Pegasus (Nd:YAG) Oral, Arthroscopic and General
100W Surgery, Gastroenterology,
Gastrointestinal and
Genitourinary Procedures,
Pulmonary Procedures,
Gynecology, Neurosurgery
and Ophthalmology . . . . . . . . Cleared to market
Sirius (.532 micron Dermatology, General and
Nd:YAG) 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
- ------------------

DELIVERY SYSTEMS AND DISPOSABLE PRODUCTS

An integral part of any laser system is the means of delivering laser
light 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 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

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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.

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., 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 rest 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. The Company has also entered into a joint
marketing relationship with IBC, pursuant to which IBC will provide marketing
and technical support for the MOD argon laser.

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 their efforts on 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 Nippon Shoji Kaisha, Ltd. ("NSK"), which is
one of the leading suppliers of sutures in the Pacific Rim. In connection with
this alliance, 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.

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

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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
generally 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 (i)
traditional surgical treatments using a tearing needle in anterior capsulotomy,
(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 patented or patent pending
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 for medical laser
products 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 have substantially
greater financial, technical and marketing resources than the Company.

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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

In the past two fiscal years, the Company has invested approximately
$2.5 million in research and development programs since the Company's formation.
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 $630,000
has been drawn 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. In the
United States, the Company holds 18 patents and has other pending patent
applications, including divisional applications. In addition, the Company holds
11 foreign patents including two utility model patents and has other foreign
patent applications pending, one of which is an international application. 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.

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<PAGE>

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 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 federal Food, Drug and Cosmetics Act (the "FDC
Act"). As such, these devices require premarket clearance or premarket approval
by the FDA prior to commercialization. Pursuant to the FDC Act, the FDA
regulates the manufacture, distribution and production of medical devices in the
United States. 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 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. Lasers are classified as Class II devices,
which are products whose safety and effectiveness the FDA has determined can
reasonably be assured through the use of special controls, such as performance
standards, postmarket surveillance, patient registries and FDA guidelines.

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 premarket approval application ("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 effectiveness of the device. There can be
no assurance

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<PAGE>

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
investigational device exemption ("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 testing. If the IDE
application is approved, human clinical studies may begin at a specific number
of investigational sites, and the FDA may specify a specific number of patients
for the studies. Sponsors of clinical studies are permitted to charge for
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 Institutional Review Board, 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 average total review time for a 510(k) notification at the
FDA is 180 days according to statistics released by the Center for Devices and
Radiological Health's Office of Device Evaluation, and average review times in
certain clinical specialty areas may approach one year. 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. Marketing of
products for medical applications other than those that are cleared or approved
could lead to enforcement action by the FDA. Labeling and promotional activities
are also subject to scrutiny by the FDA and, in certain instances, by the
Federal Trade Commission. There can be no assurance that the FDA will clear any
of the 510(k) notifications that the Company files or has filed with the agency,
or that the FDA will approve any of the PMA's that the Company submits.

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); 1.32 micron Nd:YAG (two models: 15W, 25W); .532
micron 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 fiber 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

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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 current Good Manufacturing Practice ("cGMP") regulations. The
Company's facilities in the United States are subject to periodic inspections by
the FDA. The FDA requires reporting of certain adverse events, and it may
require postmarketing surveillance. 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 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. 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.

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<PAGE>

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 believes
that its customized tooling and automated systems improve quality and
manufacturing reliability resulting in lower overall manufacturing costs. The
Company believes 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 owns the molds used to produce certain proprietary parts of
the devices. The Company also designs and develops the software necessary for
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 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.

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EMPLOYEES

As of May 17, 1996, the Company employed 44 people, two of whom are
employed on a part-time basis. None of these employees are represented by a
union. Ten 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.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and related notes thereto appearing elsewhere
in this Report. This Report 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.

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. This acquisition was led by the
Company's current Chief Executive Officer.

Since its formation and until its initial public offering 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 certain technology, assets and proprietary rights relating to a 1.32
Nd:YAG laser system for tissue melding. From its formation in 1991 through its
initial public offering, 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 initial public offering 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 FDA 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.

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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 will require additional debt or equity
financing in the very near term in order to continue to finance its operations.
Although the Company is presently seeking such financing, no assurance can be
given that such financing will be available on acceptable terms, or at all. The
Company's inability to obtain such financing would have a material adverse
effect on its business, operations and financial results.

RESULTS OF OPERATIONS

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
$775,000 in sales to the dental market, related principally to the introduction
of three new products, the Aurora diode laser, the Arago argon laser and the MOD
argon laser, in the latter half of fiscal 1996. 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 laser terminates in August 1996, and
to the extent the Company is unable to extend this arrangement or to secure
another source for this argon laser, the Company's results of operations may be
adversely effected.

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
writedown 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, constituting an increase in payroll
expense of approximately $280,000, and (iii) increased direct 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 Small Business Innovative Research ("SBIR") grant.

-19-
<PAGE>

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 Company's litigation with a
former supplier of optical fiber (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 in 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 December 1994 initial public offering and the
repayment in that month 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.

LIQUIDITY AND CAPITAL RESOURCES

The Company's operations have been financed through the proceeds from the
sale of the Company's equity securities, including an initial public offering in
December 1994, revenues from operations and the proceeds from an SBIR grant.
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 March 31, 1996, the Company had a minimal cash balance and its working
capital was $5,818,492. This represents a reduction from March 31, 1995 of
$5,852,774 in cash and cash equivalents. The decrease in cash and cash
equivalents was the result of net cash used in operating activities of
$5,312,384, and cash used in investing activities, including a $195,971 increase
in patents, a $219,723 addition to capital equipment primarily for molds for new
products and a $125,000 note receivable from International Biolaser Corporation.

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. 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 Class A Common Stock to two parties affiliated with
Mattan, in exchange for 1,150,000 shares of Mattan's Common Stock (the "Mattan
Shares"), 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. See
footnote 6 to Notes to Financial Statements.

At March 31, 1996, the Company's indebtedness consisted of a $481,195 note
payable to Pfizer HPG due in three installments commencing with a $240,598
principal reduction, plus accrued interest, in July 1996 and $120,299 quarterly
payments in October 1996 and January 1997. Upon completion of this Offering,
any remaining unpaid principal and accrued interest becomes immediately due and
payable.

-20-
<PAGE>

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 December 31, 1995 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 has a credit facility (the "Credit Facility") with Silicon
Valley Bank which permits borrowings of up to $1 million, based on the value of
the Mattan Shares. Borrowings under the Credit Facility are secured by the
Mattan Shares, bear interest at the prime rate plus 1% per annum, and are due
and payable in December 1996. In connection with this Credit Facility, the
Company issued to such lender warrants to purchase up to 9,756 shares of the
Company's Common Stock at an exercise price equal to $10.25 per share. As of
June 24, 1996, the Company has drawn approximately $300,000 on this Credit
Facility.

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. 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 $250,000 of this
amount was drawn at March 31, 1996, and an additional approximately $398,000 has
been drawn since that date. 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

The Securities and Exchange Commission has adopted a position with respect
to arrangements such as the one entered into among the Company and the holders
of its outstanding Class E-1 and Class E-2 Common Stock ("Escrow Shares") which
provides that in the 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,

-21-
<PAGE>

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 Common Stock (at a
conversion rate of one share of Common Stock for each Escrow Share) in the event
that the Company meets certain criteria relating to the market price of the
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
Common Stock, as stated in the Company's financial statements audited by the
Company's independent accountants.

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
its 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 Common Stock.

-22-
<PAGE>

ITEM 7. FINANCIAL STATEMENTS.

The Company's financial statements at March 31, 1996 and for the years
ended March 31, 1996 and 1995 follow hereafter.

-23-

<PAGE>
INDEX TO FINANCIAL STATEMENTS

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

-24-
<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

-25-
<PAGE>
PREMIER LASER SYSTEMS, INC.

BALANCE SHEET

<TABLE>
<CAPTION>
MARCH 31,
1996
--------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................................... $ 35,463
Short-term investments (Note 6)................................................................. 4,547,377
Accounts receivable, net of allowance for doubtful accounts of $154,677......................... 508,315
Inventories (Note 7)............................................................................ 2,185,355
Prepaid expenses and other current assets....................................................... 419,504
--------------
Total current assets........................................................................ 7,696,014
Property and equipment, net (Note 8)............................................................ 493,942
Intangibles, net (Note 9)....................................................................... 7,353,462
Other assets (Note 6)........................................................................... 131,150
--------------
$ 15,674,568
--------------
--------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................................ $ 1,208,219
Accrued liabilities (Note 10)................................................................... 188,108
Notes payable to related party (Notes 11 and 12)................................................ 481,195
--------------
Total current liabilities................................................................... 1,877,522
--------------
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;
4,702,203 shares issued and outstanding........................................................ 16,317,376
Common stock -- Class E-1 -- no par value, 2,200,000 shares authorized;
1,256,818 shares issued and outstanding........................................................ 4,769,878
Common stock -- Class E-2 -- no par value, 2,200,000 shares authorized;
1,256,818 shares issued and outstanding........................................................ 4,769,878
Class A warrants................................................................................ 2,321,057
Class B warrants................................................................................ 376,774
Warrants to purchase Class A common stock....................................................... 192,130
Unrealized holding gain on short-term investments............................................... 3,666,367
Accumulated deficit............................................................................. (18,616,414)
--------------
Total shareholders' equity.................................................................. 13,797,046
--------------
$ 15,674,568
--------------
--------------
</TABLE>

The accompanying notes are an integral part of these statements.

-26-
<PAGE>
PREMIER LASER SYSTEMS, INC.

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Net sales......................................................................... $ 1,249,403 $ 1,704,390
Cost of sales..................................................................... 1,298,420 3,324,757
-------------- --------------
Gross (loss)...................................................................... (49,017) (1,620,367)
Selling and marketing expenses.................................................... 1,035,863 1,308,767
Research and development expenses................................................. 1,035,705 1,213,471
General and administrative expenses............................................... 1,747,090 1,709,327
-------------- --------------
Loss from operations.......................................................... (3,867,675) (5,851,932)

Interest income (expense), net.................................................... (322,540) 99,037
-------------- --------------
Loss before extraordinary items............................................... (4,190,215) (5,752,895)
Extraordinary gain from extinguishment of indebtedness............................ 381,730
-------------- --------------
Net loss...................................................................... $ (3,808,485) $ (5,752,895)
-------------- --------------
-------------- --------------
Loss per share:
Net loss........................................................................ $ (1.26)
--------------
--------------
Weighted average number of shares outstanding................................... 4,556,959
--------------
--------------
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.

-27-
<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 CLASS B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS WARRANTS
--------- ----------- --------- ----------- ---------- ----------- ---------- ----------
<S> <C> <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 $ 286,274
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 48,165
Exercise of over-
allotment option........ 360,000 1,128,947 239,901 42,335
Net loss.................
--------- ----------- --------- ----------- ---------- ----------- ---------- ----------
Balance, March 31, 1995.. 4,501,899 15,436,178 1,256,549 4,769,820 1,256,549 4,769,820 2,321,057 376,774
Common stock issued for
investment in Mattan
(Note 6)................ 200,000 881,010
Exercise of stock
options................. 304 188 269 58 269 58
Unrealized holding gain
on short-term
investments.............
Net loss.................
--------- ----------- --------- ----------- ---------- ----------- ---------- ----------
Balance, March 31, 1996.... 4,702,203 $16,317,376 1,256,818 $ 4,769,878 1,256,818 $ 4,769,878 $2,321,057 $ 376,774
--------- ----------- --------- ----------- ---------- ----------- ---------- ----------
--------- ----------- --------- ----------- ---------- ----------- ---------- ----------

COMMON UNREALIZED
STOCK HOLDING ACCUMULATED
WARRANTS GAIN DEFICIT TOTAL
--------- ---------- ------------ ------------
<S> <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................ 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................ 1,605,496
Exercise of over-
allotment option........ 1,411,183
Net loss................. (3,808,485) (3,808,485)
--------- ---------- ------------ ------------
Balance, March 31, 1995.. 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.... $ 192,130 $3,666,367 $(18,616,414) $ 13,797,046
--------- ---------- ------------ ------------
--------- ---------- ------------ ------------
</TABLE>

The accompanying notes are an integral part of these statements.
-28-
<PAGE>
PREMIER LASER SYSTEMS, INC.

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................................ $ (3,808,485) $ (5,752,895)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 812,196 814,401
Extraordinary gain from extinguishment of debt................................ (381,730)
Amortization of debt discount................................................. 119,230
Exchange of product for clinical studies...................................... (158,250)
Amortization of clinical program expense...................................... 227,000 31,367
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)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.................................... 142,591 (92,716)
Increase in inventories....................................................... (21,880) (14,665)
Decrease (increase) in prepaid expenses and other current assets.............. (320,569) 22,468
(Increase) decrease in other assets........................................... 230,793 (6,150)
Increase (decrease) in accounts payable....................................... (411,197) 594,654
(Decrease) increase in accrued liabilities.................................... 28,907 (598,847)
-------------- --------------
Net cash used in operating activities....................................... (3,402,754) (5,312,384)
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment............................................. (45,785) (219,723)
Note receivable pursuant to strategic alliance agreement (Note 6)............... (125,000)
Patent expenditures............................................................. (204,838) (195,971)
-------------- --------------
Net cash used in investing activities......................................... (250,623) (540,694)
-------------- --------------
Cash flows from financing activities:
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
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
-------------- --------------
Net (decrease) increase in cash................................................... 5,579,473 (5,852,774)
-------------- --------------
Cash and cash equivalents, beginning of period.................................... 308,764 5,888,237
-------------- --------------
Cash and cash equivalents, end of period.......................................... $ 5,888,237 $ 35,463
-------------- --------------
-------------- --------------
</TABLE>

The accompanying notes are an integral part of these statements.

-29-
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

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 income. 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 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.

-30-
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

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

YEAR ENDED MARCH 31,
----------------------
1995 1996
----------- ---------
Cash paid for:
Interest............................................ $ 550,962 $ 52,129
Income taxes........................................ 800 800

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

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

4. BASIS OF PRESENTATION (CONTINUED)
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.

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. P rior 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.

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

7. INVENTORIES
Inventories at March 31, 1996 consist of the following:

Raw materials.................................. $ 938,560
Work-in-progress............................... 276,998
Finished goods................................. 969,797
----------
$2,185,355
----------
----------

8. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1996 consist of the following:

Machinery, equipment, molds and tooling........ $1,032,188
Furniture, fixtures and office equipment....... 433,286
----------
1,465,474
Less: accumulated depreciation............... 971,532
----------
$ 493,942
----------
----------

9. INTANGIBLES
Intangibles at March 31, 1996 consist of the following:

Patents and technology rights.................. $9,413,088
License agreements............................. 255,000
Other.......................................... 201,000
----------
9,869,088
Less: accumulated amortization................. 2,515,626
----------
$7,353,462
----------
----------

10. ACCRUED LIABILITIES
Accrued liabilities at March 31, 1996 consist of the following:

Accrued payroll, vacation and related taxes.... $ 96,132
Accrued other.................................. 91,976
----------
$ 188,108
----------
----------

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

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

12. NOTES PAYABLE TO RELATED PARTY AND EXTRAORDINARY GAIN (CONTINUED)
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 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 substantially all of the tangible assets and
certain patents of the Company.

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:

YEAR ENDING MARCH 31,
- -----------------------------------------------------------
1997................................................... $ 241,536
1998................................................... 244,634
1999................................................... 247,811
2000................................................... 252,448
2001................................................... 250,488
-------------
$ 1,236,917
-------------
-------------

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.

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

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.

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

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

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)
-----------
$ --
-----------
-----------

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 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.

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

16. SHAREHOLDERS' EQUITY (CONTINUED)
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:

WARRANT/OPTION
PRICE PER
SHARES SHARE
----------- --------------
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.......................................... 705,700 4.63- 5.63
Exercised........................................ (304) 1.00
Cancelled........................................ (31,236) 1.00-11.06
----------- --------------
Outstanding at March 31, 1996.................... 2,583,993 $ 1.00-17.69
----------- --------------
----------- --------------

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.

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.

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

16. SHAREHOLDERS' EQUITY (CONTINUED)
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

-39-
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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:

1995 1996
------------- -------------
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
------------- -------------
------------- -------------

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 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 December 1996. 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.

-40-

<PAGE>

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

The information required by this item is incorporated herein by this
reference to the information set forth under the heading "Management" in the
Company's Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2,
file number 333-04219.

ITEM 10. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by this
reference to the information set forth under the heading "Management-Executive
Compensation" in the Company's Pre-Effective Amendment No. 1 to Registration
Statement on Form SB-2, file number 333-04219.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated herein by this
reference to the information set forth under the heading "Principal
Shareholders" in the Company's Pre-Effective Amendment No. 1 to Registration
Statement on Form SB-2, file number 333-04219.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by this
reference to the information set forth under the heading "Certain Transactions"
in the Company's Pre-Effective Amendment No. 1 to Registration Statement on Form
SB-2, file number 333-04219.

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<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

A. EXHIBITS.

3.1 Amended and Restated Articles of Incorporation filed with the
California Secretary of State on November 23, 1994.
(incorporated herein by this reference to Exhibit 4.8 to the
Registrant's Quarterly Report on Form 10-QSB for the Quarter
ended December 31, 1994)
3.2 Bylaws (incorporated herein by this reference to Exhibit 3.3 to
the Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984).
10.1 Letter Agreement and Patent License Agreement dated August 29,
1991 among the Company, Patlex Corporation and Gordon Gould
(incorporated herein by this reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form SB-2, Registration
No. 33-83984).
10.2 Assignment Agreement dated July 27, 1992 between the Company and
Michael Colvard, M.D. (incorporated herein by this reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form
SB-2, Registration No. 33-83984).
10.3 Gold Catalyst Licensing Agreement dated April 16, 1992 between
the Company and Optical Engineering, Inc. (incorporated herein by
this reference to Exhibit 10.3 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984).
++10.4 Lead Generation/Distribution Agreement dated March 17, 1994
between the Company and Burkhart Dental Supply Company
(incorporated herein by this reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form SB-2, Registration
No. 33-83984).
10.5 Form of International Distribution Agreement (incorporated herein
by this reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form SB-2, Registration No. 33-83984).
10.6 Letter of Intent between the Company and Richard Leaderman,
D.D.S., together with related Patent Assignments as filed in the
U.S. Patent and Trademark Office on February 22, 1994
(incorporated herein by this reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form SB-2, Registration
No. 33-83984).
++10.7 Exclusive Marketing Agreement dated July 26, 1994 between the
Company, Proclosure, Inc. and Nippon Shoji Kaisha, Ltd.
(incorporated herein by this reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form SB-2, Registration
No. 33-83984).
10.8 Amended and Restated Registration Rights Agreement dated June 17,
1994 among the Company, Onset Enterprise Associates, L.P., New
Enterprise Associates IV Limited Partnership and Franklin Capital
Associates, LLP (incorporated herein by this reference to Exhibit
10.17 to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984).
10.9 Letter Agreement dated July 21, 1994 between the Company and
Pfizer, Inc., as amended (incorporated herein by this reference
to Exhibit 10.21 to the Registrant's Registration Statement on
Form SB-2, Registration No. 33-83984).
10.10 Form of Indemnification Agreement (incorporated herein by this
reference to Exhibit 10.23 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984).
10.11 Purchase/Supply Agreement dated January 13, 1987 between Infrared
Fiber Systems, Inc. and Pfizer Hospital Products Group, Inc., as
amended

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<PAGE>

(incorporated herein by this reference to Exhibit 10.26 to the
Registrant's Registration Statement on Form SB-2, Registration
No. 33-83984).
10.12 Security Agreement dated August 8, 1991 between the Registrant
and Pfizer Hospital Products Group, Inc. (incorporated herein by
this reference to Exhibit 10.19 to the Registrant's Quarterly
Report on Form 10-QSB for the Quarter ended December 31, 1994)
10.13 Form of Warrant Agreement (including forms of Class A and Class B
Warrant Certificates) (incorporated herein by this reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form
SB-2, Registration No. 33-83984).
10.14 Form of Underwriter's Unit Purchase Option (incorporated herein
by this reference to Exhibit 4.2 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984).
10.15 Form of Finder's Unit Purchase Option (incorporated herein by
this reference to Exhibit 4.3 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984).
10.16 1992 Stock Option Plan, together with form of Nonstatutory Stock
Option Agreement and form of Incentive Stock Option Agreement
(incorporated herein by this reference to Exhibit 4.5 to the
Registrant's Registration Statement on Form SB-2, Registration
No. 33-83984).
10.17 Employee Bonus Stock Plan, together with form of Bonus Stock
Agreement (incorporated herein by this reference to Exhibit 4.6
to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984).
10.18 Assignment and Modification Agreement dated July 26, 1991, among
the Registrant, Pfizer Hospital Products Group and Medical Laser
Technologies Limited (incorporated herein by this reference to
Exhibit 10.4 of the Registrant's Registration Statement on Form
SB-2, Registration Number 33-83984).
10.19 Letter agreement dated October 13, 1987 between Pfizer Laser
Systems, Inc. and Duke University, together with patent
assignment as filed in the U.S. Patent and Trademark Office on
October 23, 1993 (incorporated herein by this reference to
Exhibit 10.8 to the Registrant's Registration Statement on Form
SB-2, Registration Number 33-83984).
10.20 Subordinated Note dated August 8, 1991 payable to Pfizer Hospital
Products Group, Inc. in the original principal amount of
$1,343,658 (incorporated herein by this reference to Exhibit
10.19 to the Registrant's Registration Statement on Form SB-2,
Registration Number 33-83984).
10.21 Letter agreement dated February 29, 1996 between the Registrant
and Pfizer Hospital Products Group.*
10.22 Industrial Lease dated December 6, 1995 between the Registrant
and Irvine Company.*
10.23 Use and Cost Sharing Agreement dated December 1, 1995 between the
Registrant and Biopsys Medical, Inc.*
10.24 Letter of Intent dated October 19, 1995 between the Registrant
and International Biolaser Corporation, together with related
Promissory Note dated October 19, 1995 payable to Registrant in
the original principal amount of $125,000, and Security Agreement
dated October 19, 1995 between the Registrant and International
Biolaser Corporation.*
10.25 Share Exchange Agreement dated December 20, 1995 among the
Registrant, 658994 Alberta Ltd., 658997 Alberta Ltd. and Mattan
Corporation (incorporated herein by this reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1995).

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<PAGE>

10.26 Purchasing Agreement dated December 20, 1995 between Registrant
and Mattan Corporation (incorporated herein by this reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1995).
10.27 Exclusive Licensing Agreement dated June 1, 1992 between the
Registrant and Quentin M. Murphy, D.D.S.*
10.28 Distribution Agreement dated August 31, 1995 between the
Registrant and Lasermed, Inc.*
10.29 Broker Agreement dated March 13, 1996 among the Registrant, First
National Marketing Services, Inc. and William F. Sullivan.*
10.30 Form of Consulting Agreement.*
10.31 Radiation Services Agreement dated January 10, 1994 between the
Registrant and SteriGenics International.*
10.32 Form of Nonstatutory Stock Option Agreement between the
Registrant and Colette Cozean (granting option to purchase
358,650 shares of Registrant's Common Stock).*
10.33 Form of Termination Agreement between the Registrant and certain
of the Registrant's Executive Officers.*
10.34 1995 Stock Option Plan and Form of Incentive Stock Option.*
10.35 February 1996 Stock Option Plan.*
10.36 1996 Stock Option Plan.*
10.37 Loan Agreement dated June 3, 1996 between the Registrant and
Silicon Valley Bank, together with Schedule to Loan Agreement
dated June 3, 1996 (incorporated herein by this reference to
Exhibit 10.36 to the Registrant's Registration Statement on Form
SB-2, file no. 333-04219).
10.38 Pledge Agreement dated June 3, 1996 between the Registrant and
Silicon Valley Bank (incorporated herein by this reference to
Exhibit 10.37 to the Registrant's Registration Statement on Form
SB-2, file no. 333-04219).
10.39 Warrant to Purchase Stock dated June 3, 1996 issued to Silicon
Valley Bank (incorporated herein by this reference to Exhibit
10.38 to the Registrant's Registration Statement on Form SB-2,
file no. 333-04219).
10.40 Registration Rights Agreement dated June 3, 1996 between the
Registrant and Silicon Valley Bank (incorporated herein by this
reference to Exhibit 10.39 to the Registrant's Registration
Statement on Form SB-2, file no. 333-04219).
10.41 Antidilution Agreement dated June 3, 1996 between the Registrant
and Silicon Valley Bank (incorporated herein by this reference
to Exhibit 10.40 to the Registrant's Registration Statement on
Form SB-2, file no. 333-04219).
- ------------------------
* Previously filed.
++ Confidential treatment has been granted with respect to portions of
this Exhibit.

B. REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Company
during the last quarter of the period covered by this report.

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<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Amendment No. 1 to be signed on its behalf by the undersigned,
thereunto duly authorized.

PREMIER LASER SYSTEMS, INC.

By: /s/ James S. Polentz
------------------------------------
James S. Polentz, Chief Financial
Officer and Vice President

Dated: July 25, 1996

<PAGE>

EXHIBIT INDEX

Sequentially
Numbered
Exhibit No. Pages
- ----------- ------------

3.1 Amended and Restated Articles of Incorporation
filed with the California Secretary of State on
November 23, 1994. (incorporated herein by this
reference to Exhibit 4.8 to the Registrant's
Quarterly Report on Form 10-QSB for the Quarter
ended December 31, 1994) .................................. +
3.2 Bylaws (incorporated herein by this reference to
Exhibit 3.3 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984)......... +
10.1 Letter Agreement and Patent License Agreement
dated August 29, 1991 among the Company, Patlex
Corporation and Gordon Gould (incorporated herein
by this reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form SB-2, Registration
No. 33-83984).............................................. +
10.2 Assignment Agreement dated July 27, 1992 between
the Company and Michael Colvard, M.D. (incorporated
herein by this reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984)................................. +
10.3 Gold Catalyst Licensing Agreement dated April 16,
1992 between the Company and Optical Engineering,
Inc. (incorporated herein by this reference to
Exhibit 10.3 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984)......... +
++10.4 Lead Generation/Distribution Agreement dated
March 17, 1994 between the Company and Burkhart
Dental Supply Company (incorporated herein by
this reference to Exhibit 10.10 to the Registrant's
Registration Statement on Form SB-2, Registration
No. 33-83984).............................................. +
10.5 Form of International Distribution Agreement
(incorporated herein by this reference to Exhibit
10.12 to the Registrant's Registration Statement on
Form SB-2, Registration No. 33-83984)...................... +
10.6 Letter of Intent between the Company and Richard
Leaderman, D.D.S., together with related Patent
Assignments as filed in the U.S. Patent and Trademark
Office on February 22, 1994 (incorporated herein by
this reference to Exhibit 10.13 to the Registrant's
Registration Statement on Form SB-2, Registration
No. 33-83984).............................................. +
++10.7 Exclusive Marketing Agreement dated July 26, 1994
between the Company, Proclosure, Inc. and Nippon
Shoji Kaisha, Ltd. (incorporated herein by this
reference to Exhibit 10.14 to the Registrant's
Registration Statement on Form SB-2, Registration
No. 33-83984).............................................. +
10.8 Amended and Restated Registration Rights Agreement
dated June 17, 1994 among the Company, Onset Enterprise
Associates, L.P., New Enterprise Associates IV Limited
Partnership and Franklin Capital Associates, LLP
(incorporated herein by this reference to Exhibit
10.17 to the Registrant's Registration Statement
on Form SB-2, Registration No. 33-83984)................... +

-i-
<PAGE>

Sequentially
Numbered
Exhibit No. Pages
- ----------- ------------

10.9 Letter Agreement dated July 21, 1994 between the
Company and Pfizer, Inc., as amended (incorporated
herein by this reference to Exhibit 10.21 to the
Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984)................................. +
10.10 Form of Indemnification Agreement (incorporated
herein by this reference to Exhibit 10.23 to the
Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984)................................. +
10.11 Purchase/Supply Agreement dated January 13, 1987
between Infrared Fiber Systems, Inc. and Pfizer
Hospital Products Group, Inc., as amended
(incorporated herein by this reference to Exhibit
10.26 to the Registrant's Registration Statement
on Form SB-2, Registration No. 33-83984)................... +
10.12 Security Agreement dated August 8, 1991 between
the Registrant and Pfizer Hospital Products Group,
Inc. (incorporated herein by this reference to
Exhibit 10.19 to the Registrant's Quarterly Report
on Form 10-QSB for the Quarter ended December
31, 1994).................................................. +
10.13 Form of Warrant Agreement (including forms of
Class A and Class B Warrant Certificates)
(incorporated herein by this reference to Exhibit
4.1 to the Registrant's Registration Statement on
Form SB-2, Registration No. 33-83984)...................... +
10.14 Form of Underwriter's Unit Purchase Option
(incorporated herein by this reference to Exhibit
4.2 to the Registrant's Registration Statement
on Form SB-2, Registration No. 33-83984)................... +
10.15 Form of Finder's Unit Purchase Option (incorporated
herein by this reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984)................................. +
10.16 1992 Stock Option Plan, together with form of
Nonstatutory Stock Option Agreement and form of
Incentive Stock Option Agreement (incorporated herein
by this reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form SB-2, Registration
No. 33-83984).............................................. +
10.17 Employee Bonus Stock Plan, together with form of
Bonus Stock Agreement (incorporated herein by this
reference to Exhibit 4.6 to the Registrant's
Registration Statement on Form SB-2, Registration
No. 33-83984).............................................. +
10.18 Assignment and Modification Agreement dated
July 26, 1991, among the Registrant, Pfizer
Hospital Products Group and Medical Laser
Technologies Limited (incorporated herein by this
reference to Exhibit 10.4 of the Registrant's
Registration Statement on Form SB-2, Registration
Number 33-83984)........................................... +
10.19 Letter agreement dated October 13, 1987 between
Pfizer Laser Systems, Inc. and Duke University,
together with patent assignment as filed in the
U.S. Patent and Trademark Office on October 23, 1993
(incorporated herein by this reference to Exhibit
10.8 to the Registrant's Registration Statement
on Form SB-2, Registration Number 33-83984)................ +
10.20 Subordinated Note dated August 8, 1991 payable to
Pfizer Hospital Products Group, Inc. in the
original principal amount of $1,343,658 (incorporated
herein by this reference to Exhibit 10.19

-ii-
<PAGE>
Sequentially
Numbered
Exhibit No. Pages
- ----------- ------------
to the Registrant's Registration Statement on Form
SB-2, Registration Number 33-83984)........................ +
10.21 Letter agreement dated February 29, 1996 between
the Registrant and Pfizer Hospital Products Group. ........ *
10.22 Industrial Lease dated December 6, 1995 between
the Registrant and Irvine Company. ........................ *
10.23 Use and Cost Sharing Agreement dated December 1,
1995 between the Registrant and Biopsys Medical,
Inc. ...................................................... *
10.24 Letter of Intent dated October 19, 1995 between
the Registrant and International Biolaser Corporation,
together with related Promissory Note dated
October 19, 1995 payable to Registrant in the
original principal amount of $125,000, and
Security Agreement dated October 19, 1995 between
the Registrant and International Biolaser Corporation. .... *
10.25 Share Exchange Agreement dated December 20, 1995
among the Registrant, 658994 Alberta Ltd.,
658997 Alberta Ltd. and Mattan Corporation................. +
10.26 Purchasing Agreement dated December 20, 1995
between Registrant and Mattan Corporation.................. +
10.27 Exclusive Licensing Agreement dated June 1, 1992
between the Registrant and Quentin M. Murphy, D.D.S. ...... *
10.28 Distribution Agreement dated August 31, 1995 between
the Registrant and Lasermed, Inc. ......................... *
10.29 Broker Agreement dated March 13, 1996 among the
Registrant, First National Marketing Services, Inc.
and William F. Sullivan. .................................. *
10.30 Form of Consulting Agreement. ............................. *
10.31 Radiation Services Agreement dated January 10, 1994
between the Registrant and SteriGenics International. ..... *
10.32 Form of Nonstatutory Stock Option Agreement between
the Registrant and Colette Cozean (granting option
to purchase 358,650 shares of Registrant's Common
Stock). ................................................... *
10.33 Form of Termination Agreement between the Registrant
and certain of the Registrant's Executive Officers. ....... *
10.34 1995 Stock Option Plan and Form of Incentive
Stock Option. ............................................. *
10.35 February 1996 Stock Option Plan. .......................... *
10.36 1996 Stock Option Plan. ................................... *
10.37 Loan Agreement dated June 3, 1996 between the
Registrant and Silicon Valley Bank, together with
Schedule to Loan Agreement dated June 3, 1996
(incorporated herein by this reference to Exhibit
10.36 to the Registrant's Registration Statement
on Form SB-2, file no. 333-04219) ......................... +
10.38 Pledge Agreement dated June 3, 1996 between the
Registrant and Silicon Valley Bank (incorporated
herein by this reference to Exhibit 10.37 to the
Registrant's Registration Statement on Form SB-2,
file no. 333-04219)........................................ +
10.39 Warrant to Purchase Stock dated June 3, 1996 issued
to Silicon Valley Bank (incorporated herein by this
reference to Exhibit

-iii-
<PAGE>
Sequentially
Numbered
Exhibit No. Pages
- ----------- ------------
10.38 to the Registrant's Registration Statement
on Form SB-2, file no. 333-04219).......................... +

10.40 Registration Rights Agreement dated June 3,
1996 between the Registrant and Silicon
Valley Bank (incorporated herein by this reference
to Exhibit 10.39 to the Registrant's Registration
Statement on Form SB-2, file no. 333-04219)................ +
10.41 Antidilution Agreement dated June 3, 1996 between
the Registrant and Silicon Valley Bank (incorporated
herein by this reference to Exhibit 10.40 to the
Registrant's Registration Statement on Form SB-2,
file no. 333-04219)........................................ +
- -----------------------

++ Confidential treatment has been granted with respect to portions of this
Exhibit.
+ Incorporated by reference herein.
* Previously filed.

-iv-