e10vk

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DCNIiDiiCuM0EWls11McU4TnqC9H/DJ2pQeXmjVFQMzbqprT+2u/m0s0j7SnMII0 ETbPdZKDRTP9zLo/8AYi2Q== 0000950134-06-005181.txt : 20060315 0000950134-06-005181.hdr.sgml : 20060315 20060315172106 ACCESSION NUMBER: 0000950134-06-005181 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060315 DATE AS OF CHANGE: 20060315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LASERSCOPE CENTRAL INDEX KEY: 0000851737 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 770049527 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18053 FILM NUMBER: 06689133 BUSINESS ADDRESS: STREET 1: 3052 ORCHARD DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089430636 10-K 1 f18535e10vk.htm FORM 10-K e10vk

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Fiscal Year Ended December 31, 2005,
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Transition period from to .

Commission File Number: 0-18053

Laserscope

(Exact name of Registrant as Specified in its Charter)


California		77-0049527
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3070 Orchard Drive San Jose, California 95134-2011

(Address of Principal Executive Offices)

(408) 943-0636

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value

Common Share Purchase Rights

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Exchange Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ Accelerated Filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes o No þ

As of June 30, 2005, the aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant was $738,542,437 based upon the closing sale price on the NASDAQ National Market System reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% of more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date


Class		Outstanding at February 28, 2006

Common Stock, no par value per share		22,324,393 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s notice of annual meeting of shareholders and proxy statement to be filed pursuant to Regulation 14A within 120 days after Registrant’s fiscal year end of December 31, 2005 are incorporated by reference into Part III of this report.

LASERSCOPE

TABLE OF CONTENTS


		Page

PART I
Item 1.	Business		2
Item 1A.	Risk Factors		11
Item 1B.	Unresolved Staff Comments		25
Item 2.	Properties		25
Item 3.	Legal Proceedings		25
Item 4.	Submission of Matters to a Vote of Security Holders		26
Item 4A.	Executive Officers of the Registrant		26

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities		28
Item 6.	Selected Financial Data		29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		43
Item 8.	Financial Statements and Supplementary Data		44
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		44
Item 9A.	Controls and Procedures		45
Item 9B.	Other Information		46

PART III
Item 10.	Directors and Executive Officers of Registrant		46
Item 11.	Executive Compensation		46
Item 12.	Security Ownership of Certain Beneficial Owners and Related Shareholder Matters		46
Item 13.	Certain Relationships and Related Transactions		46
Item 14.	Principal Accountant Fees and Services		46

PART IV
Item 15.	Exhibits and Financial Statement Schedules		47
SIGNATURES			50
EXHIBIT 10.1C
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

REFERENCES

References made in this Report to “Laserscope,” the “Company,” the “Registrant,” “We,” “Us,” or “Our” refer to Laserscope and its subsidiaries.

The following are registered trademarks of Laserscope, which may be mentioned in this report:


	Dermastat;
	Gemini;
	GreenLight PV;
	Laserscope;
	MicroBeam;
	Opthostat;
	Venus; and
	StoneLight.


	The following are common law trademarks and service marks of Laserscope, which also may be mentioned in this report:


AccuStat;		MicronSpot;
ADD;		Microstat;
ADDStat,		Model 630 PDT Dye Module;
Aura;		Model 630XP PDT Dye Module;
Aura i;		SmartScan.
Aura SL;		SmartConnector;
Aura XP;		Solis;
Dermastat;		StarPulse;
Endostat;		Venus i;
GreenLight;		VersaStat;
Lyra;		VersaStat I; and
Lyra i;		800 Series KTP/YAG Surgical Laser System.
Lyra XP;

INTRODUCTORY STATEMENT AND REFERENCES

Some of the statements in this Annual Report on Form 10-K (“Form 10-K”), including but not limited to the “Risk Factors,” “Management’s discussion and analysis of financial condition and results of operations,” “Business” and elsewhere in this document are forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of those statements. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.

PART I


Item 1.	*Business.*

General Overview of Business

Laserscope designs, manufactures, sells and services, on a worldwide basis, an advanced line of medical laser systems and related energy delivery devices for the medical office, outpatient surgical center and hospital markets. We are a pioneer in the development and commercialization of lasers, and light source and advanced fiber-optic devices for a wide variety of applications. Our product portfolio consists of lasers and other light-based systems and related energy delivery devices for medical applications.

Our primary medical markets include urology, dermatology and aesthetic surgery. Our secondary markets include ear, nose and throat surgery, general surgery, gynecology, photo-dynamic therapy and other surgical specialties.


	*Mission*

Our corporate mission is to improve the quality and cost effectiveness of health care by providing safe, innovative and minimally invasive surgical systems.


	*Basic Corporate Information*

Laserscope is a California corporation that was founded in 1982 we shipped our first product in 1984. During our initial years, we were funded by several venture capital firms and by E.I. du Pont de Nemours & Company. We received the first in a series of United States regulatory clearances in 1987 and completed our initial public offering in December 1989. We have three wholly owned subsidiaries, including Laserscope UK, Ltd.; a United Kingdom Corporation, Laserscope France, S.A. a French Corporation and Laserscope International, Inc., a Delaware corporation. Our principal executive offices are located at 3070 Orchard Drive, San Jose, California 95134-2011. Our website address is www.laserscope.com. Information on our website, and websites linked to it, is not intended to be part of this report.


	*Market Focus*

We market and sell our products in two main markets including urology and aesthetics.


	*Urology*

Approximately one out of every two men over the age of fifty will have an enlarged prostate. By the age of 80, 80% of all men will develop this condition, also known as Benign Prostatic Hyperplasia (“BPH”). It is estimated that 30 million men worldwide have this condition. The prostate is a walnut-shaped gland located beneath the bladder and the rectum. It surrounds the urethra, the tube that carries urine. Found only in men, the main function of the prostate is to provide fluid for semen. BPH is a non-cancerous enlargement that causes urinary complications. Symptoms of BPH include frequent urination, the urgent need to urinate, and the feeling that the bladder never completely empties. BPH affects more than 11 million men in the United States. According to the Millennium Research Group, in 2003 there were approximately 2.5 million men treated for the condition in the United States and that number is expected to grow to over 3 million men by 2008. Non-drug interventional treatments in the United States during 2003 were estimated to be over 293,000. When urinary symptoms become bothersome, treatment is usually needed. Treatments include: medical therapy (drugs), thermal therapies, transurethral resection of the prostate (“TURP”), and photo-selective vaporization of the prostate (“PVP”).

The PVP procedure using our GreenLight PV laser system and GreenLight PV single-use fiber optic delivery device has been demonstrated to offer a relatively safe, durable, and clinically efficacious procedure to treat BPH with minimal side effects that can give patients quick and substantial relief from their BPH symptoms. PVP uses focused high power light energy at the 532 nm wavelength applied through a small, flexible sterile fiber optic delivery device which the urologist uses to safely, efficiently and virtually bloodlessly vaporize thin layers of the unwanted prostatic tissue until the patient’s prostatic channel is restored. A PVP treatment often results in nearly immediate symptom relief for the patient. PVP is often done on an outpatient basis and patients often can go home without an in-dwelling catheter the same day following their surgery. We estimate that over 125,000 PVP procedures have been performed worldwide since the GreenLight laser system and PVP procedure were made commercially available in 2002. In 2005, we believe approximately 54,000 PVP procedures were performed in the U.S. and over 19,000 performed internationally.


	*Aesthetics*

Our aesthetic business focuses primarily on cosmetic treatments of dermatology-related conditions. We entered the dermatology/aesthetic surgery market in the mid 1990’s with several, highly versatile laser systems. Our laser systems perform a variety of aesthetic treatments including: vascular lesions, red veins on the face and legs, port wine stains and pigmented lesions such as lentigos and sun-damage, wrinkles, leg veins, pseudofolliculitis (shaving bumps), hair removal, enhanced skin rejuvenation, and skin resurfacing.


	*Other Markets*

Our products are also used in several other applications. Since the early 1990’s, the ear, nose and throat (ENT), gynecology (OB/ GYN) and general surgery specialties have continued to represent markets into which we sell our broad range of laser systems and energy delivery devices and surgical instruments.


	*Products*


	Laser Platforms:

Our GreenLight PV laser system is a KTP single wavelength laser used for PVP. In the first quarter of 2002, we began selling the GreenLight PV laser system and ADDStat disposable fiber-optic delivery device used to perform the PVP procedure for the treatment of BPH. Since that time, we believe that

more than 2,000 urologists collectively have performed more than 125,000 PVP procedures using the GreenLight PV laser system.

Our FDA cleared Lyra i and Lyra XP laser systems are compact Nd:YAG, single wavelength lasers used primarily for aesthetic procedures, including hair removal, vascular lesions, pseudofolliculitis (shaving bumps), wrinkle treatments and leg vein treatments in physician offices.

Our Aura i and Aura XP laser systems are compact, highly portable, KTP/532 single wavelength lasers designed for office use. The Aura series laser’s integrated StarPulse feature is designed for the treatment of benign vascular and pigmented lesions, including leg and facial telangiectasia (spider-like veins) and pigmented lesions such as age-spots or lentigos, sun damage and acne. It can also be used as a continuous wave laser for surgical applications that include endoscopic blepharoplasty, rhinoplasty, facelifts, tonsillectomy, wart removal and snoring cessation.

Another application for our technology is the combined use of the Aura and the Lyra lasers in a procedure known as enhanced skin rejuvenation. Enhanced skin rejuvenation uses both wavelengths to improve appearance by addressing facial wrinkles as well as treating age spots and red facial veins.

Our Gemini laser system introduced in February 2004, combines both the wavelengths and pulsing characteristics of our two aesthetic products, the Aura and Lyra laser systems, into a single, higher power and faster platform product. The Gemini is currently FDA-cleared for 21 different non-invasive aesthetic applications.

Our Venus i Erbium:YAG laser system is among the most compact and powerful, commercially available Erbium lasers for micro-laser peels, skin resurfacing (wrinkle removal) and acne scar resurfacing.

Our Solis introduced in 2005 is an innovative intense pulsed light device that features a large 10.64cm² spot for rapidly performing hair reduction and full body rejuvenation.

Our 800 Series KTP/ YAG Surgical Laser System is designed for use in hospitals. It is a high-power, dual-wavelength system with applications in urology, general surgery, and other surgical specialties. The 800 Series System, which provides up to 40 watts of KTP/532 energy and 100 watts of Nd:YAG energy, can also serve as a base laser system for our PDT laser dye module, enabling photo-dynamic therapy applications.


	Laser Devices, Instruments and Disposables:

We offer a broad line of surgical instrumentation, disposables, kits and other accessories for use with our surgical laser systems. These products include disposable fiber optic devices, side-firing fiber optic devices, individual custom hand pieces for specific surgical applications, scanning devices, micromanipulators for microscopic surgery, procedure-specific kits and accessories and various other devices.

Our ADDStat disposable fiber-optic delivery device, also known as the GreenLight PV delivery device, is used primarily in the PVP procedure by delivering over 80 watts of average power from the GreenLight PV laser system to vaporize the soft tissue in the prostate gland.

We have developed the VersaStat i hand piece for use with our aesthetic lasers. It allows the operator to continuously and easily adjust the spot size of the laser from 1 to 5mm without changing hand pieces.

Our disposable optical fibers are available in different lengths and diameters for different surgical applications and preferences. The hand pieces, which are used to hold and aim the delivery device, give the doctor the feel of a traditional surgical tool. When used in contact with body tissue, they provide tactile feedback similar to conventional surgery.


	*Sales and Marketing*

We concentrate much of our marketing efforts for our products on high volume surgical procedures treating conditions of aging such as the treatment of BPH, facial vascular lesions, the treatment of leg veins and hair removal. We believe that increased market awareness of both the benefits of our laser

procedures and the drawbacks of conventional procedures is one of the most important factors in expanding the market for our laser and laser-based products. As a result, we have designed our marketing and sales strategy around a strong educational and clinical training effort to promote awareness of the versatility, safety, and cost-effectiveness of our laser systems and to increase the likelihood of positive clinical outcomes.

We promote our products through trade shows and exhibits covering most of the surgical specialties, physician workshops and seminars, medical journal advertising and direct mailings. We also conduct patient marketing through various web based initiatives. We support and participate in a substantial number of workshops and seminars. For laser products, the workshops usually include a demonstration of our laser systems and often provide surgeons with hands-on experience using our products.


	*Distribution*

In the United States, we distribute our urology products to hospitals, outpatient surgical centers and physician offices through our own direct sales force. Our urology customers also include various physician partnerships and certain medical technology rental companies that mobilize the GreenLight PV laser system in order to rent it to health care providers on a per use or shared use basis, increasing the availability of a single GreenLight PV laser system for multiple sites. We distribute our aesthetic products through a combination of our direct sales force and our non-exclusive U.S. distribution partner Henry Schein, Inc. (“Henry Schein”). Until November 9, 2005, we also distributed our aesthetic products through the McKesson Corporation Medical Group (“McKesson”) pursuant to a distribution agreement, that was made non-exclusive in April 2005 and terminated effective as of November 9, 2005. On July 29, 2005, we entered into a non-exclusive distribution agreement with Henry Schein (the “HSI Agreement”), pursuant to which Henry Schein, a distributor of healthcare products and services to office-based practitioners in the North American and European markets, will distribute our aesthetic product line to physicians and physician practices within the United States. We intend to distribute our aesthetic product line through Henry Schein on a non-exclusive basis for the foreseeable future. The Henry Schein distribution relationship has replaced the McKesson distribution relationship as our principal U.S. distribution network for our aesthetic product line.

Sales of our aesthetic products through McKesson and Henry Schein as a percentage of total revenues for the respective periods were as follows:


	Years Ended
	December 31,

	2005			2004			2003

McKesson Corp.		6	%		23	%		31	%
Henry Schein		2	%		—			—

As of December 31, 2005, neither McKesson or Henry Schein accounted for greater than 10% of our total accounts receivable.

We anticipate that the percentage of aesthetic sales through Henry Schein will increase in future periods. However, we are still engaged in the transitional phase of our distribution relationship with Henry Schein which involves significant training and coordination activities which are necessary to achieve an effective distribution partnership. Although to date we have made substantial progress in effecting this transition, there can be no assurance that our new relationship with Henry Schein will generate revenues equal to or greater than those previously generated through our relationship with McKesson.

Our direct sales force at December 31, 2005 consisted of 55 representatives worldwide.

In the United Kingdom and France, we distribute our products to hospitals, outpatient surgical centers and physician offices through our own direct sales force. Elsewhere, we sell our products through regional distributor networks throughout Europe, the Middle East, Latin America, Asia and the Pacific Rim. We are both ISO 13485 and CE certified.


	*International Business*

Revenues from Europe, Asia and the Pacific Rim continue to account for a large percentage of total revenues. Export revenues accounted for 31%, 27%, and 26% of total revenues for the years ended December 31, 2005, 2004, and 2003, respectively. We expect that international sales will continue to represent a significant percentage of net revenues in 2006 and beyond.

Financial information relating to our business segment and revenues generated in different geographic areas are set forth in Note 2, titled “Segment Reporting,” of Notes to Consolidated Financial Statements in Item 8 of this report. In addition, information regarding risks attendant to our foreign operations is set forth under the heading “Risk Factors” later in this report.


	*Installed Base of Lasers*

We have more than 8,500 laser systems installed worldwide. The installed base provides a market for service as well as the sale of devices, instruments and disposables.


	*Service and Support*

Our Customer Response Center handles customer calls 24 hours a day, seven days a week, and is staffed by over 12 of our professionals trained to respond to inquiries and calls from our customers. Telephone requests range from orders for parts and ADDStat fibers to requests for technical support, customer information and field service.


	*Research and Development*

We operate in an industry that is subject to rapid technological changes. Our ability to remain competitive in our industry depends on, among other things, our ability to anticipate and react to such technological changes. To this end, we have assembled a team of engineers with significant experience in the design and development of medical devices using lasers and light-based energy sources. Therefore, we intend to continue to invest significant amounts in research and development. Research and development expenditures totaled $7.9 million in 2005, $5.2 million in 2004 and $4.4 million in 2003. At December 31, 2005, we had 34 employees engaged in research and development related activities. We expect to identify and hire additional technical personnel in fiscal year 2006 to staff our planned research and development activities, and we expect that these costs will increase in the future in order to maintain a leading position in the market for surgical laser systems.

Our research and development programs are directed toward the development of new laser systems and delivery devices, enhancements to existing products, new clinical applications, and clinical trials and evaluations necessary for regulatory approval to market new products.


	*Manufacturing*

We manufacture in the United States the laser resonators, system chassis and certain accessories including disposable products and re-usable hand pieces used in our laser systems. We buy from various independent suppliers many components that are either standard or built to our proprietary specifications, and which are then assembled at our California facility. We also contract with third parties for the manufacture or assembly of certain components. Our laser manufacturing operations concentrate on the assembly and test of components and subassemblies manufactured to our designs and specifications by outside vendors. Approximately 58 of our employees work in manufacturing our products. We believe that

we have sufficient manufacturing capacity in our present facilities to support current operations at least through the end of 2006.


	*Employees*

At December 31, 2005, we had 296 employees, including 99 in sales and marketing, 34 in research and development, 118 in manufacturing operations and service, and 45 in general and administrative functions. These numbers include 37 employees located outside of the United States. We believe that we maintain competitive compensation, benefit, equity participation and work environment policies to assist in attracting and retaining qualified personnel. We also believe that the success of our business will depend, in part, on our ability to attract and retain such personnel, who are in great demand. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. None of our employees are represented by a labor union, and we believe our employee relations are good.


	*Competition*

We compete in the non-ophthalmic surgical segment of the worldwide medical laser market. In this market, lasers are used in hospital operating rooms, outpatient surgery centers and individual physician offices for a wide variety of procedures. This market is highly competitive with respect to both our aesthetic and urology product lines. Our competitors are numerous and include some of the world’s largest organizations as well as smaller, highly specialized firms. Our primary competition in the field of urology comes from alternative procedures and technologies for the treatment of PVP, principally those manufacturers producing technologies for performance of the TURP procedure, and the so-called “thermal therapies” offered by large medical device manufacturers such as Medtronic, Boston Scientific and Johnson & Johnson. In addition, we face competition from other surgical laser companies such as Lumenis and Trimedyne which offer products for what we believe are less efficacious but less costly procedures for the treatment of BPH such as Holmium Laser Ablation of the Prostate. In the aesthetic market we compete with a number of companies including Palomar Medical Technologies, Candela, Cutera and Syneron. We believe the products of these companies provide comparable clinical results.

Our ability to compete effectively depends, among other things, on such factors as:


	•	market acceptance of our products;

	•	product performance;

	•	price;

	•	satisfactory reimbursement of the PVP procedure by public and private third party payers;

	•	customer support and technical service;

	•	the success and timing of new product development; and

	•	continued development of successful distribution channels.

As we continue to introduce new technologies, we may face competition from both existing surgical laser and other medical device companies and new ones entering the market segments in which we compete. We may also face competition from companies that currently offer non-surgical solutions, such as pharmaceutical companies. Some of our current and prospective competitors have or may have significantly greater financial, technical, research and development, manufacturing and marketing resources than we have. To compete effectively, we will need to continue to expand our product offerings, update our existing products and expand our distribution.

Certain surgical laser manufacturers have targeted their efforts on narrow segments of the market, such as angioplasty, orthopedics, and lithotripsy. Their products may compete for the same capital equipment and disposable device funds as our products, and accordingly, these manufacturers may be

considered our competitors. Generally, surgical laser manufacturers such as us compete with standard surgical methods and other medical technologies and treatment modalities. Several of these manufacturers and their distribution partners offer products for the treatment of BPH using similar technologies to ours and engage in aggressive marketing campaigns and promotional efforts targeted at our products and customers. We cannot assure that we can compete effectively against such competitors. In addition, we cannot assure that these or other companies will not succeed in developing technologies, products or treatments that are more effective than ours or that would render our technology or products obsolete or non-competitive.


	*Proprietary and Intellectual Property*

We rely on a combination of nondisclosure agreements and other contractual provisions, as well as patent, trademark, trade secret and copyright law to protect our proprietary rights. Our general policy has been to seek patent protection for those inventions and improvements likely to be incorporated in our technologies or otherwise expected to be of value. We have an active program to protect our proprietary technology through the filing of patents both domestically and internationally.

As of December 31, 2005, we had 19 U.S. patents issued and 15 U.S. patent applications on file with the U.S. Patent and Trademark Office (USPTO), which generally cover surgical laser systems, delivery devices, calibration inserts, and laser resonators. We expect that once granted, the duration of patents covered by patent applications will be approximately 20 years from the filing of the application. These patents are an asset that help us to prevent others from infringing on some of our core technologies. We intend to continue to file patent applications as appropriate in the future. We cannot be sure, however, that our pending patent applications will be allowed, that any issued patents will protect our IP or will not be challenged by third parties, or that the patents of others will not seriously harm our ability to do business. In addition, others may independently develop similar or competing technology or design around any of our patents. We also have not secured patent protection in certain foreign countries in which our products are sold, and we cannot be certain that the steps we take to prevent misappropriation of our intellectual property abroad will be effective.

While we believe the patents that we have and for which we have applied are of value, other factors have competitive importance. At December 31, 2005, we had 8 U.S. trademarks registered and 4 pending U.S. trademark applications on file with the USPTO. We have also filed trademark applications in certain foreign jurisdictions. If the applications mature to registrations, these registrations would help us to prevent others from using other similar marks on similar goods and services in the U.S. We cannot be sure, however, that the USPTO will issue trademark registrations for any of our pending applications. Further, any trademark rights we hold or may hold in the future may be challenged or may not be of sufficient scope to provide meaningful protection.

We protect our trade secrets and other proprietary information through nondisclosure agreements with our employees and customers and other security measures, although others may still gain access to our trade secrets or discover them independently.

Although we believe that our technologies do not infringe on any other proprietary rights of third parties, from time to time, third parties, including our competitors, may assert patent, copyright and other intellectual property rights to technologies that are important to us.

For more information regarding our reliance on patents and licenses, please see the section below titled “Risk Factors”.


	*Government Regulation*

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

Our products are regulated in the United States by the Food and Drug Administration under the Federal Food, Drug and Cosmetic Act (the “FDC Act”) and the Radiation Control for Health and Safety

Act. The FDC Act provides two basic review procedures for medical devices. Certain products qualify for a Section 510(k) (“510(k)”) procedure under which the manufacturer gives the FDA pre-market notification of the manufacturer’s intention to commence marketing the product. The manufacturer must, among other things, establish that the product to be marketed is “substantially equivalent” to a previously marketed product. In some cases, the manufacturer may be required to include clinical data gathered under an investigational device exemption (“IDE”) granted by the FDA allowing human clinical studies.

There can be no assurance that the FDA will grant marketing clearance for our future products on a timely basis, or at all. Delays in receiving such clearances could have a significant adverse impact on our ability to compete in our industry. The FDA may also require post-market testing and surveillance programs to monitor certain products.

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

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

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

In addition, the sale of our urology products is highly dependent on the reimbursement received by hospitals and physicians for performing the PVP procedure. Reductions or delays in such insurance coverage or reimbursement may negatively impact hospitals’ and physicians’ decisions to purchase our products or adopt procedures such as PVP. Each fall the Centers for Medicare and Medicaid Services (“CMS”) publishes new payment rates for physician services and for services provided in hospital outpatient departments. Government reimbursement rates in the United States and abroad strongly influence the reimbursement rates provided by private health insurance companies and, therefore, are critical to our success. Such government regulation of public healthcare financing (including the establishment of reimbursement codes) does not impact our laser sales for aesthetic procedures in the same way as these procedures are generally not subject to reimbursement by government or private health insurance.

Obtaining satisfactory heath care reimbursement rates for the PVP procedure using the GreenLight laser system from government and private insurers continues to be a critical factor for our success in the United States and in international markets. The 2006 national Medicare reimbursement rate for PVP performed in a hospital outpatient department is approximately $2,500. This is the reimbursement rate paid by Medicare to hospitals for all prostate laser procedures described by CPT codes 52647 and 52648. Physicians receive a separate payment of approximately $600 when they perform the PVP procedure in a hospital outpatient department.

Physicians’ professional services are paid by CPT code under the Medicare Physician Fee Schedule. The fee schedule contains different reimbursement rates depending on whether a physician performs a

service in his/her office (also known as the non-facility rate) or at a facility that is paid separately (i.e., the hospital outpatient department). A change in the CPT code descriptors for CPT codes 52647 and 52648 became effective January 2006. Under the new descriptions, PVP is more appropriately described by 52648. Prior to the change, 52647 was used most frequently to describe PVP. Historically, CPT code 52648 was not assigned non-facility practice expense relative value units (RVUs). Consequently, despite the fact that physicians have been performing PVP in a well-equipped office setting, there would no longer have been a mechanism to reimburse physicians for the overhead costs of performing PVP in the non-facility setting. CMS published a technical revision to the 2006 Medicare physician fee schedule to address this situation. CPT code 52648 was assigned non-facility RVUs. Thus, the total national 2006 reimbursement rate for a PVP procedure performed in the office is approximately $3,100.


	*Environmental Regulation*

Our operations are also subject to various federal, state and local environmental protection regulations governing the use, storage, handling and disposal of hazardous materials, chemicals and certain waste products. In the United States, we are subject to the federal regulation and control of the Environmental Protection Agency. Comparable authorities are involved in other countries. We believe that compliance with federal, state and local environmental protection regulations will not have a material adverse effect on our capital expenditures, earnings and competitive and financial position.

Although we believe that our safety procedures for using, handling, storing and disposing of such materials comply with the standards required by state and federal laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials.


	*Dependence on Single-Source Suppliers and Certain Third Parties*

Certain of the components used in our laser products, including certain optical components, are purchased from single sources. These single-source suppliers are located in both the United States and overseas. During early 2003, we experienced a supply disruption of certain key components. Since then we have not experienced any significant disruptions. While we believe that most of these components are available from alternate sources, an interruption of these or other supplies could adversely affect our ability to manufacture lasers.


	*Seasonality*

We have from time to time experienced seasonal fluctuations in our business. In 2005, we experienced a slow down during the third quarter. Typically, sales in many of our markets are adversely impacted in the third quarter due in large part, we believe, to the vacation schedule of our customers and their patients.


	*Backlog*

As of December 31, 2005 and 2004, we had firm orders in our backlog worth approximately $1.2 million and $3.8 million, respectively. We completely exhausted in 2005 the backlog that existed at the end of 2004, and we plan to completely exhaust during 2006 the backlog that existed at the end of 2005.

Available Information

We make available free of charge, on or through our website at www.laserscope.com, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. Those reports are also available on the SEC website located at www.sec.gov. Information contained on our website is not part of this report.

Item 1A. Risk Factors

In determining whether to invest in our common stock, you should carefully consider the information below in addition to all other information provided to you in this Report, including the information incorporated by reference in this Report. The statements under this caption are intended to serve as cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995. The following information is not intended to limit in any way the characterization of other statements or information under other captions as cautionary statements for such purpose.

Demand for our products in the United States and internationally is highly dependent on the ability of physicians, hospitals and other health care facilities to obtain satisfactory reimbursement rates for our products and services performed with our products from private and governmental third-party payers as well as direct payments from consumers. If satisfactory reimbursement rates are not maintained, demand for Laserscope products would decline and our business and financial results and cash flows would suffer.

A substantial portion of our laser sales are for aesthetic procedures that generally are not covered or reimbursed by government or commercial health insurance. The general absence of insurance coverage for these cosmetic procedures may restrict the development of this market as growth in procedures performed with our aesthetic products largely depends on consumers’ willingness to pay out-of-pocket for these treatments.

Market acceptance of our products internationally may depend in part upon the availability of reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government sponsored health care and private insurance. We may not obtain international reimbursement approvals in a timely manner, if at all. Our failure to receive international reimbursement approvals may negatively impact market acceptance of our products in the international markets in which those approvals are sought.

Increasing the use of our GreenLight laser system to perform the Photoselective Vaporization of the Prostate (“PVP”) procedure could be hindered by the ongoing efforts of major third-party payers for health care in the United States (such as Medicare, Medicaid, private healthcare insurance and managed care plans) and in our key international markets such as the European Union and the Asia-Pacific region to contain healthcare costs through stricter coverage criteria, price regulation, and lower payments for all items, including health care services, disposable medical products and medical capital equipment.


	*The current Facility Fee reimbursement for PVP in the United States has been reduced and could be reduced further, eliminated or utilized by a competitor.*

Demand in the United States for our GreenLight laser system and disposable fiber optic delivery devices is highly dependent on the reimbursement for the PVP procedure when it is performed in the hospital outpatient setting. The rate set by Medicare is particularly influential on demand because Medicare is the largest single payer for PVP procedures and because many commercial payers use Medicare payments as a benchmark for their reimbursement rates. The national reimbursement rate for the PVP procedure was reduced to a new rate of approximately $2,500 for 2006. This amount represents a decrease of $1,250 from the temporary reimbursement amount of $3,750 per procedure previously in effect since April 2004, but is higher than the $1,850 paid per procedure prior to April 2004.

Medicare pays for hospital outpatient services on a rate-per-service basis that varies according to the ambulatory payment classification (APC) group to which the service is assigned. Services within a particular APC are supposed to be like in clinical character and resource utilization. Medicare uses the median cost to establish a payment amount for the services grouped with a single APC. The hospital outpatient payment rate includes the national payment amount that is made up of the Medicare payment and the beneficiary co-payment to the facility. Special payments are made under the hospital outpatient payment system for new technology items in one of two ways. The first is through a temporary add-on payment or “transitional pass-through payments.” This applies to certain drugs, devices and biologics. The

second is through a temporary assignment to a New Technology APC. New services, not specific items, generally are handled through this method. Assignment to a New Technology APC is time limited. Medicare has the discretion to reassign a New Technology service to a standard clinical APC when it feels it has sufficient data to understand the costs incurred by hospitals to provide the service.

The APC code applicable to the PVP procedure has varied since its launch. We submitted a New Technology Application to the Centers for Medicare and Medicaid Services (“CMS”) in September 2003, and was notified by Medicare several months afterwards that the application was approved. As a result, PVP was assigned temporary HCPCS code C9713 and was assigned to New Technology APC 1525, effective April 1, 2004. The national average payment rate for APC 1525 is $3,750. In July 2005, CMS published its proposed rule regarding the 2006 Outpatient Prospective Payment System (“OPPS”) for outpatient hospital facility reimbursement. In this rule, CMS proposed to transfer PVP to a standard clinical Ambulatory Payment Classification (“APC”) code beginning in 2006. CMS recently finalized this proposal based on the agency’s belief that although it had less than a full-year of hospital claims data for PVP, it had a sufficient number of claims upon which to establish the median cost for performing the procedure billed under code C9713, and, therefore, a median cost could be established. As of January 1, 2006, PVP was assigned to APC 0429, which includes all prostate laser procedures described by CPT codes 52647 and 52648. The 2006 national reimbursement rate for APC 0429 is approximately $2,500.


	*Physician Fee Schedule reimbursement for PVP in the United States remains uncertain.*

Demand in the U.S. for our GreenLight laser system and disposable fiber optic delivery devices is also highly dependent on the reimbursement rates physicians are paid to perform a PVP procedure. In particular, Medicare payments to physicians for the PVP procedure are of critical importance as Medicare is the largest single payer for PVP procedures and its reimbursement rates are used as a benchmark by many commercial payers.

Medicare pays for physician services under a uniform, national fee schedule based on relative value units (“RVUs”) that reflect the physician work and overhead costs associated with furnishing a particular item or service. Medicare assigns different RVUs for a single procedure depending on whether the service is performed in the physician’s office or a facility such as a hospital outpatient department or ambulatory surgery center. The non-facility payment rate is higher and is meant to reflect the fact that physicians incur greater overhead costs when they perform a procedure in their office.

Prior to January 2006, physicians generally used CPT code 52647 to describe to payers that they performed a PVP procedure. A change in the CPT code descriptors for CPT codes 52647 and 52648 became effective January 2006. Under the new descriptions, PVP is more appropriately described by 52648. Prior to the change, 52647 was used most frequently to describe PVP. Historically, CPT code 52648 was not assigned non-facility practice expense relative value units (RVUs). Consequently, despite the fact that physicians have been performing PVP in a well-equipped office setting, there would no longer have been a mechanism to reimburse physicians for the overhead costs of performing PVP in the non-facility setting. CMS published a technical revision to the 2006 Medicare physician fee schedule to address this situation. CPT code 52648 was assigned non-facility RVUs. Thus, the total national 2006 reimbursement rate for a PVP procedure performed in the office is approximately $3,100.

There is the chance that at some time in the future PVP may be assigned a payment level that does not pay physicians at a rate they feel adequately reflects the time, effort and resource costs associated with the procedure. If physicians were paid at a rate for the PVP procedure they felt was inadequate, such underpayments would discourage physicians from performing the PVP procedure. Similarly, should Medicare underpay PVP relative to other procedures it will negatively influence physician adoption of the PVP procedure, which would reduce demand for our products and harm our financial performance. CMS reimbursement decisions regarding the physician Fee Schedule for PVP in any site of service remain uncertain and could result in maintenance of the current reimbursement structure or a decrease in reimbursement rates which could adversely affect PVP procedural volume and sales of our products.


	PVP physician reimbursement is typically lower, on a per-procedure basis, compared to other BPH therapies.

The current national average rate of reimbursement paid by Medicare to physicians for performing the PVP procedure on a per-procedure basis is, in some cases, substantially lower than the reimbursement rate paid for performing certain other minimally invasive BPH therapies on a per-procedure basis. While we believe that this disparity results in physicians and hospitals not being reimbursed at a rate commensurate with the necessary resources and work required to do the PVP procedure in all sites of service currently being used by physicians, there can be no assurance that CMS will adjust reimbursement rates to address this disparity. Further, there can be no assurance that physician reimbursement for these other therapies will not be maintained at current levels or raised relative to reimbursement for PVP or that the physician reimbursement for PVP will be maintained at current levels or increased relative to other BPH therapies. The adoption rate of the PVP procedure in the United States is highly dependent upon hospital and physician economics. A substantial reduction in payments to facilities and/or a continuation of the disparity which currently exists between the physician reimbursement for certain other BPH therapies and that for PVP could cause a reduction in the adoption of PVP by hospitals and physicians, which would reduce demand for our products and harm our business.

If we are not able to protect our intellectual property adequately, we will lose a critical competitive advantage, which will reduce our revenues, profits and cash flows.

Our patents, copyrights, trademarks, trade secrets and other intellectual property are critical to our success. We hold several patents issued in the United States, generally covering surgical laser systems, delivery devices, calibration inserts and the laser resonator. We have also licensed certain technologies from others.

We cannot assure that any patents or licenses that we hold or that may be issued as a result of our patent applications will provide any competitive advantages for our products. Nor can we assure that any of the patents that we now hold or may hold in the future will not be successfully challenged, invalidated or circumvented in the future. In addition, we cannot assure that competitors, many of which have substantial resources and have made substantial investments in competing technologies, will not seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, issue, use and sell our products.

Furthermore, we cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. We have not attempted to secure patent protection in foreign countries, and the laws of some foreign countries may not adequately protect our intellectual property as well as the laws of the United States. As we increase our international presence, we expect that it will become more difficult to monitor the development of competing technologies that may infringe on our rights as well as unauthorized use of our technologies.

We believe that we own or have the right to use the basic patents covering our products. However, the laser industry is characterized by a very large number of patents, some of which appear to overlap with other issued patents. As a result, there is a significant amount of uncertainty in the industry regarding patent protection and infringement. Because patent applications are maintained in secrecy in the United States until such patents are issued and are maintained in secrecy for a period of time outside the United States, we can conduct only limited searches to determine whether our technology infringes any patents or patent applications of others.

If we are unable to protect the integrity, safety and proper use of our disposable fiber optic delivery device used with the GreenLight laser system, it could result in negative patient outcomes and reduce our disposable delivery device recurring revenue stream.

Ensuring the integrity, safety and proper use of the GreenLight PV disposable fiber optical delivery device, also known as the ADDStat fiber optic delivery device, and referred to elsewhere in this Report as the “delivery device”, used with the GreenLight PV laser system is crucial to achieving optimal patient outcomes from the PVP procedure. With this is mind, we manufacture the GreenLight PV delivery device

using high quality materials and exacting production standards. We inspect each unit carefully to check that it conforms to our specifications and use diligent efforts to ensure that the delivery device is used appropriately in connection with the GreenLight PV laser system. However, if a third party were to produce and distribute a counterfeit version of the GreenLight PV delivery device or an inferior substitute delivery device to our customers, use of inferior materials, poor design, shoddy construction or improper handling or use of such products could result in severe adverse patient events. While we are constantly making diligent efforts to promote positive clinical outcomes by protecting the safety, integrity and proper use of our products, particularly the GreenLight PV delivery device, one or more third party manufacturers may produce counterfeit or inferior quality delivery devices that our customers may, knowingly or unknowingly, purchase for use with the GreenLight PV laser system. In addition, it is possible that our customers may seek to violate our prohibition on reuse of delivery devices (or reuse inferior substitute delivery devices) on unwitting patients, reducing the efficacy of the procedure and exposing such patients to the risk of blood-borne pathogens. Use of such third party delivery devices or misuse of our genuine GreenLight PV delivery devices could result in adverse clinical outcomes, potentially reducing demand for PVP and decreasing demand for our products. Although we use a variety of methods to protect patients from inferior delivery devices and the reuse of our GreenLight PV delivery devices, including legal and regulatory safeguards, system enabling, patient education and safety packaging among other measures, there can be no assurance that such methods will be effective at avoiding the introduction of such counterfeit or substitute delivery devices into the market. Moreover, use of counterfeit or substitute disposable delivery devices for use with the GreenLight PV laser system or unauthorized reuse of delivery devices, would displace sales of our GreenLight PV disposable delivery devices reducing our recurring disposable delivery device revenue stream and harming our business.

We participate in competitive markets with companies that have significantly greater financial, technical, research and development, manufacturing and marketing resources and/or who produce standard, entrenched medical technologies.


	•	market acceptance of our products;

	•	product performance;

	•	price;

	•	satisfactory reimbursement of the PVP procedure by public and private third party payers;

	•	customer support;

	•	the success and timing of new product development; and

	•	continued development of successful distribution channels.

Some of our current and prospective competitors have or may have significantly greater financial, technical, research and development, manufacturing and marketing resources than we have. To compete effectively, we will need to continue to expand our product offerings, periodically enhance our existing products and continue to enhance our distribution.

surgical methods and other medical technologies and treatment modalities. Several of these manufacturers and their distribution partners offer products for the treatment of BPH using similar technologies to ours and engage in aggressive marketing campaigns, pricing, and promotional efforts targeted at our products and customers. We cannot assure that we can compete effectively against such competitors. In addition, we cannot assure that these or other companies will not succeed in developing technologies, products or treatments that are more effective than ours or that would render our technology or products obsolete or non-competitive.

If we are unable to effectively manage our growth, our business may be harmed.

Our future success depends on our ability to successfully manage our growth. Our ability to manage our business successfully in a rapidly evolving and extremely competitive market requires an effective planning and management process. Our rates of growth in recent years have been high. Should our business continue to grow and demand for our products continue to increase at similar rates, it will increase the strain on our personnel in all aspects of our business.

Our historical growth and international expansion, have placed, and are expected to continue to place, a significant strain on our managerial, operational and financial resources as well as our financial and management controls, reporting systems and procedures. Although some new controls, systems and procedures have been implemented, our future growth, if any, will depend on our ability to continue to implement and improve operational, financial and management information and control systems on a timely basis, together with maintaining effective cost controls. Our inability to manage any future growth effectively would be harmful to our revenues and profitability.

Our dependence on certain single-source suppliers and certain other third parties could adversely impact our ability to manufacture lasers.

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

Problems associated with international business operations could affect our ability to sell our products.

As our international business has grown, we have become increasingly subject to the risks arising from the unique and potentially adverse factors in the countries in which we operate. Our international revenues were 31% of total revenues in the year ended December 31, 2005 and 27% in the year ended December 31, 2004. Our international sales are made through international distributors and wholly-owned subsidiaries with payments to us typically denominated in the local currencies of the United Kingdom and France, and in United States Dollars in the rest of the world. We intend to continue our operations outside of the United States and potentially to enter additional international markets. We anticipate that sales to customers located outside North America will increase and will continue to represent a significant portion of our total revenues in future periods. These activities, require significant management attention and financial resources and further subject us to the risks of operating internationally. These risks include, but are not limited to:


	•	changes in regulatory requirements;

	•	delays resulting from difficulty in obtaining export licenses for certain technology;

	•	customs, tariffs and other barriers and restrictions; and

	•	the burdens of complying with a variety of foreign laws.

We are also subject to general geopolitical risks in connection with our international operations, such as:


	•	differing economic conditions;

	•	changes in political climate;

	•	differing tax structures; and

	•	changes in diplomatic and trade relationships and war.

In addition, fluctuations in currency exchange rates may negatively affect our ability to compete in terms of price against products denominated in local currencies.

Accordingly, if these risks actually materialize, our international operations may be adversely affected and sales to international customers, as well as those domestic customers that use foreign fabrication plants, may decrease

Our business has significant risks of product liability claims, which could drain our resources and exceed our limited insurance coverage.

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

At present, we maintain product liability insurance on a “claims made” basis with coverage commensurate with our business and product lines. We cannot assure that such insurance coverage will be available to us in the future at a reasonable cost, if at all, nor can we assure that other claims will not be brought against us in excess of our insurance coverage.

Our products are subject to government regulation, and we cannot assure that all necessary regulatory approvals, including approvals for new products or product improvements, will be granted on a timely basis, if at all, and that we won’t be subject to product recalls or warnings and other regulatory actions and penalties that could materially affect our operating results.

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

Our products are regulated in the United States by the Food and Drug Administration under the Federal Food, Drug and Cosmetic Act (the “FDC Act”) and the Radiation Control for Health and Safety Act. The FDC Act provides two basic review procedures for medical devices. Certain products qualify for a Section 510(k) (“510(k)”) procedure under which the manufacturer gives the FDA pre-market notification of the manufacturer’s intention to commence marketing the product. The manufacturer must, among other things, establish that the product to be marketed is “substantially equivalent” to a previously marketed product. In some cases, the manufacturer may be required to include clinical data gathered under an investigational device exemption (“IDE”) granted by the FDA allowing human clinical studies.

There can be no assurance that the FDA will grant marketing clearance for our future products on a timely basis, or at all.

If the product does not qualify for the 510(k) procedure, the manufacturer must file a pre-market approval application (“PMA”) based on testing intended to demonstrate that the product is both safe and effective. The PMA requires more extensive clinical testing than the 510(k) procedure and generally involves a significantly longer FDA review process. Approval of a PMA allowing commercial sale of a product requires pre-clinical laboratory and animal tests and human clinical studies conducted under an IDE establishing safety and effectiveness. Generally, because of the amount of information required, the 510(k) procedure takes less time than the PMA procedure.

In addition, we are subject to review, periodic inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements for any product for which we obtain marketing approval. Following approval, our manufacturing processes, subsequent clinical data and promotional activities are subject to ongoing regulatory obligations. If the FDA finds that we have failed to comply with these requirements or later discovers previously unknown problems with our products, including unanticipated adverse events of unanticipated severity or frequency, manufacture or manufacturing processes or failure to comply with regulatory requirements, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, including:


	•	fines, injunctions and civil penalties;

	•	recall or seizure of our products;

	•	restrictions on our products or manufacturing processes, including operating restrictions, partial suspension or total shutdown of production;

	•	denial of requests for 510(k) clearances or PMAs of product candidates;

	•	withdrawal of 510(k) clearances or PMAs already granted;

	•	disgorgement of profits; and

	•	criminal prosecution.

Any of these enforcement actions could affect our ability to commercially distribute our products in the United States and may also harm our ability to conduct the clinical trials necessary to support the marketing, clearance or approval of these products and could materially and adversely affect our business.

To date, all of our products (except for the 800 and 600 Series Dye Module) have been marketed through the 510(k) procedure. Future products, however, may require clearance through the PMA procedure. There can be no assurance that such marketing clearances can be obtained on a timely basis, or at all. Delays in receiving such clearances could have a significant adverse impact on our ability to compete in our industry. The FDA may also require post-market testing and surveillance programs to monitor certain products.

Certain other countries require medical device manufacturers to obtain clearances for products prior to marketing the products in those countries. The requirements vary widely from country to country and are subject to change. Obtaining necessary regulatory approvals in key international markets and retaining such regulatory licenses is essential to international expansion of our business, which is an important strategic objective.

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

internationally. We also cannot predict the extent or impact of future legislation or regulations in the United States and abroad.

We are also subject to regulation under federal and state laws regarding, among other things, occupational safety, the use and handling of hazardous materials and protection of the environment. While we believe that we are in material compliance with these requirements, noncompliance with any such requirements could have a material adverse effect on our business.

The regulatory approval process outside the United States varies depending on foreign regulatory requirements and may limit our ability to develop, manufacture and sell our products internationally.

To market any of our products outside of the United States, we and our collaborative partners, including certain of our distributors, are subject to numerous and varying foreign regulatory requirements, implemented by foreign health authorities, governing the design and conduct of human clinical trials and marketing approval for diagnostic products. As an example, we are seeking regulatory approval to market the GreenLight laser system for the treatment of BPH in Japan, which we hope will be received before the end of 2007. However, there can be no assurance that this approval will obtained within this time frame or at all. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country, nor does the approval by foreign health authorities ensure approval by the FDA.

If our dispute with Palomar is resolved in a manner contrary to our position, we could be required to record additional expenses which could have a material adverse impact on our financial results.

Palomar Medical Technologies, Inc. (“Palomar”) has informed us that it disputes the method used by us for calculating the royalty to be paid on the Lyra laser system pursuant to the Patent License Agreement between Laserscope and Palomar (the “License Agreement”). Palomar also disputes our application of the License Agreement to the Gemini laser system, including our calculation of royalties due on the Gemini laser system under the License Agreement. In the third quarter of 2005, Palomar exercised its right under the License Agreement to engage an independent auditor to conduct a review of our royalty calculations and payments under the License Agreement. The independent auditors have issued a report identifying several potential alternative interpretations of the application of the License Agreement that indicate a potential liability of up to $3.7 million. We disagree with each of these potential alternative interpretations and believe that we have been correctly calculating and paying the royalties owed to Palomar under the License Agreement. Although we intend to vigorously defend our position while we seek to negotiate a resolution of the dispute with Palomar, we may be unable to reach a mutually agreeable resolution of the dispute. Additionally, we have not accrued for a settlement of the dispute. If our dispute with Palomar is resolved in a manner contrary to our position, we could be required to litigate the dispute incurring significant expenses and risk an unfavorable judgment, to record additional expenses and/or to pay a material amount to settle the dispute, which could have a material adverse impact on our financial results.

As we have limited working capital, we may need additional capital that may not be available to us and, if raised, may dilute our shareholders’ ownership interest in us.

We may need to raise additional funds to develop or enhance our technologies, to fund expansion, to respond to competitive pressures or to acquire complementary products, businesses or technologies.

As of December 31, 2005, our total assets were $111.8 million and our total liabilities were $27.0 million. As of the same date, our working capital was $75.0 million and our cash and cash equivalents totaled $30.7 million. Current and anticipated demand for our products as well as procurement and production affect our need for capital. Changes in these or other factors could have a material impact on capital requirements and may require us to raise additional capital.

In 2005, except for shares issued through our Employee Stock Purchase Plan and through the exercise of stock options under our Incentive Stock Option Plans, the only other capital raised was through the exercise of warrants, which resulted in the issuance of 10,000 shares.

We anticipate that future changes in cash and working capital will be dependent on a number of factors including:


	•	Our ability to manage effectively non-cash assets such as inventory and accounts receivable;

	•	Our ability to anticipate and adapt to the changes in our industry such as new and alternative medical procedures;

	•	Our level of profitability; and

	•	Our determination to acquire or invest in products and businesses complementary to ours.

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

Additional financing may not be available on terms that are acceptable to us. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders would be reduced and these securities might have rights, preferences and privileges senior to those of our current shareholders. If adequate funds are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, develop or enhance our products or services, or otherwise respond to competitive pressures would be significantly limited.

We may have difficulty sustaining profitability and may experience additional losses in the future.

Although we recorded net income of $22.6 million, $14.7 million, and $2.5 million for fiscal years 2005, 2004, and 2003 respectively, prior to 2002 we had prolonged periods of consecutive quarterly net losses. In order to maintain and improve our profitability, we will need to continue to generate new sales while controlling our costs. However, any failure to do so could harm our profitability and negatively affect the market price of our stock.

We may be unable to respond to the rapid technological changes that often affect the markets in which we compete.

If we fail to rapidly develop, manufacture and market technologically innovative products at acceptable costs, our operating results will suffer.

We operate in an industry that is subject to rapid technological change. Our ability to remain competitive and future operating results will depend upon, among other things, our ability to anticipate and respond rapidly to such change by developing, manufacturing and marketing technologically innovative products in sufficient quantities at acceptable costs to meet such demand. As we introduce new products this may cause some of our existing products to become obsolete, which may result in the write-off of inventory. However, without new products and enhancements, our existing products will likely become obsolete due to technological advances by other companies, which could result in the write-off of inventory as well as diminished revenues. Therefore, we intend to continue to invest significant amounts in research and development.

Our expenditures for research and development were $7.9 million for the year ended December 31, 2005, $5.2 million in 2004 and, $4.4 million in 2003. We anticipate that our ability to compete will require significant research and development expenditures with a continuing flow of innovative, high-quality products. We cannot assure that we will be successful in designing, manufacturing or selling enhanced or new products in a timely manner. Nor can we assure that a competitor could not introduce a new or enhanced product or technology that could have an adverse effect on our competitive position.

Our current research and development programs are directed toward the development of new laser systems and delivery devices. We cannot assure that these markets will develop as anticipated or that our product development efforts will prove successful. Nor can we assure that such new products, if developed and introduced, will be accepted by the market.

We may become a party to a patent infringement and other intellectual property related actions or disputes, which could result in significant royalty or other payments or in injunctions that can prevent the sale of our products.

Our industry has been characterized by frequent allegations of patent infringement and or other intellectual property related activity including demands for licenses and litigation. Our competitors or other patent holders may assert that our products and the methods we employ are covered by their patents. In addition, we do not know whether our competitors will apply for and obtain patents that will prevent, limit or interfere with our ability to make, use, sell or import our products. Although we may seek to resolve any potential future claims or actions, we may not be able to do so on reasonable terms, or at all. If, following a successful third-party action for infringement, we cannot obtain a license or redesign our products, we may have to stop manufacturing and marketing our products, and our business would suffer as a result.

We may become involved in litigation not only as a result of alleged infringement of a third party’s intellectual property rights but also to protect our own intellectual property. We have and may hereafter become involved in litigation to protect the trademark rights associated with our company name or the names of our products. If we have to change the name of our products, we may experience a loss in goodwill associated with customer confusion and a loss of sales.

Infringement and other intellectual property related claims, with or without merit, can be expensive and time-consuming to litigate, and could divert management’s attention from our core business. We do not know whether necessary licenses would be available to us on satisfactory terms, or whether we could redesign our products or processes to avoid infringement. If we lose this kind of litigation, a court could require us to pay substantial damages, and prohibit us from using technologies essential to our products, either of which would have a material adverse effect on our business, results of operations and financial condition.

Any acquisitions or divestitures we make may not provide us the expected benefits and could disrupt our business and harm our financial condition.

Any acquisitions we make may not provide us the expected benefits and could disrupt our business and harm our financial condition, results of operations and cash flows. We have acquired businesses and technologies in the past, and we may continue to acquire businesses or technologies that we believe are a strategic fit with our business. Any future acquisitions may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. In addition, the integration of acquisition targets may prove to be more difficult than expected, and we may be unsuccessful in maintaining and developing relations with the employees, customers and business partners and other acquisition targets. Since we will not be able to accurately predict these difficulties and expenditures, it is possible that these costs may outweigh the value we realize from a future acquisition. Future acquisitions could result in issuances of equity securities that would reduce our shareholders’ ownership interest, the incurrence of debt, contingent liabilities, stock based compensation or expenses related to the valuation of goodwill or other intangible assets and the incurrence of large, immediate write-offs.

We may be unable to attract and retain key personnel who are critical to the success of our business.

Our future success also depends on our ability to attract and retain engineers and other highly skilled personnel and senior managers. In addition, in order to meet our planned growth we must increase our sales force, both domestic and international, with qualified employees and personnel. Hiring qualified

technical, sales and management personnel is difficult due to a limited number of qualified professionals and competition in our industry for these types of personnel. We have in the past experienced delays and difficulties in recruiting and retaining qualified technical and sales personnel and believe that at times our personnel are recruited aggressively by our competitors and start-up companies. Our employees are “at will” and may leave our employment at any time. As a result, we may experience significant employee turnover. Failure to attract and retain personnel, particularly sales and technical personnel would make it difficult for us to develop and market our technologies.

In addition, our business and operations are substantially dependent on the performance of our key personnel, including Eric Reuter, our President and Chief Executive Officer, Derek Bertocci, Vice President Finance and Chief Financial Officer, Bob Mathews, Group Vice President, Operations and Product Development, and Robert Mann, Group Vice President, Global Surgical Sales and Marketing. We do not have formal employment agreements with Messrs. Reuter, Bertocci, Mathews and Mann and do not maintain “key person” life insurance policies on their lives. If such individuals were to leave or become unable to perform services for our company, our business could be severely harmed.

Our quarterly operating results may fluctuate significantly and any failure to meet financial expectations for any fiscal quarter may cause our stock price to decline.

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

If we are unable to expand and maintain our relationship with our U.S. distribution partner, Henry Schein on favorable contractual terms, our business may be harmed.

In July 2005, we entered into a non-exclusive distribution agreement with Henry Schein (the “HSI Agreement”), pursuant to which Henry Schein, a provider of healthcare products and services to office-based practitioners in the North American and European markets, will distribute our aesthetic product line to physicians and physician practices within the United States. The HSI Agreement is terminable by either party upon 90 days notice. The Henry Schein distribution relationship is intended to replace our distribution relationship with McKesson, which terminated effective November 9, 2005. McKesson had been our exclusive U.S. distribution partner for aesthetic products for nearly four years until April 2005, when our relationship with McKesson was made non-exclusive. On August 9, we received a notice from McKesson that it intended to terminate the McKesson Agreement effective in November 2005. Following the amendment of our distribution agreement with McKesson to make it non-exclusive and prior to termination of the distribution relationship with McKesson, we experienced a significant decline in sales of our aesthetic products through McKesson. Sales of our aesthetic products through the Henry Schein

relationship failed to offset the decline in revenues through McKesson in the 2005. A national distribution relationship that extends our reach is important to our success because the potential customer base for our aesthetic product line includes physicians from a variety of specialties including among others, dermatologists, plastic surgeons, primary care and OB/GYN physicians. During the term of our distribution relationship with McKesson, sales to McKesson accounted for a substantial portion of our revenues. For the year ended December 31, 2005, sales through McKesson accounted for approximately 6% of our total revenues and at December 31, 2005 accounts receivable from McKesson accounted for approximately 1% of our total accounts receivable. Although we expect revenue generated through Henry Schein to increase significantly as this new distribution relationship is fully implemented, there can there be no assurance that our distribution relationship with Henry Schein will adequately replace our relationship with McKesson and we may be unable to generate sufficient revenues on a timely basis or at all. If we are unable to effect a timely and effective transition to the new distribution relationship and maintain a favorable relationship with Henry Schein and/or another major U.S. distribution partner or if Henry Schein or any such other U.S. distribution partner encounters financial difficulties, it could have a material adverse effect on our business, financial condition, results of operations, and future cash flows.

If we are unable to effect a swift transition and rapidly establish a strong working relationship with our U.S. distribution partner, Henry Schein, we may be unable to achieve growth in sales of our aesthetic product line in a timely manner or at all.

The Henry Schein distribution relationship has replaced the McKesson distribution relationship as our principal U.S. distribution network for our aesthetic product line, but as of yet has not replaced the revenues previously generated through McKesson. During 2004, sales to McKesson accounted for approximately 23% of our total revenues, and revenues generated through McKesson in 2005 declined. Such sales represented a material portion of our revenues in 2004. In 2005, revenues generated through Henry Schein failed to offset the decline in revenues through McKesson. Establishing a strong U.S. distribution partner for our aesthetic products is important to our future success in the near future and beyond. The initial phase of our distribution relationship with Henry Schein involves significant training and coordination activities which are necessary to achieve a successful distribution partnership. Although to date we have made substantial progress in effecting this transition, unless we are able to accelerate this process and expand our relationship rapidly we will be unable to generate revenues sufficient to replace those previously generated through our relationship with McKesson.

If our products contain defects that harm our customers’ patients, it would damage our reputation, subject us to potential legal liability and cause us to lose customers and revenue.

Laser systems and fiber optic delivery devices are inherently complex in design and manufacturing. Laser systems require ongoing regular maintenance. The manufacture of our lasers, laser products, disposable delivery devices, and systems involve highly complex and precise processes. As a result of the technical complexity of our products, changes in our or our suppliers’ manufacturing processes or the inadvertent use of defective materials by us or our suppliers could result in a material adverse effect on our ability to achieve acceptable manufacturing yields and product reliability. To the extent that we do not achieve such yields or product reliability, this could have a material affect on our business, financial position, and results of operations.

Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our products are combined with products from other vendors, which may contain defects. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to fix defects or other problems, we could experience, among other things:


	•	loss of customers;

	•	increased costs of product, returns and warranty expenses;

	•	damage to our brand reputation;


	•	failure to attract new customers or achieve market acceptance;

	•	action by regulatory authorities;

	•	diversion of development and engineering resources; and

	•	legal actions by our customers.

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

Our financial results and stock price are affected by a number of factors which are beyond our control.

A number of factors affect our financial results and stock price including, but not limited to:


	•	product mix;

	•	competitive pricing pressures;

	•	material costs;

	•	revenue and expenses related to new products and enhancements to existing products;

	•	delays in customer purchases in anticipation of new products or product enhancements by Laserscope or its competitors; and

	•	the risk of loss or interruption to our operations or increased costs due to earthquakes, the availability of power and energy supplies and other events beyond our control .

The market price of our common stock has historically been subject to significant fluctuations. These fluctuations may be due to factors specific to Laserscope, such as:


	•	quarterly fluctuations in our financial results;

	•	changes in analysts’ estimates of future results;

	•	changes in investors’ perceptions of our products;

	•	announcement of new or enhanced products by us or our competitors;

	•	announcements relating to acquisitions and strategic transactions by us or our competitors;

	•	general conditions in the medical equipment industry; and

	•	general conditions in the financial markets.

The stock market has from time to time experienced extreme price and volume fluctuations, particularly among stocks of high technology companies, which, on occasion, have been unrelated to the operating performance of particular companies. Factors not directly related to our performance, such as negative industry reports or disappointing earnings announcements by publicly traded competitors, may have an adverse impact on the market price of our common stock.

As of December 31, 2005, we had 22,296,689 shares of outstanding common stock. The sale of a substantial number of shares of common stock or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock.

Our financial results and stock price are highly dependent upon successful pricing and sales of our main product line, the GreenLight laser system and related fiber optic delivery device, which increases our vulnerability to a variety of factors outside of our direct control.

Our financial results are highly dependent on successful pricing and sales of the GreenLight PV laser system and related fiber optic delivery device. Pricing and sales may be affected by a myriad of factors including public and private payer reimbursement domestically and internationally, products and services offered by competitors with greater financial resources than us who may engage in aggressive marketing

and pricing strategies, new technologies that deliver superior results to PVP or comparable results at commensurate or lower costs, our ability to maintain or reduce the costs of materials and components used to produce the GreenLight products, among other factors beyond our direct control. Any of these or other factors could compel us to make significant reductions in our pricing or other changes in our sales strategy, which could adversely affect our financial performance and future prospects.

We are a party to legal proceedings arising in the ordinary course of business.

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

We typically assume warranty obligations in connection with the sales of our products, which could cause a significant drain on our resources if our products perform poorly.

We have a direct field service organization that provides service for our products. We generally provide a twelve month warranty on our laser systems. After the warranty period, maintenance and support is provided on a service contract basis or on an individual call basis. Our warranties and premium service contracts provide for a “99.0% Uptime Guarantee” on our laser systems. Under provisions of this guarantee, at the request of the customer, we extend the term of the related warranty or service contract if specified system uptime levels are not maintained. Although the number of warranties extended under this program are currently not material, we can not assure that the number of warranties will not become significant in the future if our products perform poorly, which could cause a significant drain on our resources.

Natural catastrophic events, such as earthquakes, hurricanes or terrorist attacks may reduce our revenues and harm our business.

Our corporate headquarters, including our research and development operations, our manufacturing facilities, and our principal sales, marketing and service offices, are located in the Silicon Valley area of Northern California, a region known for seismic activity. A significant natural disaster, such as an earthquake or a flood, could have a material adverse impact on our business, operating results, and financial condition. In addition, despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems. Any such event could have a material adverse effect on our business, operating results, and financial condition.

In addition, as our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions, natural and man-made disasters. Disruptions in large areas of the United States due to natural disasters and subsequent relief efforts, as seen with the hurricanes that struck the southern United States in the summer and fall of 2005, could have a material adverse effect on our business, operating results, and financial condition. The effects of war or acts of terrorism could likewise have a material adverse effect on our business, operating results, and financial condition. The terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001 disrupted commerce throughout the world and intensified the uncertainty of the United States and other economies. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to these economies and create further uncertainties. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders, or the manufacture or shipment of our products, our business, operating results, financial condition and cash flows could be materially and adversely affected.

No Dividends.

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

The exercise of outstanding options and warrants granted under our stock option plans and other options and warrants may result in dilution of our shareholders equity interests.

Shareholders may experience dilution in the net tangible book value of their investment upon the exercise of outstanding options and warrants granted under our stock option plans and other options and warrants.

Other Risks.

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


Item 1B.	*Unresolved Staff Comments*

None.


Item 2.	*Properties.*

We lease two buildings aggregating approximately 69,000 square feet in San Jose, California under leases expiring in October 2012. In addition, we occupy approximately 10,000 square feet in a third adjacent building in San Jose through a holdover tenancy which is anticipated to run through the end of April 2006. We have options to extend the leases at the then-current market rates. These facilities house our research and development and manufacturing operations as well as our principal sales, marketing, service and administrative offices. We also lease approximately 9,054 square feet of manufacturing space in Milpitas, California under a lease that expires in January 2011. We also lease offices in the United Kingdom, France and South Korea where our local sales and marketing staff are based. We believe that these facilities are suitable for our current operations and are adequate to support those operations beyond 2006.


Item 3.	*Legal Proceedings.*

Palomar Medical Technologies, Inc. (“Palomar”) has informed us that it disputes the method used by us for calculating the royalty to be paid on the Lyra laser system pursuant to the Patent License Agreement between Laserscope and Palomar (the “License Agreement”). Palomar also disputes our application of the License Agreement to the Gemini laser system, including our calculation of royalties due on the Gemini laser system under the License Agreement. In the third quarter of 2005, Palomar exercised its right under the License Agreement to engage an independent auditor to conduct a review of our royalty calculations and payments under the License Agreement. In November the independent auditors issued a report identifying several potential alternative interpretations of the application of the License Agreement that indicate a potential liability of up to $3.7 million. We disagree with each of these potential alternative interpretations and believe that we have been correctly calculating and paying the royalties owed to Palomar under the License Agreement. Accordingly, we have not accrued for a settlement. We intend to vigorously defend our position while we continue to negotiate with Palomar. If our dispute with Palomar is resolved in a manner contrary to our position, we could be required to record additional expenses which could have a material adverse impact on our financial results.

On November 8, 2005, we received notice from a customer of our GreenLight products alleging that we have violated certain terms of a specific treatment parameters/outcomes program agreement with it.

We are in the process of assessing the allegations contained in the November 8, 2005 notice and will determine an appropriate response in due course. If this matter is resolved in a manner unfavorable to us, it could have a material adverse impact on our financial results.

We are involved in various legal proceedings and other disputes that arise in the normal course of business. These other matters include product liability actions, contract disputes and other matters. Based on currently available information, we believe we have meritorious defenses to these actions and that resolution of these cases is not likely to have a material adverse effect on our business, financial position, cash flows or future results of operations.


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

No matters were submitted to a vote of security holders during the fourth quarter of 2005.


Item 4A.	*Executive Officers of the Registrant*

The following sets forth certain information with respect to the executive officers of the Company:


Name	Age		Position

Robert J. Pressley, Ph.D		73	Chairman of the Board of Directors
Eric M. Reuter		44	President, Chief Executive Officer and Director
Robert Mann		48	Group Vice President, Global Surgical Sales and Marketing
Robert L. Mathews		60	Group Vice President, Operations and Product Development
Ken Arnold		36	Vice President, Research and Development
Van Frazier		53	Vice President, Quality and Regulatory Affairs
Peter Hadrovic		39	Vice President, Legal Affairs, General Counsel and Secretary
Derek Bertocci		52	Vice President, Finance and Chief Financial Officer
Dennis LaLumandiere		52	Vice President, Human Resources and Organizational Development
Kester Nahen, Ph.D.		36	Vice President, Application Research
Allan Danto		52	Vice President, Global Aesthetic Sales and Marketing
Lloyd Diamond		38	Vice President, Marketing, Urology

Robert J. Pressley, Ph.D. is a co-founder of the Company and has been a director since its founding. Dr. Pressley was appointed Chairman of the Board of Directors in June 1998. Dr. Pressley co-founded Candescent Technologies Corporation (formerly named Silicon Video Corporation), a developer of electronic products, and served as its President and Chief Executive Officer from January 1991 to January 1994. Dr. Pressley also founded XMR, Inc., a manufacturer of excimer lasers and laser systems, and served as its Chief Executive Officer from March 1979 until March 1990. Dr. Pressley has been a self-employed technology consultant since January 1995.

Eric M. Reuter joined Laserscope as Vice President, Research and Development in September 1996 and was appointed President and Chief Executive Officer of the Company in June 1999. Prior to joining Laserscope, from February 1994 to August 1996, Mr. Reuter was employed at the Stanford Linear Accelerator Center at Stanford University (SLAC) as the Project Engineer for the B-Factory High Energy Ring, an electron storage ring used for high energy physics research. From February 1991 to January 1994, he served as a Senior Staff Engineer and Program Manager in digital imaging at Siemens Medical Systems — Oncology Care Systems, a medical device company.

Robert Mann joined Laserscope in May 2001 as Director of Physician Practice Enhancement. Mr. Mann served as Senior Director of North American Aesthetic Sales from December 2001 to October 2002, Vice President, North American Sales and Marketing in October 2002, Group Vice President, Global Sales and Marketing in December 2004 and was appointed Group Vice President, Global Surgical Sales and Marketing in November 2005. Prior to joining Laserscope, Mr. Mann served as National Director of Operations for Vanishing Point Medical Group, a Multi-Specialty Laser Aesthetics practice from January 1999 to May 2001, Vice President of Operations at Pasqua Coffee, a retail food service company, from January 1989 to May 1998 and as Vice President of Operations at Mrs. Fields Cookies, a retail food service company, from April 1981 to January 1989.

Robert L. Mathews joined Laserscope as Executive Vice President in August 1999 and was appointed Group Vice President, Operations and Product Development in December 2004. Before joining Laserscope, from December 1998 to August 1999, he was Executive Vice President & General Manager of the MasterPlan Division of COHR, Inc., a management consulting and independent service organization. From April 1997 to December 1998, he was Vice President and General Manager of Diasonics Vingmed Ultrasound, Inc., a medical device manufacturer. From April 1996 to April 1997, he was Senior Director, Corporate Accounts at Spacelabs Medical, Inc., a medical device manufacturer. From May 1995 to April 1996, Mr. Mathews was a self employed business consultant and from February 1994 to May 1995 he was President and Chief Executive Officer of Resonex Holdings Ltd., a medical device manufacturer.

Ken Arnold joined Laserscope as a Manufacturing Engineer in March 1996. Mr. Arnold served as a Design Engineer from April 1997 to July 1999, Director of Engineering and Technology from July 1999 to October 2001 and as Vice President of Research and Development since October 2001. Prior to joining Laserscope, from 1993 to 1996, he was a Program Manager and Design Engineer at United Defense LP, a major defense contractor.

Van Frazier joined Laserscope as Director of Quality Assurance in January 1999 and was appointed Vice President, Quality and Regulatory Affairs in June 1999. Before joining Laserscope, from October 1997 to January 1999, he was Director of Quality Assurance and Regulatory Affairs of St. Jude Medical, a medical device manufacturer. From January 1996 to October 1997, Mr. Frazier held various regulatory management positions at Telectronics Pacing Systems, a medical device manufacturer and from November 1991 to January 1996, he was Regulatory Compliance Manager for Physio-Control, a medical device manufacturer.

Peter Hadrovic joined Laserscope in December 2004 as Vice President, Legal Affairs and General Counsel and Secretary since December 2005. Prior to joining Laserscope he was a corporate, securities and mergers and acquisitions attorney at Heller Ehrman/ Venture Law Group from June 2000 to December 2004. From September 1997 to June 2000, Mr. Hadrovic was a corporate transactional attorney at White & Case LLP. Mr. Hadrovic received a J.D. from Cornell Law School in 1997. From 1988 to 1991, Mr. Hadrovic served as a Legislative Assistant, and from 1992 to 1994 as the District Representative, to U.S. Congressman John LaFalce.

Derek Bertocci joined Laserscope in June 2005 as Vice President, Finance and Chief Financial Officer. Prior to joining Laserscope he served as Senior Vice President and Chief Financial Officer at VISX, Incorporated from March 2004 to June 2005. He was Vice President and Controller at VISX from December 1998 to February 2004. He was Controller at VISX from November 1995 to December 1998. Prior to joining VISX, Mr. Bertocci was Controller for Time Warner Interactive from 1993 to 1995.

Dennis LaLumandiere joined Laserscope in September 1989 as Corporate Controller. Mr. LaLumandiere has served as Vice President, Human Resources and Organizational Development since June 2005. Mr. LaLumandiere also served as Vice President, Finance from February 1995 to June 2005, Chief Financial Officer from February 1996 to June 2005, Assistant Secretary from November 1996 to October 2001 and Secretary from October 2001 to December 2005. Prior to joining Laserscope, from 1983 to 1989, Mr. LaLumandiere held various financial and operations management positions at Raychem Corporation, a multinational materials science company.

Kester Nahen joined Laserscope as Laser Scientist in May 2001. Dr. Nahen served as Clinical Product Manager from October 2002 to October 2003, as Director of Professional Education and Clinical Applications from October 2003 to December 2004, as Vice President of Professional Education and Clinical Applications in December 2004, and was appointed Vice President of Application Research in November 2005. Prior to joining Laserscope, from March 1996 to May 2001, he worked as Scientist at the Medical Laser Center Lübeck an institute of the Medical University of Lübeck in Lübeck, Germany focusing on fundamental and applied research in biomedical optics. Dr. Nahen received his M.S. in Physics from the University of Hamburg, Germany in March 1996 and his Ph.D. in Physics from the Medical University of Lübeck, Germany in October 2001.

Lloyd Diamond joined Laserscope as Vice President, Utilization in July 2005. Mr. Diamond has served as Vice President, Marketing, Urology since November 2005. Prior to joining Laserscope, Mr. Diamond was Director of Product and Procedure Marketing at Kyphon, Inc., from June 2004 to July 2005. From June 1998 to June 2004, Mr. Diamond held various management positions at Linvatec Hall Surgical a division of the Conmed Corporation.

Allan Danto jointed Laserscope as Vice President, Global Aesthetic Sales and Marketing in December 2005. From October 2001 to December 2005, Mr. Danto served as President of Danto & Associates, Inc, a healthcare consulting firm, assisting corporations and physician practices with operational, marketing, and distribution solutions. From August 1996 to October 2001, Mr. Danto served as President and Chief Operating Officer of Cosmetic Technologies.

PART II


Item 5.	*Market for Registrant’s Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities.*

Our common stock is traded on the NASDAQ National Market under the symbol “LSCP”. As of February 24, 2006, we had approximately 567 shareholders of record and the last reported sale of our Common Stock on the NASDAQ National Market was $21.91 per share.

The following table shows our high and low selling prices for the years ended December 31, 2005 and December 31, 2004 as reported by the NASDAQ National Market System:


	2005

	High		Low

First Quarter	$	37.11	$	26.55
Second Quarter	$	42.47	$	28.59
Third Quarter	$	43.67	$	27.25
Fourth Quarter	$	30.47	$	20.81


	2004

	High		Low

First Quarter	$	27.85	$	14.91
Second Quarter	$	34.18	$	22.54
Third Quarter	$	27.94	$	15.27
Fourth Quarter	$	36.68	$	18.83

We have never declared or paid dividends on our common stock. We presently intend to retain all future earning for use in our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Provisions of our bank line of credit prohibit the payment of dividends without the bank’s consent.

To address our capital needs in 2000, we completed a private placement of our Common Stock pursuant to Regulation D of the Securities Act of 1933, as amended, to accredited investors providing

gross proceeds of approximately $1.9 million to us. The transaction consisted of two closings. The first was approximately $1.1 million in gross proceeds in exchange for 1,505,000 shares of our common stock, which closed on December 30, 1999. The second closing was for approximately $0.8 million in exchange for 995,000 shares of our common stock which closed on January 14, 2000. The shares had no par value and were issued at a price of $0.80 per share. We also issued warrants to purchase 218,875 shares of common stock on the date of the second closing which were convertible into shares of our common stock at $1.25 per share and expired in 2005. At December 31, 2005, no warrants issued pursuant to the private placement of Common Stock remained outstanding.

On February 11, 2000, we completed a private placement of subordinate convertible debentures pursuant to Regulation D of the Securities Act of 1933, as amended, to affiliates of Renaissance Capital Group, Inc. (“Renaissance”) with gross proceeds to us of $3.0 million. The debentures were to mature seven years from issuance and had an interest rate of 8.00%. The debentures were convertible into our common stock with an initial conversion price, which was subject to adjustment, of $1.25. In the first six months of 2003, $400,000 of the debentures were converted to 320,000 shares of our common stock by Renaissance. During the last six months of 2003, Renaissance converted the remaining $2.6 million of debentures into 2,080,000 shares of our common stock. The private placement also included warrants to purchase 240,000 shares of our common stock at $1.50 per share and expired in 2005. As of December 31, 2005, no warrants issued pursuant to the private placement of subordinate convertible debentures remained outstanding.

The proceeds from both of these financings were used for general corporate working capital purposes.

We do not have a stock repurchase program.

The equity compensation plan information required to be provided in this Annual Report on Form 10-K is incorporated by reference to our proxy statement for the 2006 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2005.


Item 6.	*Selected Financial Data.*

We derived the following selected financial data from our consolidated financial statements. The historical financial data should be read in conjunction with our consolidated financial statements and notes thereto.

Selected Consolidated Financial Information


	Year Ended December 31,

	2005		2004		2003		2002		2001

	(In thousands, except per share amounts)
Statement of Operations Data:
Net revenues	$	127,124	$	93,770	$	57,427	$	43,088	$	35,087
Net income (loss)		22,550		14,739		2,517		323		(829	)
Basic net income (loss) per share		1.02		0.70		0.13		0.02		(0.05	)
Diluted net income (loss) per share		0.98		0.65		0.13		0.02		(0.05	)


	Year Ended December 31,

	2005		2004		2003		2002		2001

	(In thousands)
Balance Sheet Data:
Cash & cash equivalents	$	30,653	$	15,954	$	7,158	$	4,661	$	3,408
Working capital		75,047		38,566		20,722		15,652		13,336
Total assets		111,770		61,589		37,028		29,163		25,482
Capital leases (excluding current portion)		9		31		—		60		60
Other long term debt		—		—		—		2,853		3,000
Shareholders’ equity		84,788		42,911		23,198		15,482		13,412


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations.*

Our discussion and analysis of our financial condition, results of operations, and cash flows are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to bad debts, product returns, inventory valuation and obsolescence, intangible assets, income taxes, warranty obligations, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Overview

We are a leading provider of medical laser and other light-based systems for surgical and aesthetic applications. Founded in 1982, we are a pioneer developer of innovative technologies with over 8,500 lasers installed worldwide in doctors’ offices, out-patient surgical centers and hospitals. Our product portfolio consists of lasers and other light-based systems and related energy delivery devices for medical applications.

We primarily serve the needs of two medical specialties: urology and aesthetic surgery. Our GreenLight PV laser system, offers a treatment for a urological disorder called benign prostatic hyperplasia (“BPH”), an enlargement of the prostate gland experienced by most men beginning after the age of fifty. For aesthetic applications, we offer a full line of products used to perform a wide variety of treatments including the removal of leg and facial veins, unwanted hair, pseudo-folliculitis and wrinkles.

In the United States, we distribute our urology products to hospitals, outpatient surgical centers and physician offices through our own direct sales force. Our urology customers also include various physician partnerships and certain medical technology rental companies that mobilize the GreenLight PV laser system in order to rent it to health care providers on a per use or shared use basis, increasing the availability of a single GreenLight PV laser system for multiple sites. We distribute our aesthetic products through a combination of our direct sales force and our non-exclusive U.S. distribution partner Henry Schein. Until November 9, 2005, we also distributed our aesthetic products through the McKesson Corporation Medical Group (“McKesson”) pursuant to a distribution agreement, that was made non-exclusive in April 2005 and terminated effective as of November 9, 2005. On July 29, 2005, we entered into a non-exclusive distribution agreement with Henry Schein (the “HSI Agreement”), pursuant to which Henry Schein, a distributor of healthcare products and services to office-based practitioners in the North American and European markets, will distribute our aesthetic product line to physicians and physician practices within the United States. We intend to distribute our aesthetic product line through Henry Schein on a non-exclusive basis for the foreseeable future. The Henry Schein distribution

relationship has replaced the McKesson distribution relationship as our principal U.S. distribution network for our aesthetic product line.

Sales of our aesthetic products through McKesson and Henry Schein as a percentage of total revenues for the respective periods were as follows:


	Year Ended
	December 31,

	2005		2004		2003

McKesson Corp.		6%		23%		31%
Henry Schein		2%		—		—

As of December 31, 2005, neither McKesson or Henry Schein accounted for greater than 10% of our total accounts receivable.

In the United Kingdom and France we distribute our products to hospitals, outpatient surgical centers and physician offices through our own direct sales force. Elsewhere, we sell our products through regional distributor networks throughout Europe, the Middle East, Latin America, Asia and the Pacific Rim. We are both ISO 13485 and CE certified.

We have from time to time experienced seasonal fluctuations in our business. In 2005, we experienced a slow down during the third quarter. Typically, sales in many of our markets are adversely impacted in the third quarter due, we believe, to the vacation schedule of our customers and their patients.

During 2005 our revenues and net income increased compared to the prior year primarily as a result of continued growth in sales of our main urology products, the GreenLight PV laser system and GreenLight PV delivery devices. Our reported revenue for the year ended December 31, 2005 was $127.1 million, a 36% increase as compared to total revenues of $93.8 million in 2004. Net income in 2005 was $22.6 million, or $0.98 per diluted share, a 53% increase when compared to net income of $14.7 million, or $0.65 per diluted share, in 2004. We expect revenues from our urology products, fueled by sales of the GreenLight products, will continue to grow at a faster rate than revenue from our aesthetic products in 2006.

Intense competition in the market for light-based cosmetic treatment devices, which is characterized by low barriers to entry and marginal technological differentiation among product offerings, continued to create price pressure on our aesthetic products. We will continue to focus on the key features of our product offerings affecting the value proposition to the customer, in particular the speed and comfort of light-based aesthetic treatments, to address this challenge. There can be no assurance that our existing products and newly offered products will be competitive in an increasingly difficult market for light-based cosmetic treatment devices.

Sales of GreenLight PV delivery devices used for the Photoselective Vaporization of the Prostate (“PVP”) procedure grew in 2005 both domestically and internationally over the same period of the prior year and we expect continued growth in 2006. Our priority in the urology market is to have the PVP procedure, using the GreenLight PV laser system, replace the TURP procedure as the worldwide standard for the surgical treatment of BPH. Demonstrating and maintaining the clinical effectiveness and safety of the PVP procedure using our product is essential to achieving this goal. As a result, we continued to make significant investments in sales, marketing and professional education and training in 2005, and intend to continue to do so in 2006. Our efforts to increase adoption of PVP using our product in the United States, Europe and the Asia-Pacific region will be especially important to our continued success. The international

market for PVP, which we believe to be substantially larger than the U.S. market, offers great promise but also a greater variety of challenges and uncertainties than our domestic market, which are discussed in greater detail in Item 1A, “Risk Factors”. We expect sales of our urology products in international markets to grow at a rate as fast or faster than domestic sales of our urology products, although there can be no assurance that such growth will occur.

Obtaining satisfactory heath care reimbursement rates for the PVP procedure using the GreenLight laser system from government and private insurers continues to be a critical factor for our success in the United States and in international markets. The 2006 national Medicare reimbursement rate for PVP performed in a hospital outpatient department is approximately $2,500, a reduction from $3,750 which was in effect from April 1, 2004 to December 31, 2005. $2,500 is the reimbursement rate paid by Medicare to hospitals for all prostate laser procedures described by CPT codes 52647 and 52648. Physicians receive a separate payment of approximately $600 when they perform a PVP procedure in a hospital outpatient department.

Physicians’ professional services are paid by CPT code under the Medicare Physician Fee Schedule. The fee schedule contains different reimbursement rates depending on whether a physician performs a service in his/her office (also known as the non-facility rate) or at a facility that is paid separately (i.e., the hospital outpatient department). A change in the CPT code descriptors for CPT codes 52647 and 52648 became effective January 2006. Under the new descriptions, PVP is more appropriately described by 52648. Prior to the change, 52647 was used most frequently to describe PVP. Historically, CPT code 52648 was not assigned non-facility practice expense relative value units (RVUs). Consequently, despite the fact that physicians have been performing PVP in a well-equipped office setting, there would no longer have been a mechanism to reimburse physicians for the overhead costs of performing PVP in the non-facility setting. CMS published a technical revision to the 2006 Medicare physician fee schedule to address this situation. CPT code 52648 was assigned non-facility RVUs. Thus, the total national 2006 reimbursement rate for a PVP procedure performed in the office is approximately $3,100.

We will continue to work diligently to obtain satisfactory health care reimbursement in our key domestic and international markets. Our sensitivity to public and private payer reimbursement rates makes us subject to a variety of risks and uncertainties, which are discussed in greater detail in Item 1A, “Risk Factors”.

During the fourth quarter of 2005 we introduced a new pricing program for the GreenLight PV delivery devices in the United States, reducing the retail sales price of our GreenLight PV delivery device from $875 to $795. We do not expect a significant change to the price of our GreenLight PV delivery devices in 2006. We expect revenues from the sales of GreenLight PV delivery devices to continue to increase worldwide in 2006 based on the following factors:


	•	Further increases in demand for the PVP procedure;

	•	Growth in the worldwide PVP market; and

	•	Increased positive clinical data on the benefits of the PVP procedure.

We operate in a technologically advanced, dynamic and highly competitive environment. Our future operating results are subject to quarterly variations based on a variety of factors, many of which are beyond our control. While we attempt to identify and respond to these conditions in a timely manner, these conditions represent significant risks to our performance.

International sales accounted for 31%, 27% and 26% of our net revenues for 2005, 2004 and 2003, respectively. We believe that international sales will continue to account for a significant portion of our net revenues in the foreseeable future. Our international sales generally occur through our foreign subsidiaries and exports to foreign distributors. Our international sales and operations are subject to the risks of conducting business internationally, particularly the financial impact of currency fluctuations, limited intellectual property protections, greater difficultly in monitoring and ensuring positive clinical outcomes

and regulation by foreign governmental entities among others described in Item 1A, Risk Factors. These risks could harm our financial condition, results of operations and future cash flows.

Through December 31, 2005, sales outside of the United States have been denominated in the local currencies of the United Kingdom and France and in United States Dollars for the rest of the world. During 2005, 2004 and 2003, fluctuations in foreign currencies did not materially affect the results of operations reported by us. However, we are exposed to foreign currency risk in a number of areas. Although our revenues denominated in United States Dollars represented approximately 90% of total revenues in 2005, 90% in 2004 and 91% in 2003, market risk exists in foreign countries where we sell in United States Dollars, and a major strengthening of the United States Dollar could have a material negative impact on our business. We do not engage in foreign currency hedging transactions.

On December 21, 2005, the Compensation Committee of the Board voted to accelerate the vesting of approximately 438,200 “out-of-the-money” stock options. The primary purpose of the accelerated vesting of the “out-of-the-money” stock options referenced above is to eliminate future stock-based employee compensation expense we would otherwise recognize in our consolidated statement of operations with respect to these accelerated options once SFAS No. 123(R) becomes effective. These options had exercise prices substantially in excess of our then current stock price which was $23.10 as of the close of market on December 21, 2005. We believe that these options were of limited value to employees and did not offer incentive comparable to the compensation expense attributed to the options. Approximately $7.3 million future expense was eliminated and is included in the pro forma net income for the year ended December 31, 2005.

Results of Operations

The following table sets forth, for the period indicated, certain financial information as a percentage of net revenues:


		2005			2004			2003

Net revenues			100.0	%		100.0	%		100.0	%
Cost of products and services			39.7			41.7			47.6

Gross margin			60.3			58.3			52.4
Operating expenses:
	Research and development		6.2			5.6			7.7
	Selling, general and administrative		35.4			36.3			39.9

			41.6			41.9			47.6
Operating income			18.7			16.4			4.7
Interest income and other, net			0.4			0.3			0.0

Income before provision for income taxes			19.1			16.7			4.7
Provision for income taxes			1.4			1.0			0.3

Net income			17.7	%		15.7	%		4.4	%

2005 results compared to 2004 (in thousands, except percentages)


		Years Ended December 31,

		2005				2004
										2004-2005
		Amount		%(a)		Amount		%(a)		% Change

Revenues from sales of:
	Lasers & Instrumentation	$	62,047		49%	$	56,958		61%		9%
	Disposable supplies		56,341		44%		29,383		31%		92%
	Service		8,736		7%		7,429		8%		18%

Total net revenues		$	127,124		100%	$	93,770		100%		36%
Gross margin:
	Product	$	74,339		63%	$	53,043		61%		40%
	Service		2,364		27%		1,612		22%		47%
Total gross margin			76,703		60%		54,655		58%		40%
Research & development			7,858		6%		5,217		6%		51%
Selling, general & admin			45,014		35%		34,023		36%		32%
Net income			22,550		18%		14,739		16%		53%


(a)		expressed as a percentage of total net revenues except for gross margins which are expressed as a percentage of either product or service revenues as designated.


	*Lasers and Instrumentation*

Revenues from the sales of lasers and instrumentation increased 9% to $62.0 million compared to $57.0 million in 2004. The increase is due primarily to increased revenue from the sale of GreenLight PV laser systems offset by a reduction in aesthetic laser revenues. We believe the increase in GreenLight laser revenue was driven by continued strong demand for these systems to treat BPH. The worldwide installed base of GreenLight PV laser systems now stands at approximately 775 units with approximately 425 units domestically and approximately 350 units internationally. Revenues from the sale of aesthetic lasers and instrumentation decreased approximately 5% in 2005 compared to 2004. We believe the decrease in aesthetic revenues was impacted by the transition from McKesson to Henry Schein as our U.S. distributor for aesthetic products.

We expect to see higher sales of our laser systems and instrumentation during 2006 as we expect demand for the procedures which use our laser systems to continue to grow.


	*Disposable Supplies*

Revenues from the sales of disposable supplies increased 92% to $56.3 million compared to $29.4 million in 2004. This increased revenue was driven primarily by an increase in shipments of GreenLight PV fiber optic delivery devices which totaled approximately 74,000 units in 2005, up from approximately 37,000 units in 2004. We believe these increases were driven by the growing world wide body of clinical data that demonstrates the clinical efficacy, high safety profile, and cost effectiveness of the PVP procedure. During the fourth quarter of 2005, we introduced a new pricing program for the GreenLight PV delivery devices in the United States, reducing the retail sales price of our GreenLight PV delivery devices from $875 to $795. We do not expect a significant change to the price of our GreenLight PV delivery devices in 2006. We expect revenues from the sales of GreenLight PV delivery devices to continue to increase worldwide in 2006 based on the following factors:


	•	Further increases in demand for the PVP procedure;

	•	Growth in the worldwide PVP market; and

	•	Increased positive clinical data on the benefits of the PVP procedure.


	*Service*

Service revenues increased 18% to $8.7 million compared to $7.4 million in 2004. The increases were due primarily to a greater number of service contracts sold to service our growing installed base of lasers. We generally provide a twelve month warranty on our laser systems. After the warranty period, maintenance and support is provided on a service contract basis or on a time and material basis. We recognize revenues on service over the period of the service contract or when time and material services are performed. Increases in future service revenues depends on increases to the installed base of lasers, as well as the acceptance of our service contracts by our customers.


	*Gross Margin — Product*

Product gross margin as a percentage of net product revenues was 63% in 2005, an improvement of two percentage points compared to 2004. The increase in product gross margin is primarily due to a shift in product mix to higher margin disposable devices. The increase in worldwide sales of disposable supplies at high margins was offset by the increased percentage of sales to international customers at lower profit margins. Our gross profit margin will vary as our sales mix changes. Increases in sales of our GreenLight PV delivery devices will generally raise our overall gross profit margin, whereas increases in sales of products through distributors in international markets will tend to decrease our overall gross profit margin.


	*Gross Margin — Service*

Gross margin from service activities as a percentage of net service revenues was 27% in 2005 compared to 22% in 2004. The increase in service margins reflects a decrease in time and material costs on average to service our installed base of lasers. We expect that gross margin, as a percentage of net revenues from service activities in 2006, will be similar to 2005 levels.


	*Research and Development*

Research and development expenses increased 51% in 2005 compared to 2004. The increase in research and development expenses resulted primarily from new product development and clinical activities focused on the development and launch of future products and new clinical applications. As a percentage of total revenues these expenses remained constant. We expect research and development expenses to increase between 50-60% in 2006 as we continue funding of key new product development programs, enhancements to existing products, new clinical applications, and clinical trials and evaluations necessary for regulatory approval to market new products. Research and development spending during 2006 is expected to be in the range of 7% to 9% of total revenues.


	*Selling, General and Administrative*

Selling, general and administrative (“S,G&A”) expenses increased by approximately $11.0 million to $45.0 million in 2005 from $34.0 million in 2004. The increase in SG&A expenses resulted primarily from higher sales and marketing expenses to support our current and future growth initiatives and increased sales in the United States and international markets.

We expect our S,G&A expenses to increase in 2006 as domestic and international initiatives in sales and marketing are executed, but not exceed the rate of increase in our revenues. S,G&A expenses are expected to range between 33% to 35% of sales during 2006.


	*Interest and Other Income*

Interest and other income increased by approximately $0.3 million to $0.5 million in 2005. The increase is primarily due to higher average cash balances from cash generated during operating activities in 2005.


	*Provision for Income Taxes*

Our effective income tax rate in 2005 was 7.4% as compared to 6.0% in 2004. During 2005, we determined that it is more likely than not that we will have sufficient future taxable income in the United States to utilize our deferred tax assets and accordingly eliminated our valuation allowances against these deferred tax assets. The valuation allowances we eliminated related mainly to net operating loss carryforwards (“NOLs”) arising from deductions taken on income tax returns in prior years for compensation arising from the exercise of stock options. This generated a $17.5 million increase to equity in 2005. The effective income tax rate for 2006 is anticipated to be approximately 40%, though our cash payments for income taxes will be reduced while we utilize our NOL carryforwards.

2004 results compared to 2003 (in thousands, except percentages):


		Years Ended December 31,

		2004				2003
										2003-2004
		Amount		%(a)		Amount		%(a)		% Change

Revenues from sales of:
	Lasers & Instrumentation	$	56,958		61%	$	37,568		65%		52	%
	Disposable supplies		29,383		31%		13,536		24%		117	%
	Service		7,429		8%		6,323		11%		17	%

Total net revenues		$	93,770		100%	$	57,427		100%		63	%
Gross Margin:
	Product	$	53,043		61%	$	28,162		55%		88	%
	Service		1,612		22%		1,924		30%		(16	)%
Total gross margin			54,655		58%		30,086		52%		82	%
Research & development			5,217		6%		4,443		8%		17	%
Selling, general & admin			34,023		36%		22,936		40%		48	%
Net income			14,739		16%		2,517		4%		486	%


(a)		expressed as a percentage of total net revenues except for gross margins which are expressed as a percentage of either product or service revenues as designated.


	*Lasers and Instrumentation*

During 2004, revenues from the sales of laser equipment and instrumentation increased 52% to $57.0 million, or 61% of total net revenues, compared to $37.6 million, or 65%, of total net revenues in 2003. The increases in sales of these products is attributed to higher sales of GreenLight PV laser systems for the treatment of BPH as well as higher sales of lasers and instrumentation for aesthetic applications.

This increase is attributed to higher demand for the product created by the growing popularity of the PVP procedure that uses the GreenLight PV laser system.

The increase in sales of lasers and instrumentation for aesthetic applications is attributed to continued demand for products used in these types of applications. Sales of these products increased 24% during the year ended December 31, 2004 compared to 2003. The demand comes from growing numbers of doctors (particularly family practice doctors and OB/GYN doctors) adding aesthetic procedures to their traditional practices as well as the continued strong demand from patients seeking these types of procedures.


	*Disposable Supplies*

Net revenues from shipments of disposable supplies were 117% higher in 2004 than 2003, and were approximately $29.4 million, or 31%, of total revenues in 2004, compared to approximately $13.5 million, or 24% of total revenues in 2003. These higher revenues are principally due to increasing demand for the

GreenLight PV delivery devices which are used with the GreenLight PV laser system to perform the PVP procedure. Since the introduction of the GreenLight PV laser system and the PVP procedure. We have sold over 54,000 Greenlight PV delivery devices.


	*Service*

Service revenues were 17% higher in 2004 than 2003, and were approximately $7.4 million, or 8% of total revenues in 2004, compared to $6.3 million, or 11% of revenue in 2003. Service revenues increased in all geographic regions, but the growth rate was marginally higher at our foreign subsidiaries.


	*Gross Margin — Product*

Product gross margin as a percentage of net product revenues was 61% in 2004, an improvement of 6 percentage points compared to results for 2003. In 2004, gross margin increased due to a shift in the product mix towards higher margin disposable devices. We expect that product gross margin, as a percentage of net revenues in 2005, will be marginally higher than the level of 2004. However, we expect that these amounts may vary from quarter to quarter during 2005 and will depend on product demand and distribution mix.


	*Gross Margin — Service*

Gross margin from service activities as a percentage of net service revenues was 22% in 2004 compared to 30% in 2003. The decrease reflects an increase in material costs.


	*Research and Development*

Research and development expenses result from activities related to the development of new laser, instrumentation and disposable products, the enhancement of our existing products and the development of surgical applications for new and existing products. In 2004, amounts spent on research and development increased 17% from amounts spent in 2003.


	*Selling, General, and Administrative*

Selling, general and administrative expenses increased 48% in 2004 compared to 2003. This was due in part to higher commissions paid commensurate with the increase in aesthetic and surgical revenues, higher marketing and education expenses related to expanding the presence of our products in both domestic and international markets, as well as increased costs related to compliance with the new requirements of the Sarbanes-Oxley Act of 2002.

In 2004, we recorded an income tax provision of $940,000. While the United States operations reported a book income before tax, due to net operating loss carryforwards, the United States entity’s tax liability was limited to the alternative minimum tax. The United Kingdom subsidiary incurred a charge of $183,000 for income taxes due to its profitability. While the French subsidiary reported a net income in 2004, no tax provision was required due to that entity’s net operating loss carryforwards.


	*Provision for Income Taxes*

At December 31, 2004, we had deferred tax assets of approximately $22.9 million. We evaluated the need for a valuation allowance for the deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. At December 31, 2004, we had no apparent near-term ability to realize our deferred tax assets through carry backs or available tax planning strategies. Additionally, based on cumulative pre-tax losses we sustained in the three years ended December 31, 2004 and the current economic uncertainty in our industry that limited our ability to generate verifiable forecasts of future domestic taxable income, a valuation allowance, in an amount equal to our deferred tax assets was recorded at December 31, 2004. The valuation allowance increased by approximately $7.2 million in 2004 and decreased by approximately $0.1 million in 2003.

Critical Accounting Policies and Estimates

We follow accounting principles generally accepted in the United States (“GAAP”) in preparing our financial statements. As part of this work, we must make many estimates and judgments about future events. These affect the value of the assets and liabilities, contingent assets and liabilities, and revenues and expenses reported in our financial statements. We believe these estimates and judgments are reasonable and we make them in accordance with policies based on information available at the time. However, actual results could differ from our estimates and could require us to record adjustments to expenses or revenues material to our financial position and results of operations in future periods. We believe our most critical accounting policies, estimates and judgments include the following:


	•	revenue recognition;

	•	allowance for doubtful accounts;

	•	warranty obligation;

	•	excess and obsolete inventory;

	•	legal contingencies; and

	•	income tax


	*Revenue Recognition*

Our revenue is primarily comprised of the following: sale and rental of laser equipment and instrumentation, GreenLight PV delivery devices, and service and parts revenue. We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (“SAB 104”). Under this standard the following four criteria must be met in order to recognize revenue:

1) Persuasive evidence of an arrangement exists;

2) Delivery has occurred or services have been rendered;

3) Our selling price is fixed or determinable; and

4) Collectibility is reasonably assured

The four revenue recognition criteria and other revenue related accounting pronouncements are applied to our sales as described in the following paragraphs.

We recognize revenues from the sale of GreenLight PV delivery devices when we ship the delivery device. We recognize revenue upon shipment of the GreenLight PV delivery devices as we have no continuing obligations subsequent to shipment. We do not accept returns of GreenLight PV delivery devices. The fee for a GreenLight delivery device becomes due upon shipment and is not dependent on actual PVP procedures performed and our customers do not notify us of their GreenLight PV delivery device usage.

In international regions outside of the United Kingdom and France, we utilize distributors to market and sell our products. We recognize revenues upon shipment for sales through these independent, third party distributors as we have no continuing obligations subsequent to shipment. Generally, our distributors are responsible for all marketing, sales, installation, training and warranty labor coverage for our products. Our standard terms and conditions do not provide price protection or stock rotation rights to any of our distributors. In addition, our distributor agreements do not allow the distributor to return or exchange products and the distributor is obligated to pay us for the sale regardless of whether the distributor is able to resell the product.

make reasonable estimates of future returns based upon historical return rates and therefore we recognize revenue on all products as they are shipped, provided that Staff Accounting Bulletin No. 104, “Revenue Recognition” criteria have been met. Returns have an insignificant impact on revenue as historical return rates have been low.

Certain sales of lasers have post-sale obligations of installation and advanced training. These obligations are fulfilled after product shipment, and in these cases, we recognize revenue in accordance with the multiple element accounting guidance set forth in en Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverables”. When we have objective and reliable evidence of fair value of the undelivered elements we defer revenue attributable to the post-shipment obligations and recognize such revenue when the obligation is fulfilled. Otherwise we defer all revenue until all elements are delivered.

We provide incentives to customers that are accounted for under EITF 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”. Customers are not required to provide documentation that would allow us to reasonably estimate the fair value of the benefit received and we do not receive an identifiable benefit in exchange for the consideration. Accordingly, the incentives are recorded as a reduction of revenue.

We occasionally provide consideration (in the form of cash or free products) to customers in exchange for performing training. Such consideration is treated as a sales and marketing expense and not as a reduction of revenue, because we receive an identifiable benefit and we can reasonably estimate the fair value of that benefit, based upon external market rates for similar training and physicians’ services.

Service revenues are related to the provision of repair and maintenance services under various types of arrangements. For customers who purchase fixed price service contracts, we recognize service revenue on a straight-line basis over the term of the contract. Payments received in advance of services performed, normally for purchases of service contracts by our customers for a specified period, are initially recorded as deferred revenue. For customers without service contracts, we recognize service revenue when we provide service. We record spare parts revenue upon shipment of the parts.

For all types of revenue we assess the credit worthiness of all customers in connection with their purchases. We only recognize revenue when collectibility is reasonably assured.


	*Allowance for Doubtful Accounts*

We assess the credit worthiness of our customers prior to making a sale in order to mitigate the risk of loss from customers not paying us. However, to account for the possibility that a customer may not pay us, we maintain an allowance for doubtful accounts. We estimate losses based on the overall business climate, our accounts receivable aging profile, and an analysis of the circumstances associated with specific accounts which are past due. Despite the significant amount of analysis used to compute the required allowance, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As of December 31, 2005, 2004 and 2003 our allowance for doubtful accounts totaled approximately $416,000, $104,000 and $268,000 respectively.


	*Warranty Obligation*

We provide for the estimated cost of product warranties at the time revenue is recognized. We estimate the cost of our future warranty obligation based on actual material usage and service delivery costs experienced in correcting product warranty failures over the preceding twelve months. However, should actual product failure rates, material usage or service delivery costs differ from historical experience, increases in warranty expense could be required. Warranty reserves as of December 31, 2005, 2004 and 2003 were $2.9 million, $2.5 million and $1.9 million, respectively.


	*Excess and Obsolete Inventory*

We maintain reserves for our estimated obsolete or unmarketable inventory. Inventory reserves are recorded when conditions indicate that the selling price may be less than cost due to factors such as estimates about future demand, reductions in selling prices, physical deterioration, usage and obsolescence. The reserves are equal to the difference between the cost of inventory and the estimated market value. Once established, the original cost of the inventory less the related inventory reserve represents the new cost basis of such products. Reversal of these reserves is recognized only when the related inventory has been scrapped or sold. If actual market conditions are less favorable than those projected by management, additional inventory writedowns may be required and gross margin could be adversely impacted. As of December 31, 2005, 2004 and 2003, our reserves were $1.6 million, $1.8 million and $1.9 million, respectively.


	*Legal Contingencies*

At the end of each accounting period, we review all outstanding legal matters. If we believe it is probable that we will incur a loss as a result of the resolution of a legal matter and we can reasonably estimate the amount of the loss, we accrue our best estimate of the potential loss. New developments in legal matters can cause changes in previous estimates and result in significant changes in loss accruals. If current legal matters are resolved in a manner unfavorable to us, it could have a material adverse impact on our financial results.


	*Income Tax*

We are subject to income taxes in both the United States and foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. We establish reserves for tax-related uncertainties based on our estimate of the possibility that certain positions will be challenged and may not be sustained upon audit by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the completion of audits or the expiration of statutes of limitations. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.

We must assess whether it is “more likely than not” that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Due to the amount of Net Operating Losses available for income tax purposes through 2004, we had a full valuation allowance against our deferred tax assets. In 2005 we concluded that it is more likely than not that we will have sufficient future taxable income in the United States to utilize our deferred tax assets and accordingly eliminated our valuation allowances against these deferred tax assets.

Financial Review — Liquidity and Capital Resources

The following table contains selected balance sheet information that serves as the basis of the discussion of our liquidity and capital resources (in thousands):


	December 31,		December 31,
	2005		2004

Cash and cash equivalents	$	30,653	$	15,954
Working capital	$	75,047	$	38,566
Total assets	$	111,770	$	61,589

Our cash and cash equivalents consist principally of money market funds. Cash and cash equivalents were $30.7 million at December 31, 2005 , an increase of $14.7 million compared with December 31, 2004.

Cash and cash equivalents were impacted principally by:


	•	Positive cash flow from operating activities of $19.2 million;

	•	Proceeds from issuance of common stock related to employee participation in employee stock programs generating $2.5 million; and

	•	Capital expenditures of $6.6 million primarily for facility expansion and implementation of a new enterprise resource planning system.

Operating activities generated $19.2 million in 2005 up from $7.4 million provided in 2004. In 2005 we:


	•	Generated $24.3 million of cash from net income plus non-cash related expenses;

	•	Used cash of $7.9 million to increase inventory levels, primarily for the GreenLight PV laser systems and Greenlight PV delivery devices;

	•	Increased accounts payable by $5.7 million due to increased sales and marketing expenses; and

	•	Increased sales, which resulted in increases of $5.7 million and $1.6 million to accounts receivable and deferred revenue, respectively.

Net cash used in investing activities was $6.8 million in 2005 up from $2.9 million net cash used in 2004. The principal changes in cash used in investing activities in 2005 were due to acquisition of property and equipment. The remaining $0.3 million was used on the acquisition of intellectual property related to our new Solis aesthetic light-based treatment device.

Cash provided by financing activities was $2.5 million in 2005 a decrease from $4.2 million cash provided in 2004. The principal factor that contributed to the cash provided by financing activities was cash received from the issuance of stock under employee stock programs.

We have in place an asset based line of credit which provides up to $5.0 million in borrowings. The line of credit expires in September 2006. Credit is extended based on our eligible accounts receivable and inventory. At December 31, 2005, we had approximately $5.0 million in borrowing capacity and no borrowings outstanding. Our assets collateralize the line of credit which bears an interest rate equivalent to the bank’s prime rate plus 2.0%. Borrowings against the line of credit are paid down as we collect our accounts receivable. Provisions of the bank loan agreement prohibit the payment of dividends on non-preferred stock, or the redemption, retirement, repurchase or other acquisition of our stock. The agreement further requires we maintain a minimum tangible net worth. As of December 31, 2005, we were in compliance with all covenants and had no outstanding borrowings under the line of credit facility.

We anticipate that future changes in cash and working capital will be dependent on a number of factors including:


	•	Our level of profitability;

	•	Our determination to acquire or invest in products and businesses complementary to ours; and

	•	The market price for our common stock as it affects the exercise of stock options and sale of common stock under stock plans.

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

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

Contractual Obligations

The impact that our contractual obligations as of December 31, 2005 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands):


	Payments Due by Period

			Less Than						More Than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years

Operating Leases	$	6,907	$	1,248	$	2,224	$	1,964	$	1,471
Capital Leases	$	28	$	19	$	9		—		—

Total	$	6,935	$	1,267	$	2,233	$	1,964	$	1,471

On July 29, 2005, we entered into a non-exclusive distribution agreement with Henry Schein, Inc, pursuant to which Henry Schein, a provider of healthcare products and services to office-based practitioners in the North American and European markets, will distribute our aesthetic product line to physicians and physician practices within the United States.

We did not enter into any other additional material contractual obligations during the year ended December 31, 2005.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2005, we are not involved in any unconsolidated SPE transactions.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R). This standard requires expensing of stock options and other share-based payments and supersedes the FASB’s earlier rule (the original SFAS 123) that allowed companies to choose between expensing stock options or showing pro forma disclosure only. We currently show the pro forma disclosures in Note 1 to these consolidated financial statements. In April 2005, the SEC approved a new rule to delay the effective date of SFAS 123(R) to annual periods that commence after June 15, 2005. We will be required to implement the new pronouncement and begin recording share-based expense at the beginning of the first quarter of 2006. Although we have not yet determined whether the adoption of the SFAS 123(R) will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we expect the adoption of SFAS 123(R) to have a significant adverse impact on our consolidated operating results.

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, “Share Based Payment”. SAB 107 provides guidance on the initial implementation of SFAS 123(R). In particular, the statement includes guidance related to share-based payment awards for non-employees, valuation methods and selecting underlying assumptions such as expected volatility and expected term. It also gives guidance on the classification of compensation expense associated with such awards and accounting for the income tax effects of those awards upon the adoption of SFAS 123(R). We are currently assessing the guidance provided in SAB 107 in connection with the implementation of SFAS 123(R).

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations (FIN No. 47)”. FIN No. 47 clarifies that a company should record a liability for a conditional asset retirement obligation when incurred if the fair value of the obligation can be reasonably estimated. This interpretation further clarified conditional asset retirement obligation, as used in SFAS No. 143, Accounting for Asset Retirement Obligations, as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 is effective for companies no later than

the end of their fiscal year ending after December 15, 2005. We do not expect that the adoption of FIN No. 47 will have a material impact on our results of operations or financial condition.

In May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. We do not expect that adoption of this statement will have a material impact on our results of operations or financial condition.

In June 2005, the Emerging Issues Task Force (“EITF”) issued EITF No. 05-06, “Determining the Amortization Period for Leasehold Improvements Purchased After Lease Inception or Acquired in a Business Combination”. EITF No. 05-06 requires that leasehold improvements that are placed in service significantly after and not contemplated at or near the beginning of the lease term should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured (as defined in paragraph 5 of Statement 13) at the date the leasehold improvements are purchased. In September 2005, the EITF clarified that the consensus in this issue does not apply to preexisting leasehold improvements. EITF 05-06 is effective for leasehold improvements that are purchased or acquired in reporting periods beginning after June 2005. The adoption of this statement did not have a material impact on our results of operations or financial condition.

In November 2005, the FASB issued FASB Staff Position No. 123(R)-3 “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (FSP 123(R)-3). FSP 123(R)-3 provides an alternative transition method of accounting for the tax effects of adopting SFAS 123(R). This FSP grants one year from the later of the date of the FSP or the adoption of SFAS 123(R) to the company for determination of the one-time election for purposes of transition. We are currently evaluating the alternative methods.


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk.*

We are exposed to a variety of risks, including changes in interest rates affecting the return on investments, outstanding debt balances and foreign currency fluctuations. In the normal course of business, we employ established policies and procedures to manage exposure to fluctuations in interest rates and foreign currency values.

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our cash and cash equivalents. In 2005 and 2004, we did not use derivative financial instruments. We invest our excess cash in money market funds. Our debt financings have generally consisted of convertible debentures and bank loans requiring either fixed or variable rate interest payments. Investments in and borrowings under both fixed-rate and floating-rate interest-earning instruments carry a degree of interest rate risk. On the investment side, fixed-rate securities may have their fair market value adversely affected due to a rise in interest rates, while floating-rate securities may produce less income than expected if interest rates fall. In addition, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates.

On the debt side, borrowings that require fixed-rate interest payments require greater than current market rate interest payments if interest rates fall, while floating rate borrowings may require greater interest payments if interest rates rise. Additionally, our future interest expense may be greater than expected due to changes in interest rates.

Foreign Currency Risk

International revenues were approximately 31% of total revenues in 2005 and 27% of total revenues in 2004. Our international sales are made through international distributors and wholly-owned subsidiaries with payments to us typically denominated in the local currencies of the United Kingdom and France, and in United States Dollars in the rest of the world. We intend to continue our operations outside of the United States and potentially to enter additional international markets. These activities require significant management attention and financial resources and further subject us to the risks of operating internationally. These risks include, but are not limited to:


	•	changes in regulatory requirements;

	•	delays resulting from difficulty in obtaining export licenses for certain technology;

	•	customs, tariffs and other barriers and restrictions; and

	•	the burdens of complying with a variety of foreign laws.

We are also subject to general geopolitical risks in connection with our international operations, such as:


	•	differing economic conditions;

	•	changes in political climate;

	•	differing tax structures; and

	•	changes in diplomatic and trade relationships and war.

In addition, fluctuations in currency exchange rates may negatively affect our ability to compete in terms of price against products denominated in local currencies.

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

We do not engage in hedging transactions.


Item 8.	*Consolidated Financial Statements and Supplementary Data.*

Consolidated financial statements of Laserscope at December 31, 2005 and 2004, and for each of the three years ended December 31, 2005, the report of independent registered public accounting firm thereon and Supplementary Data are included as separate sections in this Annual Report on Form 10-K in Item 6 “Selected Financial Data” and Item 15, “Exhibits, Financial Statement Schedules and reports on Form 8-K.”


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.*

None.


Item 9A.	*Controls and Procedures.*

Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the our Securities Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon, and as of the date of, this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, we conducted an evaluation of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers, LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Control Over Financial Reporting. There have not been any changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the fiscal quarter ended December 31, 2005 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Item 9B.	*Other Information*

On December 15, 2005, the Company announced that Robert Pearson, a member of the Board of Directors of the Company and the Chairman of its Audit Committee, stated his intention to resign from the Board effective upon the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Mr. Pearson has since determined that he will serve as a member of the Company’s Board of Directors and as the Chairman of its Audit Committee until the Company’s 2006 Annual Meeting. Mr. Pearson has decided to leave the Board for personal reasons. The Company plans to fill the vacancy created by Mr. Pearson’s departure.

PART III

Certain information required by Part III is omitted from this Annual Report on Form 10-K because we intend to file a definitive proxy statement on or prior to May 1, 2006 pursuant to Regulation 14A (the “Proxy Statement”) for our Annual Meeting of Shareholders and the information included in the Proxy Statement is incorporated herein by reference.


Item 10.	*Directors and Executive Officers of the Registrant.*

The information concerning our directors and executive officers required by this Item 10 is incorporated by reference from our Proxy Statement for the 2006 Annual Meeting of Shareholders under the headings “Election of Directors.” “Management” and “Section 16(a) Beneficial Ownership Reporting Compliance,” respectively. See also Item 1 above.

Code of Ethics

The information required by this Item 10 is incorporated by reference from our Proxy Statement for the 2006 Annual Meeting of Shareholders under the heading “Code of Ethics.”


Item 11.	*Executive Compensation.*

The information required by this Item 11 is incorporated by reference from our Proxy Statement for the 2006 Annual Meeting of Shareholders under the heading “Executive Compensation.”


Item 12.	*Security Ownership of Certain Beneficial Owners and Related Shareholder Matters.*

The information required by this Item 12 is incorporated by reference from our Proxy Statement for the 2006 Annual Meeting of Shareholders under the heading “Beneficial Ownership of Securities” and “Equity Compensation Plan Information.”


Item 13.	*Certain Relationships and Related Transactions.*

The information required by this Item 13 is incorporated by reference from our Proxy Statement for the 2006 Annual Meeting of Shareholders under the heading “Certain Transactions.”


Item 14.	*Principal Accountant Fees and Services*

The information required by this Item 14 is incorporated by reference from our Proxy Statement for the 2006 Annual Meeting of Shareholders under the heading “Principal Accountant Fees and Services.”

Part IV


Item 15.	*Exhibits and Financial Statement Schedules*

(a) (1) Consolidated Financial Statements:


	Page

Report of Independent Registered Public Accounting Firm on Financial Statements		51
Consolidated Balance Sheets at December 31, 2005 and 2004		53
Consolidated Statements of Operations — Years ended December 31, 2005, 2004 and 2003		54
Consolidated Statements of Cash Flows — Years ended December 31, 2005, 2004 and 2003		55
Consolidated Statements of Shareholders’ Equity — Years ended December 31, 2005, 2004 and 2003		56
Notes to Consolidated Financial Statements		57


	(2)	The following financial statement schedule for the years ended December 31, 2005, 2004 and 2003 is submitted herewith:


	Page

Schedule II — Valuation and Qualifying Accounts		S-1

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

(3) Exhibits included herein (numbered in accordance with Item 601 of Regulation S-K):


Exhibit
Number			Description

	3	.1	By-laws of Registrant, as amended.(1)
	3	.1A	Amendment to By-laws adopted on August 10, 2005.(2)
	3	.3	Eighth Amended and Restated Articles of Incorporation of Registrant.(3)
	10	.1A	1984 Stock Option Plan, as amended, and forms of Incentive Stock Option Agreement and Non-statutory Stock Option Agreement.(4)
	10	.1B	1994 Stock Option Plan and forms of Incentive Stock Option Agreement and Non-statutory Stock Option Agreement.(5)
	10	.1C	2004 Stock Option Plan and form of Stock Option Agreement.(6)
	10	.2	1984 Stock Purchase Plan and form of Common Stock Purchase Agreement.(7)
	10	.3A	1989 Employee Stock Purchase Plan and form of Subscription Agreement.(8)
	10	.3B	1999 Employee Stock Purchase Plan and form of Subscription Agreement.(9)
	10	.4	2006 Director Compensation Plan.(10)
	10	.5	2006 Incentive Compensation Plan.(11)
	10	.6	401(k) Plan.(12)
	10	.7A	Net Lease Agreement between the Registrant and Realtec Properties dated June 20, 2000.(13)
	10	.7B	Net Lease Agreement between the Registrant and Realtec Properties dated October 18, 2000.(14)
	10	.8	Form of indemnification agreement.(15)
	10	.9A	Loan and Security Agreement between the Registrant and Silicon Valley Bank dated October 1, 1999.(16)
	10	.9B	Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 25, 2000.(17)
	10	.9C	Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 26, 2001.(18)
	10	.9D	Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 26, 2002.(19)
	10	.9E	Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 25, 2003.(20)


Exhibit
Number			Description

	10	.9F	Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 24, 2004.(21)
	10	.10	1990 Director’s Stock Option Plan and form of Option Agreement.(22)
	10	.11A	Form of Laserscope Management Continuity Agreement, as amended.(23)
	10	.11B	Form of Laserscope Management Continuity Agreement, as amended.(24)
	10	.12C	Form of Laserscope Management Continuity Agreement.(25)
	10	.12D	Form of Laserscope Management Continuity Agreement. (26)
	10	.13A	1995 Director’s Stock Option Plan and form of Option agreement.(27)
	10	.13B	1999 Director’s Stock Option Plan.(28)
	10	.14A	Common Stock Placement Agreement.(29)
	10	.14B	Form of Common Stock Purchase Agreement.(30)
	10	.15A	Convertible Loan Agreement.(31)
	10	.15B	Amendment to Convertible Loan Agreement.(32)
	10	.15C	Amendment to the Convertible Debentures Agreement between the Registrant and Renaissance Capital Growth and Income Fund III, Inc.(33)
	10	.16	Form of Distribution Agreement between Laserscope and Henry Schein, Inc. dated July 29, 2005.(34)
	21	.1	Subsidiaries of Registrant.(35)
	23	.1	Consent of Independent Registered Public Accounting Firm.(36)
	31	.1	Certification of the Registrant’s Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.(37)
	31	.2	Certification of Registrant’s Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.(38)
	32	.1	Certification of Registrant’s Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.(39)
	32	.2	Certification of Registrant’s Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.(40)


	(1)			Incorporated by reference to Exhibit 3.4 filed in response to Item 14(a)(3),“Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991.
	(2)			Incorporated by reference to Exhibit 3.1 filed in response to Item 9.01(c), “Financial Statements and Exhibits,” of Registrant’s Current Report on Form 8-K filed on August 11, 2005.
	(3)			Incorporated by reference to Exhibit 3.3 filed in response to Item 15(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.
	(4)			Incorporated by reference to Exhibit 10.1A filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991.
	(5)			Incorporated by reference to Exhibit 10.1B filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1994.
	(6)			Filed herewith.
	(7)			Incorporated by reference to Exhibit 10.2 filed in response to Item 16(a), “Exhibits,” of the Registrant’s Registration Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto (File No. 33-31689), which became effective on November 29, 1989.
	(8)			Incorporated by reference to Exhibit 10.3 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991.
	(9)			Incorporated by reference to Exhibit 10.3A filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
	(10)			Filed herewith.
	(11)			Filed herewith.
	(12)			Incorporated by reference to Exhibit 10.4 filed in response to Item 16(a), “Exhibits,” of the Registrant’s Registration Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto (File No. 33-31689), which became effective on November 29, 1989.


	(13)			Incorporated by reference Exhibit 10.6 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000.
	(14)			Incorporated by reference Exhibit 10.6A filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000.
	(15)			Incorporated by reference to Exhibit 10.10 filed in response to Item 16(a), “Exhibits,” of the Registrant’s Registration Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto (File No. 33-31689), which became effective on November 29, 1989.
	(16)			Incorporated by reference to Exhibit 10.11G filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
	(17)			Incorporated by reference to Exhibit 10.11H filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000.
	(18)			Incorporated by reference to Exhibit 10.11I filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001.
	(19)			Incorporated by reference to Exhibit 10.11J filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002.
	(20)			Incorporated by reference to Exhibit 10.1 filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003.
	(21)			Incorporated by reference to Exhibit 10.11L filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004.
	(22)			Incorporated by reference to Exhibit 10.13 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991.
	(23)			Incorporated by reference to Exhibit 10.14 filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000.
	(24)			Incorporated by reference to Exhibit 10.14 filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002.
	(25)			Incorporated by reference to Exhibit 10.1 filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004.
	(26)			Incorporated by reference to Exhibit 10.1 filed in response to Item 9.01(c),“Financial Statements and Exhibits”, of the Registrant’s Current Report on Form 8-K filed on December 28, 2005.
	(27)			Incorporated by reference to Exhibit 10.18 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K/ A for the year ended December 31, 1995.
	(28)			Incorporated by reference to Exhibit 10.18A filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
	(29)			Incorporated by reference to Exhibit 10.19 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
	(30)			Incorporated by reference to Exhibit 10.19A filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
	(31)			Incorporated by reference to Exhibit 10.20 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
	(32)			Incorporated by reference to Exhibit 10.20A filed in response to Item 15(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.
	(33)			Incorporated by reference to Exhibit 10.2 filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003.
	(34)			Incorporated by reference to Exhibit 10.1 filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005.
	(35)			Filed herewith.
	(36)			Filed herewith.
	(37)			Filed herewith.
	(38)			Filed herewith.
	(39)			Filed herewith.
	(40)			Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	LASERSCOPE


	By:	/s/ ERIC M. REUTER



	Eric M. Reuter
	President and Chief Executive Officer

Date: March 15, 2006

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Eric M. Reuter and Derek Bertocci as his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.


Signature	Title	Date


/s/ Robert J. Pressley (Robert J. Pressley, Ph.D.)	Chairman of the Board of Directors	March 15, 2006

/s/ Eric M. Reuter (Eric M. Reuter)	President, Chief Executive Officer and Director (Principal Executive Officer)	March 15, 2006

/s/ Derek Bertocci (Derek Bertocci)	Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)	March 15, 2006

/s/ James Baumgardt (James Baumgardt)	Director	March 15, 2006

/s/ Robert C. Pearson (Robert C. Pearson)	Director	March 15, 2006

/s/ Rodney Perkins (Rodney Perkins, M.D.)	Director	March 15, 2006

/s/ Elisha Finney (Elisha Finney)	Director	March 15, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON FINANCIAL STATEMENTS

To the Board of Directors and Shareholders of Laserscope:

We have completed integrated audits of Laserscope, Inc.’s December 31, 2005 and December 31, 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its December 31, 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedules

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) in the accompanying index present fairly, in all material respects, the financial position of Laserscope, Inc. and its subsidiaries at December 31, 2005 and December 31, 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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 our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for

external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


	/s/ PricewaterhouseCoopers LLP

San Jose, California

March 15, 2006

LASERSCOPE

CONSOLIDATED BALANCE SHEETS


				December 31,

				2005			2004

				(Thousands except
				share amounts)
ASSETS
Current assets
	Cash and cash equivalents			$	30,653		$	15,954
	Accounts receivable, net of allowance for doubtful accounts of $416 and $104, respectively				25,138			20,342
	Inventories				27,058			19,446
	Deferred tax assets				16,285			—
	Other current assets				2,886			1,471

		Total current assets			102,020			57,213
Property and equipment, net					8,663			3,457
Goodwill					655			655
Other assets					432			264

			Total assets	$	111,770		$	61,589


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Accounts payable			$	7,961		$	2,389
	Accrued compensation				4,273			4,365
	Warranty				2,947			2,536
	Other accrued liabilities				6,691			5,761
	Deferred revenue				5,082			3,575
	Current obligations under capital leases				19			21

		Total current liabilities			26,973			18,647

Long-term liabilities:
	Obligations under capital leases				9			31

		Total long-term liabilities			9			31

Commitments and contingencies (Note 8)
Shareholders’ equity
	Common stock, no par value:
	Authorized shares — 30,000,000 at December 31, 2005 and 2004
	Issued and outstanding shares — 22,296,689 and 21,966,117 at December 31, 2005 and 2004, respectively				84,957			65,009
	Retained earnings (accumulated deficit)				287			(22,263	)
	Accumulated other comprehensive income/(loss)				(456	)		165

		Total shareholders’ equity			84,788			42,911

			Total liabilities and shareholders’ equity	$	111,770		$	61,589

See notes to consolidated financial statements

LASERSCOPE

CONSOLIDATED STATEMENTS OF OPERATIONS


				Years Ended December 31,

				2005		2004		2003

				(Thousands, except
				per share amounts)
Net revenues:
	Products			$	118,388	$	86,341	$	51,104
	Services				8,736		7,429		6,323

			Total net revenues		127,124		93,770		57,427

Cost of products and services:
	Products				44,049		33,298		22,942
	Services				6,372		5,817		4,399

			Total cost of products and services		50,421		39,115		27,341

Gross margin					76,703		54,655		30,086

Operating expenses:
	Research and development				7,858		5,217		4,443
	Selling, general and administrative				45,014		34,023		22,936

			Total operating expenses		52,872		39,240		27,379

Operating income					23,831		15,415		2,707
Interest income					224		39		52
Interest expense and other income, net					321		225		(40	)

Income before income taxes					24,376		15,679		2,719
Provision for income taxes					1,826		940		202

Net income				$	22,550	$	14,739	$	2,517

Net income per share
		Basic		$	1.02	$	0.70	$	0.13

		Diluted		$	0.98	$	0.65	$	0.13

Shares used for net income per share
		Basic			22,142		21,075		17,452

		Diluted			22,917		22,808		21,838

See notes to consolidated financial statements

LASERSCOPE

CONSOLIDATED STATEMENTS OF CASH FLOWS


			Years Ended December 31,

			2005			2004			2003

			(In thousands)
Cash flows from operating activities:
	Net income		$	22,550		$	14,739		$	2,517
	Adjustments to reconcile net income to cash provided by operating activities:
		Depreciation and amortization		1,420			1,055			1,222
		Tax benefit of stock option exercises		17,455			383			—
		Amortization of debt issuance costs		—			—			135
		Provision for doubtful accounts		606			229			93
	Changes in assets and liabilities:
		Accounts receivable		(5,965	)		(7,627	)		(2,204	)
		Inventories		(7,905	)		(5,940	)		(2,679	)
		Deferred tax assets		(16,285	)		—			—
		Prepayments and other current assets		(1,581	)		(68	)		(326	)
		Accounts payable		5,709			(1,271	)		829
		Accrued compensation		(53	)		1,998			327
		Warranty		411			589			820
		Deferred revenue		1,561			1,539			614
		Other accrued liabilities		1,256			1,758			371

Cash provided by operating activities				19,179			7,384			1,719

Cash flows from investing activities:
	Capital expenditures			(6,553	)		(2,812	)		(873	)
	Acquisition of licenses and other intangibles			(267	)		(127	)		(200	)

	Cash used in investing activities			(6,820	)		(2,939	)		(1,073	)

Cash flows from financing activities:
	Payment on obligations under capital leases			(20	)		(10	)		(117	)
	Proceeds from the sale of common stock under stock plans			2,478			3,691			1,565
	Proceeds from the exercise of warrants			15			508			97
	Repayment of shareholder notes			—			—			125
	Proceeds from line of credit			—			—			200
	Repayment of line of credit			—			—			(200	)

	Cash provided by financing activities			2,473			4,189			1,670

	Effect of exchange rate changes on cash			(133	)		162			181
	Increase in cash and cash equivalents			14,699			8,796			2,497
	Cash and cash equivalents, beginning of year			15,954			7,158			4,661

	Cash and cash equivalents, end of year		$	30,653		$	15,954		$	7,158

Supplemental cash flow information:
	Cash paid for income taxes, net of refunds		$	1,023		$	224		$	67
	Cash paid for interest		$	34		$	37		$	234
	Non-cash financing, equipment lease		$	—		$	81		$	—
	Debenture conversion		$	—		$	—		$	2,850

See notes to consolidated financial statements

LASERSCOPE

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


							Retained			Accumulated			Notes
			Common				Earnings			Other			Receivable			Total
			Shares		Common		(Accumulated			Comprehensive			from			Shareholders’
			Issued		Stock		Deficit)			Income/(Loss)			Shareholders			Equity

			(In thousands)
Balance at December 31, 2002				16,828	$	55,915	$	(39,519	)	$	(789	)	$	(125	)	$	15,482
Components of comprehensive income:
	Net income							2,517									2,517
	Translation adjustments										562						562

		Total comprehensive income															3,079
Common stock issued under stock plans				828		1,565											1,565
Common stock issued upon warrant exercises				76		97											97
Debenture conversion into common stock, net of unamortized issuance costs				2,400		2,850											2,850
Repayment of shareholder notes														125			125

Balance at December 31, 2003				20,132		60,427		(37,002	)		(227	)		—			23,198
Components of comprehensive income:
	Net income							14,739									14,739
	Translation adjustments										392						392

		Total comprehensive income															15,131
Common stock issued under stock plans				1,471		3,691											3,691
Common stock issued upon warrant exercises				363		508											508
Tax benefit of stock option exercise						383											383

Balance at December 31, 2004				21,966		65,009		(22,263	)		165			—			42,911
Components of comprehensive income:
	Net income							22,550									22,550
	Translation adjustments										(621	)					(621	)

		Total comprehensive income															21,929
Common stock issued under stock plans				321		2,478											2,478
Common stock issued upon warrant exercises				10		15											15
Tax benefit of stock option exercise						17,455											17,455

Balance at December 31, 2005				22,297	$	84,957	$	287		$	(456	)	$	—		$	84,788

See notes to consolidated financial statements

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	Summary of Significant Accounting Policies


	*Business*

Laserscope (the “Company,” “we,” “us,” “our”), operates in one business segment, the medical systems business. We develop, manufacture, market and support aesthetic and surgical lasers and other light-based systems, related instrumentation and disposable supplies. We market our products and services in over thirty-five countries worldwide to hospitals, outpatient surgery centers and physicians.


	*Basis of presentation*

The accompanying consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. All inter-company transactions and balances have been eliminated.


	*Use of estimates*

Preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America 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 reported period. Actual results could differ from those estimates.


	*Fair value of financial instruments*

Carrying amounts of our financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate their fair values due to their short maturities. Based on the borrowing rates currently available to us for loans with similar terms, the carrying value of the capital lease obligations, approximates its fair value.


	*Cash and cash equivalents*

We consider cash equivalents to be short-term financial instruments that are readily convertible to cash, subject to no more than insignificant interest rate risk and that have original maturities of three months or less.


	*Revenue recognition*

1) Persuasive evidence of an arrangement exists;

2) Delivery has occurred or services have been rendered;

3) Our selling price is fixed or determinable; and

4) Collectibility is reasonably assured

The four revenue recognition criteria and other revenue related accounting pronouncements are applied to our sales as described in the following paragraphs.

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

devices. The fee for a GreenLight delivery device becomes due upon shipment and is not dependent on actual PVP procedures performed.

Historically, we have allowed the return of a small number of lasers, and as of December 31, 2005 we have recorded an allowance to cover such laser returns as a direct reduction to revenues. In addition, we are usually willing to accept returns of small-dollar accessories if the customer ordered the wrong part or quantity. The return of small-dollar accessories has an insignificant impact on revenue. We are able to make reasonable estimates of future returns based upon historical return rates and therefore we recognize revenue on all products as they are shipped, provided that Staff Accounting Bulletin No. 104, “Revenue Recognition” criteria have been met. Returns have an insignificant impact on revenue as historical return rates have been low.

For all types of revenue we asses the credit worthiness of all customers in connection with their purchases. We only recognize revenue when collectibility is reasonably assured.

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Allowance for Doubtful Accounts*


	*Warranty Obligation*

We provide for the estimated cost of product warranties at the time revenue is recognized. We estimate the cost of our future warranty obligation based on actual material usage and service delivery costs experienced in correcting product warranty failures over the preceding twelve months. Warranty reserves as of December 31, 2005, 2004 and 2003 were $2.9 million, $2.5 million and $1.9 million, respectively.


	*Excess and Obsolete Inventory*

We maintain reserves for our estimated obsolete or unmarketable inventory. Inventory reserves are recorded when conditions indicate that the selling price may be less than cost due to factors such as estimates about future demand, reductions in selling prices, physical deterioration, usage and obsolescence. The reserves are equal to the difference between the cost of inventory and the estimated market value. Once established, the original cost of the inventory less the related inventory reserve represents the new cost basis of such products. Reversal of these reserves is recognized only when the related inventory has been scrapped or sold. As of December 31, 2005, 2004 and 2003, our reserves were $1.6 million, $1.8 million and $1.9 million, respectively.


	*Litigation*

At the end of each accounting period, we review all outstanding legal matters. If we believe it is probable that we will incur a loss as a result of the resolution of a legal matter and we can reasonably estimate the amount of the loss, we accrue our best estimate of the potential loss. New developments in legal matters can cause changes in previous estimates and result in significant changes in loss accruals. If current legal matters are resolved in a manner unfavorable to us, they could have a material adverse impact on our financial results, financial position, or future cash flows.


	*Functional Currency*

We have a foreign subsidiary in France which sells to customers in France, and we also have a subsidiary in the United Kingdom which sells to customers in all of Europe, except France. Sales are denominated in United States Dollars except for sales in the United Kingdom and France, which are denominated in British Pound Sterling and Euro, respectively. In preparing our consolidated financial statements, we are required to translate the financial statements of the foreign subsidiaries from the currency in which they keep their accounting records into United States Dollars. Our two subsidiaries maintain their accounting records in their functional currencies which are also their respective local currencies, the Euro and the British Pound Sterling. The functional currency is determined based on management’s judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billing, financing, payroll, and other expenditures would be considered the functional currency but any dependency upon the parent and the nature of the subsidiary’s operations must also be considered. Since our two subsidiaries’ functional currencies are deemed to be the local currencies, any gain or loss associated with the translation of those subsidiaries’ financial statements is included, as a

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

component of shareholders’ equity, in accumulated other comprehensive income (loss). If in the future we determine that there has been a change in the functional currency of a subsidiary from its local currency to the United States Dollar, any translation gains or losses arising after the date of change would be included within our statement of operations.


	*Income Tax*


	*Research and development expenditures*

Costs related to research, design and development of products are charged to research and development expense as incurred. The types of costs included in research and development expenditures include salaries, contractor fees, building costs, utilities, clinical evaluation, and material costs.


	*Property and equipment*

Property and equipment is stated at cost less accumulated depreciation and amortization. Equipment is depreciated using principally accelerated methods over estimated useful lives of three to seven years. Equipment under capital leases is amortized over the period of the lease. Leasehold improvements are amortized using the straight-line method over the remaining term of the lease or useful life if shorter. Maintenance and repairs are charged to operations as incurred.


	*Internal use software*

We recognize software development costs in accordance with the Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Software development costs, including costs incurred to purchase third party software, are capitalized beginning when we have determined certain factors are present including, among others, that technology exists to achieve the performance requirements, and/or buy versus internal development decisions have been made. Capitalization of software costs ceases when the software is substantially complete, is ready for its intended use, and is amortized over its estimated useful life. We have capitalized internal use software of $2.5 million and $1.0 million at December 31, 2005 and 2004, respectively, principally for the addition of new ERP software that we anticipate to begin amortizing in the second quarter of 2006.


	*Inventories*

Inventories are valued using standard costing and are stated at the lower of cost (computed on a first-in, first-out basis) or market.

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Net income per share*

Basic net income per share is calculated using the weighted average number of shares of common stock outstanding. Diluted net income per share is calculated using the weighted average number of shares of common stock outstanding plus dilutive common equivalent shares from stock options, warrants and debentures.

The following table sets forth the computation of basic and diluted net income per common share:


		2005		2004		2003

		(Thousands, except
		per share data)
Basic earnings per share
Numerator:
	Net income used in computing basic and diluted net income per share	$	22,550	$	14,739	$	2,517
	Amount allocated to holders of convertible debentures		—		—		(267	)

	Income available to common stockholders-basic	$	22,550	$	14,739	$	2,250

Denominator:
	Weighted average common shares outstanding used in computing basic net income per share		22,142		21,075		17,452

Basic earnings per share		$	1.02	$	0.70	$	0.13

Diluted earnings per share
Numerator:
	Net income used in computing basic and diluted net income per share	$	22,550	$	14,739	$	2,517
	Addback interest on debentures		—		—		219

	Income available to common stockholders-diluted	$	22,550	$	14,739	$	2,736

Denominator:
	Weighted average common shares outstanding used in computing basic net income per share		22,142		21,075		17,452
Add dilutive potential shares used in computing dilutive net income per share:
	Assumed exercise of stock options		775		1,463		1,881
	Assumed exercise of warrants		—		270		437
	Assumed conversion of debentures		—		—		2,068

Total weighted average number of shares used in computing diluted net income per share			22,917		22,808		21,838

Diluted earnings per share		$	0.98	$	0.65	$	0.13

The company adopted Emerging Issues Task Force Statement No. 03-06 “Participating Securities and the Two Class Method Under FASB Statement No. 128, Earnings Per Share” during the period ended June 30, 2004 and in accordance with the standard has retroactively adjusted reported earnings per share for prior periods. The amount previously reported as basic EPS was $0.14 for the year ended December 31, 2003. There was no impact on previously reported diluted EPS.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Options to purchase 273,000, 88,000, and 305,000 weighted shares during 2005, 2004 and 2003, respectively, were excluded from the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of our common stock during those years and would have had been anti-dilutive.


	*Goodwill*

Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in business combinations. We perform an annual assessment of our goodwill at the reporting unit level, or earlier if an event occurs or circumstances change that would reduce the fair value of the reporting unit below its carrying amount, as prescribed by SFAS No. 142. No impairment charges have been recorded as of December 31, 2005.


	*Intangible and other assets*

We purchased a technology license and other intellectual property for use in certain laser and light-based systems. The costs of these assets have been capitalized and are carried at cost less accumulated amortization. We amortize intangible assets on a straight-line basis over their estimated useful lives, generally five years.


	*Advertising expense*

Advertising costs are expensed as incurred. Advertising costs were not significant in 2005, 2004 or 2003.


	*Stock-based compensation*

We account for stock-based employee compensation arrangements using the intrinsic value method in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and Financial Accounting Standards Board (“FASB”) Interpretation No. 44 (“FIN 44”), Accounting for Certain Transactions Involving Stock Compensation- an Interpretation of APB No. 25”. and comply with the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure Amendment of SFAS No, 123.” Under APB 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company’s stock and the exercise price. SFAS No. 123 defines a “fair value” based method of accounting for an employee stock option or similar equity instrument. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services” (“EITF Issue No. 96-18”).

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Had compensation cost for stock-based employee compensation arrangements been determined based on the fair value at the date of the awards consistent with the provisions of SFAS No. 123, the impact on our net income would be as follows (in thousands, except per share data):


			2005			2004			2003

Net income as reported			$	22,550		$	14,739		$	2,517
	Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects			(10,742	)		(2,244	)		(1,352	)

	Pro forma net income		$	11,808		$	12,495		$	1,165

	Amount allocated to holders of convertible debentures			—			—			(267	)

	Pro forma net income available to common stockholders-basic		$	11,808		$	12,495		$	898

Net income per share:
		Basic-as reported	$	1.02		$	0.70		$	0.13

		Basic-pro forma	$	0.53		$	0.59		$	0.05

		Diluted-as reported	$	0.98		$	0.65		$	0.13

		Diluted-pro forma	$	0.52		$	0.55		$	0.05

For purposes of computing pro forma net income, we estimate the fair value of each option grant and employee stock purchase plan purchase right on the date of grant using the Black-Scholes option pricing model. The assumptions used to value the option grants and purchase rights are stated as follows:


	2005			2004			2003

Risk free interest rate for options		4.05	%		3.26	%		2.60	%
Risk free interest rate for ESPP rights		3.85	%		1.15	%		1.12	%
Dividend yield		—			—			—
Volatility for options		73	%		84	%		85	%
Volatility for ESPP rights		55	%		66	%		63	%
Expected life (in years)		4.19			4.45			4.13
Expected life for ESPP rights (in years)		0.70			0.50			0.50

The weighted average per share grant date fair values of employee stock options granted in 2005, 2004, and 2003 were $17.02, $16.01 and $5.35, respectively. The weighted average per share fair values of options granted under the ESPP in 2005, 2004 and 2003 were $11.80, $8.79 and $1.66, respectively.

These pro forma amounts may not be representative of the effects for future years as options vest over several years and additional awards are generally made each year. In addition, on December 21, 2005, the Compensation Committee of the Board voted to accelerate the vesting of approximately 438,200 “out-of-the-money” stock options.

In December 2004 the FASB issued SFAS No. 123(R) (Share Based Payment). We will be required to implement SFAS No. 123(R) beginning in the first quarter of 2006. This standard requires the expensing of stock options and other share-based payments and supersedes SFAS 123 that allowed us to choose between expensing stock options or showing pro forma disclosure only. The primary purpose of the accelerated vesting of the “out-of-the-money” stock options referenced above is to eliminate future stock-based employee compensation expense we would otherwise recognize in our consolidated statement of

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

operations with respect to these accelerated options once SFAS No. 123(R) becomes effective. These options had exercise prices substantially in excess of our then current stock price which was $23.10 as of the close of market on December 21, 2005. We believe that these options were of limited value to employees and did not offer incentive comparable to the compensation expense attributed to the options.


	*Reclassifications*

Certain amounts in prior fiscal years have been reclassified to conform with the presentation adopted in the current fiscal year.


	*Recent Accounting Pronouncements*

In December 2004, the FASB issued SFAS No. 123(R). This standard requires expensing of stock options and other share-based payments and supersedes the FASB’s earlier rule (the original SFAS 123) that allowed companies to choose between expensing stock options or showing pro forma disclosure only. We currently show the pro forma disclosures in Note 2 to these condensed consolidated interim financial statements. In April 2005, the SEC approved a new rule to delay the effective date of SFAS 123(R) to annual periods that commence after June 15, 2005. We will be required to implement the new pronouncement and begin recording share-based expense at the beginning of the first quarter of 2006. Although we have not yet determined whether the adoption of the SFAS 123(R) will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we expect the adoption of SFAS 123(R) to have a significant adverse impact on our consolidated operating results.

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In June 2005, the Emerging Issues Task Force (“EITF”) issued EITF No. 05-06, “Determining the Amortization Period for Leasehold Improvements Purchased After Lease Inception or Acquired in a Business Combination”. EITF No. 05-06 requires that leasehold improvements that are placed in service significantly after and not contemplated at or near the beginning of the lease term should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured (as defined in paragraph 5 of Statement 13) at the date the leasehold improvements are purchased. In September 2005, the EITF. clarified that the consensus in this issue does not apply to preexisting leasehold improvements. EITF 05-06 is effective for leasehold improvements that are purchased or acquired in reporting periods beginning after June 2005. The adoption of this statement did not have a material impact on our results of operations or financial condition.


2.	Segment information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operation decision maker, or chief operating decision making group, in deciding how to allocate resources and in assessing performance. Our CEO is our chief operating decision maker. Although discrete components that earn revenues and incur expenses exist, significant expenses such as research and development and corporate administration are not incurred by or allocated to these operating units but rather are employed by the entire enterprise. Additionally, our chief operating decision maker evaluates resource allocation not on a product or geographic basis, but rather on an enterprise wide basis. Therefore, we have concluded that we contain only one reportable segment, which is the medical systems business.

Revenues from sales to external customers by similar products and services and by major geographic area for the years ended December 31 were:


		2005		2004		2003

		(In thousands)
By similar products and services
Lasers & instrumentation		$	62,047	$	56,958	$	37,568
Disposables			56,341		29,383		13,536
Service			8,736		7,429		6,323

	Total	$	127,124	$	93,770	$	57,427

By major geographic area(1)
United States		$	87,657	$	68,390	$	42,398
Europe(2)			30,384		19,893		11,221
Asia Pacific(2)			8,030		4,862		3,214
Rest of world(2)			1,053		625		594

Total		$	127,124	$	93,770	$	57,427


(1)	Based on the location of the external customer.

(2)	Individual countries within each of these geographic regions represent less than 10% of total revenues.

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Location of long lived assets by major geographic area at December 31 were:


	2005		2004		2003

	(In thousands)
United States	$	8,622	$	3,328	$	1,508
France		90		166		204
United Kingdom		52		95		65

	$	8,764	$	3,589	$	1,777


3.	Inventories

Inventories at December 31 consisted of:


		2005		2004

		(In thousands)
Raw materials		$	12,785	$	9,120
Work-in-process			7,963		6,330
Finished goods			6,310		3,996

	Total inventories	$	27,058	$	19,446


4.	Property and Equipment

Property and equipment at December 31 consisted of:


		2005			2004

		(In thousands)
Machinery and equipment		$	6,456		$	5,436
Office equipment and furniture			11,850			9,189
Leasehold improvements			1,601			1,273
Software			6,037			3,551

			25,944			19,449
Less accumulated depreciation and amortization			(17,281	)		(15,992	)

	Total property and equipment	$	8,663		$	3,457

Depreciation and amortization expense for property and equipment in 2005, 2004 and 2003 was approximately $1,359,000, $1,087,000 and $958,000 respectively.


5.	Warranty and Service Contracts


	*Warranty*

We have a direct field service organization that provides service for products. We generally provide a twelve month warranty on laser systems. After the warranty period, maintenance and support is provided on a service contract basis or on an individual call basis. Our warranties and premium service contracts provide for a “99.0% Uptime Guarantee” on laser systems. Under provisions of this guarantee, at the request of the customer, we extend the terms of the related warranty or service contract if specified system uptime levels are not maintained.

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We currently provides for the estimated cost to repair or replace products under warranty at the time of sale. The cost estimate is based on warranty costs experienced in the prior 12 months, and the outstanding warranty liability is revalued on a quarterly basis.


		(In thousands)
Warranty Reserve
Balance, December 31, 2003		$	1,947
Add: Accruals for warranties issued in 2004			3,275
	Accruals related to pre-existing warranties		—
Less: Settlements made during the period			(2,686	)

Balance, December 31, 2004		$	2,536
Add: Accruals for warranties issued in 2005			3,451
	Accruals related to pre-existing warranties		92
Less: Settlements made during the period			(3,132	)

Balance, December 31, 2005		$	2,947


6.	Line of Credit

We have in place an asset based line of credit which provides up to $5.0 million in borrowings. The line of credit expires September 2006. Credit is extended based on our eligible accounts receivable and inventory. At December 31, 2005, we had approximately $5.0 million in borrowing capacity and no borrowings, resulting in $5.0 million of unused borrowing capacity. Our assets collateralize the line of credit which bears an interest rate equivalent to the bank’s prime rate plus 2.0%. The prime rate at December 31, 2005 was 7.25%. Borrowings against the line of credit are paid down as we collect accounts receivable. Provisions of the bank loan agreement prohibit the payment of dividends on non-preferred stock, or the redemption, retirement, repurchase or other acquisition of our stock. The agreement further requires us to maintain a minimum tangible net worth. As of December 31, 2005 and 2004, we were in compliance with all covenants and had no outstanding borrowings under the line of credit facility.


7.	Intangibles and Other Assets

We purchased a technology license for use in certain laser products. The license covered certain product sales previous and up to 2003. In 2005, 2004, and 2003 we paid amounts of $23,250, $126,750 and $200,000, respectively, in connection with the license. In 2005, 2004 and 2003 we amortized $38,889, $38,889 and $155,556, respectively of the license.

In June 2005, we acquired certain intellectual property assets related to the Solis intense pulsed light aesthetic treatment device, including among other things the rights to certain patent applications, copyrights, trademarks, designs, trade secrets and licenses to certain other intellectual property (collectively, the “Solis Assets”) from New Star Lasers, Inc., which had been the OEM manufacturer of the Solis product prior to such asset purchase. We acquired the Solis Assets for $250,000 in cash and incurred legal fees of approximately $95,000. The OEM agreement between New Star Lasers, Inc. and us was superseded by a supply agreement pursuant to which New Star Lasers, Inc. is to sell certain component parts of the Solis product to us.

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The changes in carrying amount of intangible assets are as follows (in thousands):


	December 31, 2005						December 31, 2004

	Gross Carrying		Accumulated				Gross Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net

Technology License	$	350	$	234	$	116	$	327	$	195	$	132
Intellectual Property		345		30		315		—		—		—

	$	695	$	264	$	431	$	327	$	195	$	132

The weighted average amortization period of the technology license and intellectual property is five years. The aggregate amortization expense of intangible assets was approximately $69,000, $39,000, and $156,000 for the years ended December 31, 2005, 2004, and 2003, respectively. We expect to record amortization expense of approximately $108,000 for the years 2006 through 2008, $70,000 in 2009 and $37,000 in 2010.


8.	Commitments and Contingencies


	*Lease Obligations*

We lease certain equipment under lease agreements that have been accounted for as capital leases. Leased equipment and accumulated amortization related to assets under capital leases at December 31 were as follows:


	2005			2004

	(In thousands)
Leased equipment (Primarily office equipment and software)	$	1,714		$	1,738
Accumulated amortization		(1,687	)		(1,601	)

	$	27		$	137

There were no capital lease additions during 2005 and $81,000 of additions to leased equipment in 2004.

Amortization of equipment under capital leases of approximately $20,000 is included in depreciation expense.

We lease certain facilities and equipment under non-cancelable operating leases. Rent expense under these leases amounted to approximately $1,398,000, $1,859,000, and $1,938,000 in the years ended December 31, 2005, 2004 and 2003, respectively.

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Future minimum lease payments under capital and operating leases were as follows at December 31, 2005:


		Capital			Operating
		Leases			Leases

		(In thousands)
2006		$	19		$	1,248
2007			9			1,191
2008			—			1,033
2009			—			972
2010			—			992
2010 and beyond			—			1,471

		$	28		$	6,907

	Less amount representing interest		(1	)

	Present value of future minimum lease payments		27

	Less current portion		19

		$	8


	*Indemnifications*

In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify the third party to such arrangement from any losses incurred relating to the services they perform on our behalf or for losses arising from certain events as defined within the particular contract, which may include, for example, patents, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.

We have entered into indemnification agreements with our directors and officers that may require us: to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and to make good faith determination whether or not it is practicable for us to obtain directors’ and officers’ insurance. We currently have directors’ and officers’ insurance.


	*Contingencies*

Palomar Medical Technologies, Inc. (“Palomar”) has informed us that it disputes the method used by us for calculating the royalty to be paid on the Lyra laser system pursuant to the Patent License Agreement between Laserscope and Palomar (the “License Agreement”). Palomar also disputes our application of the License Agreement to the Gemini laser system, including our calculation of royalties due on the Gemini laser system under the License Agreement. In the third quarter of 2005, Palomar exercised its right under the License Agreement to engage an independent auditor to conduct a review of our royalty calculations and payments under the License Agreement. In November the independent auditors issued a report identifying several potential alternative interpretations of the application of the License Agreement that indicate a potential liability of up to $3.7 million. We disagree with each of these potential alternative interpretations and believe that we have been correctly calculating and paying the royalties owed to Palomar under the License Agreement. Accordingly, we have not accrued for a settlement. We intend to vigorously defend our position while we continue to negotiate with Palomar. If

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

our dispute with Palomar is resolved in a manner contrary to our position, we could be required to record additional expenses which could have a material adverse impact on our financial results.

On November 8, 2005, we received notice from a customer of our GreenLight products alleging that we have violated certain terms of a specific treatment parameters/outcomes program agreement with it. We are in the process of assessing the allegations contained in the November 8, 2005 notice and will determine an appropriate response in due course. If this matter is resolved in a manner unfavorable to the company, it could have a material adverse impact on our financial results.

We are at times a party to legal proceedings arising in the ordinary course of its business. While it is not feasible to predict or determine the outcome of the actions brought against us, our management believes that the ultimate resolution of these claims will not ultimately have a material adverse effect on our financial position or results of operations or future cash flows. Legal fees in connection with loss contingencies are recognized as the fees are incurred.


9.	Convertible Subordinated Debentures

In February of 2000, we sold $3.0 million of 8.00% convertible debentures in a private placement. The debentures were originally scheduled to mature in February 2007 and interest was paid monthly. The debentures were convertible at the option of the holder at any time prior to the close of business on the maturity date, unless previously repurchased, into 2.4 million shares of common stock at a conversion price of $1.25, subject to adjustment in certain circumstances. In connection with the sale of the convertible debentures, we issued warrants to purchase 240,000 shares of our common stock at $1.50 per share. The warrants expired in 2005. The value of the warrants of $311,000 was amortized as interest expense in the statement of operations over the original term of the debentures.

In the first six months of 2003, $400,000 of the debentures were converted to 320,000 shares of our common stock at $1.25 per share. During the last six months of 2003, the holders converted the remaining $2.6 million of debentures into 2,080,000 shares of our common stock. Upon conversion, of the remaining debentures, $150,054 of remaining unamortized issuance and warrants costs were transferred to additional paid-in capital.


10.	Shareholders’ Equity

We have 30,000,000 shares of no par value common stock authorized. In addition, we have authorized 5,000,000 shares of undesignated preferred stock with rights, preferences and privileges to be determined by our Board of Directors.


	*Warrants*

In connection with common stock and convertible debenture issuances in 2000, we issued 458,875 warrants to purchase our common stock at prices ranging from $1.25 to $1.50 per share. All 10,000 warrants outstanding as of December 31, 2004 were exercised during 2005 for aggregate proceeds of $15,000.


	*1994 Stock Option Plan*

During 1994, we adopted a stock option plan under which the Board of Directors may grant incentive stock options to purchase shares of common stock to employees at a price not less than the fair value of the shares as of the date of grant. The Board of Directors may also grant non-statutory stock options to employees and consultants, including directors who serve as employees or consultants, at not less than 85% of the fair market value of the shares as of the date of grant. Options issued pursuant to the 1994 plan vest and become exercisable over periods of up to four years and expire five years after the date of grant.

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The 1994 Stock Option Plan expired by its term with respect to future grants in 2004.


	*1999 Retention Stock Option Plan*

During 1999, we adopted a stock option plan under which the Board of Directors may grant non-statutory options to purchase shares of common stock to non-officer employees at a price not less than the fair value of the shares as of the date of grant. Options issued pursuant to the 1999 plan vest and become exercisable over periods of up to four years and expire five to ten years after the date of grant.

We have reserved 698,000 shares of common stock of which there were 8,584 shares available for issuance pursuant to our 1999 Retention Stock Option Plan as of December 31, 2005.


	*2004 Stock Option Plan*

During 2004, we adopted a stock option plan under which the Board of Directors may grant incentive stock options to purchase shares of common stock to employees at a price not less than the fair value of the shares as of the date of grant. The Board of Directors may also grant non-statutory stock options to employees and consultants, including directors who serve as employees or consultants, at not less than 85% of the fair market value of the shares as of the date of grant. Options issued pursuant to the 2004 plan vest and become exercisable over periods of up to four years and expire five to ten years after the date of grant.

We have reserved 850,000 shares of common stock of which there were 67,726 shares available for issuance pursuant to our 2004 stock option plan as of December 31, 2005.


	*Directors’ Stock Option Plans*

We have reserved an aggregate of 840,000 shares of our common stock for issuance pursuant to our 1999 and 1995 Directors’ Stock Option Plans. Under these plans, non-employee directors have been granted options to purchase shares of our common stock exercisable at the fair market value of such shares on the respective grant dates. Options issued pursuant to these plans vest and become exercisable over three years from the respective original date of issuance with respect to each optionee who remains a director and expire five to ten years after the date of grant. Upon the adoption of the 1999 Directors’ Stock Option Plan, the 1995 Directors’ Stock Option Plan expired with respect to future grants. There were 240,000 shares available for issuance pursuant to the 1999 Directors’ Stock Option Plan at December 31, 2005.

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes activity in our stock option plans during the years ended December 31, 2005, 2004 and 2003:


	Options			Weighted Average
	Outstanding			Exercise Price

Balance, January 1, 2003		2,855,316		$	2.12
Granted		556,583		$	8.50
Exercised		(740,841	)	$	1.49
Canceled		(77,701	)	$	3.53

Balance, December 31, 2003		2,593,357		$	3.63
Granted		337,250		$	24.49
Exercised		(1,407,038	)	$	2.09
Canceled		(66,076	)	$	14.78

Balance, December 31, 2004		1,457,493		$	9.44
Granted		579,400		$	29.12
Exercised		(277,773	)	$	5.68
Canceled		(83,467	)	$	17.17

Balance, December 31, 2005		1,675,653		$	16.48

The following table displays a summary of relevant ranges of exercise prices for options outstanding and options exercisable for our stock option plans at December 31, 2005:


	Options Outstanding
							Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
	Number		Contractual		Exercise		Number		Exercise
Range of Exercise Prices	Outstanding		Life (Years)		Price		Exercisable		Price

$1.03-$1.63		200,341		2.27	$	1.58		200,341	$	1.58
$1.65-$4.19		172,364		3.22	$	3.72		148,922	$	3.73
$4.52-$5.25		253,582		1.86	$	4.97		167,730	$	5.00
$7.53-$7.53		1,913		2.49	$	7.53		1,124	$	7.53
$9.91-$9.91		183,218		2.64	$	9.91		95,817	$	9.91
$14.33-$21.33		181,250		8.17	$	20.72		56,719	$	20.49
$23.10-$24.42		206,564		8.62	$	23.37		41,964	$	24.42
$29.50-$30.01		231,084		9.44	$	29.75		231,084	$	29.75
$30.85-$31.25		101,837		8.94	$	31.15		101,837	$	31.15
$34.40-$34.40		143,500		9.44	$	34.40		143,500	$	34.40

$1.03-$34.40		1,675,653		5.77	$	16.48		1,189,038	$	16.69


	*1999 Employee Stock Purchase Plan*

During 1999, we adopted our 1999 Employee Stock Purchase Plan under which qualified employees can purchase up to a specified maximum amount of our common stock through payroll deductions at 85% of its fair market value. The 1999 Employee Stock Purchase Plan replaced the 1989 Employee Stock Purchase Plan which expired in July 1999. We have reserved 750,000 shares of common stock for issuance pursuant to its 1999 Employee Stock Purchase Plan.

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


11.	Employee Savings and Investment Plan

In October 1989, we adopted a 401(k) savings and investment plan, which covers all employees. Our contributions to the plan have been 50% matching of employee contributions up to 5% of each employee’s base compensation and were approximately $301,000, $226,000, and $201,000 in the years ended December 31, 2005, 2004 and 2003, respectively.


12.	Income Taxes

The geographic distribution of income before taxes was as follows (in thousands):


	2005		2004		2003

United States income before taxes	$	23,657	$	14,894	$	3,077
Foreign income before taxes		719		785		(358	)

Income before taxes	$	24,376	$	15,679	$	2,719

Significant components of the provision for income taxes were as follows (in thousands):


			2005			2004		2003

Current:
	Federal taxes		$	18,708		$	613	$	91
	State taxes			(845	)		144		35
	Foreign taxes			247			183		76

		Total current		18,110			940		202

Deferred:
	Federal taxes			(16,294	)		—		—
	State taxes			3			—		—
	Foreign taxes			7			—		—

		Total deferred		(16,284	)		—		—

Total provision for income taxes			$	1,826		$	940	$	202

Our provision for income taxes is comprised of the following elements, all expressed as a percentage of income before provision for income taxes:


	Year Ended December 31,

	2005			2004			2003

Statutory Federal income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of Federal benefit		4.9			0.6			1.3
Release of valuation reserve for deferred and prepaid tax assets		(32.4	)		—			—
Operating loss with no carry back benefit		—			—			9.3
Benefit of net operating loss carryforward		—			(32.5	)		(38.8	)
R&D credits		(1.3	)		—			—
Other		1.3			(2.9	)		0.7

Effective income tax rate		7.5	%		6.0	%		7.4	%

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of the net deferred tax assets consist of the following at December 31, 2005 and 2004 (in thousands):


		2005			2004

Deferred tax assets:
	Net operating loss carryforwards	$	9,356		$	17,645
	General business credit carryforwards		2,560			1,732
	Inventory reserves and adjustments		1,229			1,072
	Other accruals and reserves not currently deductible for tax purposes		2,703			1,708
	Capitalized research and development		149			321
	Depreciation & amortization		505			386
	AMT carryforward		437			—

Total deferred tax assets			16,939			22,864
Less valuation allowance			(655	)		(22,864	)

Net deferred tax asset		$	16,284		$	—

We are entitled to a deduction for federal and state tax purposes with respect to employees’ stock option activity. The net deduction in taxes otherwise payable arising from that deduction has been credited to additional paid-in capital. Net reductions in taxes payable due to employees’ stock option activity through 2005 was approximately $17.5 million and this amount was credited to shareholders’ equity in 2005.

We must assess whether it is “more likely than not” that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Due to the amount of net operating losses available for income tax purposes through 2004, we had a full valuation reserve against our deferred tax assets. In 2005 we concluded that it is more likely than not that we will have sufficient future taxable income in the United States to utilize our deferred tax assets and accordingly eliminated our valuation allowances against these deferred tax assets. The valuation allowance of approximately $655,000 remaining at December 31, 2005 relates to net operating loss carryforwards in France that we believe are likely to expire before utilization, accordingly we have provided a full valuation allowance.

As of December 31, 2005, we had net operating loss carryforwards of approximately $8.2 million and $0.5 million for federal and state tax purposes, respectively. If not utilized, these carryforwards will begin to expire in 2020 for federal and in 2015 for state purposes. As of December 31, 2005, we also have foreign net operating loss carryforwards of approximately $0.7 million that will begin to expire in 2006.

We have research and development tax credit carryforwards of approximately $1.4 million and $1.1 million for federal and state purposes, respectively. If not utilized, the federal carryforward will expire in various amounts beginning in 2006. The California credit can be carried forward indefinitely.

The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. We have performed a review of our changes in stock ownership and do not believe the use of our net operating losses or tax credit carryforwards would be restricted.

LASERSCOPE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


13.	Financial Instruments With Market Risks, Concentrations of Customer and Credit Risk,

and Other Risks

Our trade receivables are made up of amounts due from our health care industry customers, primarily in the United States of America, Europe and Asia Pacific. In 2005, 2004 and 2003, our former United States distributor, McKesson, accounted for approximately 6%, 23% and 31% of total 2005, 2004 and 2003 revenues, respectively. We had no other customers whose purchases were 10% or more of net revenues. At December 31, 2005 and 2004, McKesson’s accounts receivable balance was approximately $0.4 million and $5.1 million which represented 1% and 21% of our total net accounts receivable, respectively. We perform ongoing credit evaluations of our customers and maintains reserves for potential credit losses. Historically, such losses have been within our expectations.

Certain of the components used in our laser products, including certain optical components, are purchased from single sources. These single-source suppliers are located in both the United States and overseas. While we believe that most of these components are available from alternate sources, an interruption of these or other supplies could adversely affect our ability to manufacture lasers.

We also have an investment policy approved by our Board of Directors related to our short-term cash investment practices. That policy limits investments to certain types of financial instruments based on specified credit criteria.

We maintain our cash and cash equivalents in accounts with major financial institutions in the United States of America and in countries where subsidiaries operate, in the form of demand deposits and money market accounts. Deposits in these banks may exceed the amounts of insurance provided on such deposits. We have not experienced any losses on our deposits of cash and cash equivalents. We do not engage in hedging or other derivative security transactions.


14.	Consolidated Quarterly Statement of Operations Data (Unaudited):


	Three Months Ended

	Mar. 31,		Jun. 30,		Sep. 30,		Dec. 31,

	(In thousands, except per share data)
2005
Net revenues	$	28,177	$	33,518	$	30,428	$	35,001
Gross margin		17,600		20,366		18,025		20,711
Net income		4,963		5,357		6,323		5,907
Basic net income per share		0.23		0.24		0.28		0.27
Diluted net income per share		0.22		0.23		0.28		0.26
2004
Net revenues	$	18,750	$	21,434	$	24,156	$	29,430
Gross margin		10,669		12,329		14,407		17,250
Net income		2,214		2,988		4,353		5,184
Basic net income per share		0.11		0.14		0.20		0.24
Diluted net income per share		0.10		0.13		0.19		0.23

SCHEDULE II

LASERSCOPE

VALUATION AND QUALIFYING ACCOUNTS


		Balance at						Balance at
		Beginning						End of
Descriptions		of Period		Additions		Deductions		Period

				(In thousands)
Allowance for doubtful accounts receivable:
	Year ended December 31, 2003	$	303	$	93	$	127	$	268

	Year ended December 31, 2004	$	268	$	229	$	394	$	104

	Year ended December 31, 2005	$	104	$	606	$	294	$	416

Reserve for excess and obsolete inventory:
	Year ended December 31, 2003	$	2,291	$	288	$	713	$	1,866

	Year ended December 31, 2004	$	1,866	$	151	$	224	$	1,793

	Year ended December 31, 2005	$	1,793	$	190	$	374	$	1,609

Valuation allowance for deferred tax assets:
	Year ended December 31, 2003	$	15,770	$	—	$	61	$	15,709

	Year ended December 31, 2004	$	15,709	$	7,155	$	—	$	22,864

	Year ended December 31, 2005	$	22,864	$	—	$	22,209	$	655

S-1

EXHIBIT INDEX


Exhibit
Number			Description

	3	.1	By-laws of Registrant, as amended.(1)
	3	.1A	Amendment to By-laws adopted on August 10, 2005.(2)
	3	.3	Eighth Amended and Restated Articles of Incorporation of Registrant.(3)
	10	.1A	1984 Stock Option Plan, as amended, and forms of Incentive Stock Option Agreement and Non-statutory Stock Option Agreement.(4)
	10	.1B	1994 Stock Option Plan and forms of Incentive Stock Option Agreement and Non-statutory Stock Option Agreement.(5)
	10	.1C	2004 Stock Option Plan and form of Stock Option Agreement.(6)
	10	.2	1984 Stock Purchase Plan and form of Common Stock Purchase Agreement.(7)
	10	.3A	1989 Employee Stock Purchase Plan and form of Subscription Agreement.(8)
	10	.3B	1999 Employee Stock Purchase Plan and form of Subscription Agreement.(9)
	10	.4	2006 Director Compensation Plan.(10)
	10	.5	2006 Incentive Compensation Plan.(11)
	10	.6	401(k) Plan.(12)
	10	.7A	Net Lease Agreement between the Registrant and Realtec Properties dated June 20, 2000.(13)
	10	.7B	Net Lease Agreement between the Registrant and Realtec Properties dated October 18, 2000.(14)
	10	.8	Form of indemnification agreement.(15)
	10	.9A	Loan and Security Agreement between the Registrant and Silicon Valley Bank dated October 1, 1999.(16)
	10	.9B	Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 25, 2000.(17)
	10	.9C	Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 26, 2001.(18)
	10	.9D	Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 26, 2002.(19)
	10	.9E	Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 25, 2003.(20)
	10	.9F	Amendment to Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 24, 2004.(21)
	10	.10	1990 Director’s Stock Option Plan and form of Option Agreement.(22)
	10	.11A	Form of Laserscope Management Continuity Agreement, as amended.(23)
	10	.11B	Form of Laserscope Management Continuity Agreement, as amended.(24)
	10	.12C	Form of Laserscope Management Continuity Agreement.(25)
	10	.12D	Form of Laserscope Management Continuity Agreement. (26)
	10	.13A	1995 Director’s Stock Option Plan and form of Option agreement.(27)
	10	.13B	1999 Director’s Stock Option Plan.(28)
	10	.14A	Common Stock Placement Agreement.(29)
	10	.14B	Form of Common Stock Purchase Agreement.(30)
	10	.15A	Convertible Loan Agreement.(31)
	10	.15B	Amendment to Convertible Loan Agreement.(32)
	10	.15C	Amendment to the Convertible Debentures Agreement between the Registrant and Renaissance Capital Growth and Income Fund III, Inc.(33)
	10	.16	Form of Distribution Agreement between Laserscope and Henry Schein, Inc. dated July 29, 2005.(34)
	21	.1	Subsidiaries of Registrant.(35)
	23	.1	Consent of Independent Registered Public Accounting Firm.(36)


Exhibit
Number			Description

	31	.1	Certification of the Registrant’s Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.(37)
	31	.2	Certification of Registrant’s Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.(38)
	32	.1	Certification of Registrant’s Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.(39)
	32	.2	Certification of Registrant’s Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.(40)


	(1)			Incorporated by reference to Exhibit 3.4 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991.
	(2)			Incorporated by reference to Exhibit 3.1 filed in response to Item 9.01(c), “Financial Statements and Exhibits,” of Registrant’s Current Report on Form 8-K filed on August 11, 2005.
	(3)			Incorporated by reference to Exhibit 3.3 filed in response to Item 15(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.
	(4)			Incorporated by reference to Exhibit 10.1A filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991.
	(5)			Incorporated by reference to Exhibit 10.1B filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1994.
	(6)			Filed herewith.
	(7)			Incorporated by reference to Exhibit 10.2 filed in response to Item 16(a), “Exhibits,” of the Registrant’s Registration Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto (File No. 33-31689), which became effective on November 29, 1989.
	(8)			Incorporated by reference to Exhibit 10.3 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991.
	(9)			Incorporated by reference to Exhibit 10.3A filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
	(10)			Filed herewith.
	(11)			Filed herewith.
	(12)			Incorporated by reference to Exhibit 10.4 filed in response to Item 16(a), “Exhibits,” of the Registrant’s Registration Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto (File No. 33-31689), which became effective on November 29, 1989.
	(13)			Incorporated by reference Exhibit 10.6 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000.
	(14)			Incorporated by reference Exhibit 10.6A filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000.
	(15)			Incorporated by reference to Exhibit 10.10 filed in response to Item 16(a), “Exhibits,” of the Registrant’s Registration Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto (File No. 33-31689), which became effective on November 29, 1989.
	(16)			Incorporated by reference to Exhibit 10.11G filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
	(17)			Incorporated by reference to Exhibit 10.11H filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000.
	(18)			Incorporated by reference to Exhibit 10.11I filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001.
	(19)			Incorporated by reference to Exhibit 10.11J filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002.
	(20)			Incorporated by reference to Exhibit 10.1 filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003.
	(21)			Incorporated by reference to Exhibit 10.11L filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004.
	(22)			Incorporated by reference to Exhibit 10.13 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991.


	(23)			Incorporated by reference to Exhibit 10.14 filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000.
	(24)			Incorporated by reference to Exhibit 10.14 filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002.
	(25)			Incorporated by reference to Exhibit 10.1 filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004.
	(26)			Incorporated by reference to Exhibit 10.1 filed in response to Item 9.01(c), “Financial Statements and Exhibits”, of the Registrant’s Current Report on Form 8-K filed on December 28, 2005.
	(27)			Incorporated by reference to Exhibit 10.18 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K/ A for the year ended December 31, 1995.
	(28)			Incorporated by reference to Exhibit 10.18A filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
	(29)			Incorporated by reference to Exhibit 10.19 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
	(30)			Incorporated by reference to Exhibit 10.19A filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
	(31)			Incorporated by reference to Exhibit 10.20 filed in response to Item 14(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
	(32)			Incorporated by reference to Exhibit 10.20A filed in response to Item 15(a)(3), “Exhibits,” of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.
	(33)			Incorporated by reference to Exhibit 10.2 filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003.
	(34)			Incorporated by reference to Exhibit 10.1 filed in response to Item 6(a), “Exhibits,” of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005.
	(35)			Filed herewith.
	(36)			Filed herewith.
	(37)			Filed herewith.
	(38)			Filed herewith.
	(39)			Filed herewith.
	(40)			Filed herewith.

EX-10.1C 2 f18535exv10w1c.htm EXHIBIT 10.1C exv10w1c

Exhibit 10.1C

LASERSCOPE

2004 STOCK OPTION PLAN

STOCK OPTION AGREEMENT

NOTICE OF STOCK OPTION GRANT

«Optionee»

You have been granted an option to purchase Common Stock of Laserscope (the “Company”) as follows:


Date of Grant		[Date of Grant]

Exercise Price Per Share:		$«ExercisePrice»

Total Number of Shares Granted:		«SharesGranted»

Total Price of Shares Granted:		$«TotalExercisePrice»

Type of Option:		Incentive Stock Option (ISO)

Term/Expiration Date:		[10 Years from Date of Grant]

Vesting Schedule:		At the end of six months following the date of grant set forth in this Agreement, 6/48^th of the shares subject to this Option shall vest and this Option shall become exercisable for such shares; and

		At the end of each one-month period thereafter, 1/48^th of the shares subject to this Option shall vest and this Option shall become exercisable for such shares and any shares previously vested but unpurchased.

Termination Period:		Option may be exercised for a period of 90 days after termination of employment or consulting relationship except as set out in Sections 7 and 8 of the Laserscope 2004 Stock Option Plan (but in no event later than the Expiration Date).

By your signature and the signature of the Company’s representative below, you and the Company agree that this option is granted under and governed by the terms and conditions of the Laserscope 2004 Stock Option Plan, which is attached and made a part of this document.


OPTIONEE:	LASERSCOPE



	By:

Signature		Signature


	By:	Eric Reuter
«Optionee» Date:


Print Name		President & CEO

Page 2

LASERSCOPE

2004 STOCK OPTION PLAN

1. Purposes of the Plan. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company’s business.

Options granted hereunder may be either Incentive Stock Options or Nonstatutory Stock Options, at the discretion of the Administrator and as reflected in the terms of the written option agreement.

2. Definitions. As used herein, the following definitions shall apply:

(a)		“Administrator” shall mean the Board or any of its Committees appointed pursuant to Section 4 of the Plan.

(b)		“Board” shall mean the Board of Directors of the Company.

(c)		“Code” shall mean the Internal Revenue Code of 1986, as amended.

(d)		“Committee” shall mean a committee appointed by the Board in accordance with Section 4(a) below, if one is appointed.

(e)		“Common Stock” shall mean the common stock of the Company and any other securities into which such stock is changed, for which such stock is exchanged or which may be issued in respect thereof.

(f)		“Company” shall mean Laserscope, a California corporation.

(g)		“Consultant” shall mean any person who is engaged by the Company or any Parent or Subsidiary to render consulting services and is compensated for such consulting services.

(h)		“Continuous Status as an Employee, Director or Consultant” shall mean the absence of any interruption or termination of service as an Employee, Director or Consultant. A person’s Continuous Status as an Employee, Director or Consultant shall not be considered interrupted or terminated in the case of sick leave, military leave, or any other bona fide leave of absence. An Employee’s Continuous Status as an Employee, Director or Consultant terminates in any event when the approved leave ends unless he or she immediately returns to active work. For purposes of this Plan, a change in status among Employee, Director or Consultant will not constitute an interruption or termination of service as an Employee, Director or Consultant.

(i)		“Director” shall mean a member of the Board whether compensated or not and any director of a Parent or Subsidiary who is compensated (other than only paid a director’s fee) for his or her services.

(j)		“Employee” shall mean any person who is a common-law employee of the Company or any Parent or Subsidiary of the Company. The payment of a director’s fee by the Company or any Parent or Subsidiary shall not be sufficient to constitute “employment” for purposes of this definition.

(k)		“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(l)		“Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

(i)		If the Common Stock is listed on any established stock exchange or a national market system (including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation (“NASDAQ”) System) or is a NASDAQ small-cap issue, its Fair Market Value shall be the closing price for such stock reported by the applicable composite transactions report for such exchange or quoted on such system for the applicable date, as such price is reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii)		If the Common Stock is traded over-the-counter on the date in question but is not a NASDAQ national market or small-cap issue, then its Fair Market Value shall be the mean between the last reported representative bid and asked prices for the Common Stock quoted by the applicable trading market for the applicable date or;

(iii)		If none of the foregoing provisions is applicable, then Fair Market Value shall be determined in good faith by the Administrator.

(m)		“Incentive Stock Option” shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

(n)		“Nonstatutory Stock Option” shall mean an Option not intended to qualify as an Incentive Stock Option.

(o)		“Option” shall mean a stock option granted pursuant to the Plan.

(p)		“Optioned Stock” shall mean the Shares subject to an Option.

(q)		“Optionee” shall mean an Employee, Director or Consultant who receives an Option.

(r)		“Parent” shall mean a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

(s)		“Plan” shall mean this 2004 Stock Option Plan, as amended and restated on March 4, 2005.

(t)		“Rule 16b-3” shall mean Rule 16b-3 promulgated under the Exchange Act as the same may be amended from time to time, or any successor provision.

(u)		“Share” shall mean a share of the Common Stock.

(v)		“Subsidiary” shall mean a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

3. Stock Subject to the Plan. Subject to the adjustment provisions of Section 14 of the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is 850,000¹ shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock.

If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Notwithstanding any other provision of the Plan, Shares issued under the Plan and later repurchased by the Company shall not become available for future grant or sale under the Plan.

¹ The maximum aggregate number of Shares that may be optioned and sold under the Plan was increased from 400,000 to 850,000 on March 4, 2005, as approved by the shareholders at the Annual Meeting of Shareholders held on June 10, 2005.

4. Administration of the Plan.

(a)		Composition of Administrator.

(i)		Multiple Administrative Bodies. To the extent permitted by applicable law and subject to the provisions of this Section 4, the Plan shall be administered by the Board and/or one or more Committees appointed by the Board.

(ii)		Section 16 and Section 162(m) Persons. With respect to persons subject to Section 16 of the Exchange Act, the Administrator shall be either (A) the Board or (B) a Committee consisting of solely two (2) or more directors of the Board each of whom shall be a “non-employee director” within the meaning of Rule 16b-3 (or its successor) under the Exchange Act; provided, that, to the extent necessary for any Option intended to qualify as performance-based compensation under Section 162(m) of the Code to so qualify, such award shall be administered by solely two (2) or more directors of the Board each of whom shall be an “outside director” within the meaning of Section 162(m) of the Code.

(iii)		Administration with Respect to Other Persons. Except as required by subsection (ii) of this Section 4, the Plan shall be administered by (A) the Board or (B) a Committee appointed by the Board, which Committee shall be constituted of two or more directors of the Board (or otherwise in such a manner as permitted or required by applicable law).

(iv)		General. Once a Committee has been appointed pursuant to subsection (ii) or (iii) of this Section 4(a), such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of a Committee and thereafter directly administer the Plan, all to the extent permitted by applicable law and, in the case of a Committee appointed under subsection (ii), to the extent consistent with subsection (ii).

(b)		Powers of the Administrator. Subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:

(i)		to determine the Fair Market Value of the Common Stock, in accordance with Section 2(l) of the Plan;

(ii)		to select the Employees, Directors and Consultants to whom Options may from time to time be granted hereunder;

(iii)		to determine whether and to what extent Options are granted hereunder;

(iv)		to determine the number of shares of Common Stock to be covered by each Option granted hereunder;

(v)		to approve forms of agreement for use under the Plan;

(vi)		to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option granted hereunder (including, but not limited to, the exercise price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option and/or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator shall determine, in its sole discretion);

(vii)		to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted;

(viii)		To determine whether Options or other rights under the Plan will be granted in replacement of other grants under stock option or other compensation plans of an acquired business;

(ix)		To correct any defect, supply any omission, or reconcile any inconsistency in the Plan or any Option Agreement;

(x)		To take any other actions deemed necessary or advisable for the administration of the Plan;

	(xi)		To effectuate an exchange of Options for other Options or other consideration;

	(xii)		To create such plans or subplans as may be necessary or advisable to allow the grant of Options under the Plan in non-United States jurisdictions or to non-United States taxpayers; and

	(xiii)		Within the limitations of the Plan, the Administrator may modify, extend, or assume outstanding options, provided that no such action shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such Option.

(c)

Effect of Administrator’s Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options.

5. Eligibility

(a)		Nonstatutory Stock Options may be granted to Employees, Directors and Consultants. Incentive Stock Options may be granted only to Employees. An Employee, Director or Consultant who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options.

(b)		Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate fair market value of stock with respect to which “incentive stock options” (within the meaning of Section 422 of the Code) are exercisable for the first time by an Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess options shall not be treated as incentive stock options.

(c)		For purposes of Section 5(b), incentive stock options shall be taken into account in the order in which they were granted, and the fair market value of the stock shall be determined as of the time the option with respect to such stock is granted.

(d)		The Plan shall not confer upon any Optionee any right with respect to continuation of employment, consulting or other service relationship with the Company, nor shall it interfere in any way with his or her right or the Company’s right to terminate his or her employment, consulting or other relationship at any time, with or without cause.

6. Term of Plan. The Plan shall become effective upon its approval by the shareholders of the Company as described in Section 20 of the Plan. It shall continue in effect for a term of ten (10) years following March 5, 2004 (the date of the Board’s adoption of the Plan) unless sooner terminated under Section 16 of the Plan.

7. Term of Option. The term of each Option shall be the term stated in the Option Agreement; provided, however, that in the case of an Incentive Stock Option, the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. However, in the case of an Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement.

8. Limitation on Grants to Employees. Subject to adjustment pursuant to Section 14 of the Plan, the maximum number of Shares which may be granted under options to any Employee under this Plan for any fiscal year of the Company shall be 325,000.

9. Option Exercise Price and Consideration.

(a)		The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following:

(i)		In the case of an Incentive Stock Option

(A)		granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant;

(B)		granted to any Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

(ii)		In the case of a Nonstatutory Stock Option intended to qualify as performance-based compensation under Section 162(m) of the Code, the per Share Exercise Price shall be no less than 100% of the Fair Market Value on the date of grant.

(b)		The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator and may consist entirely of (1) cash, (2) check, (3) promissory note (subject to the loan prohibition provisions of the Sarbanes-Oxley Act of 2002), (4) other Shares that (x) in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (5) a broker-assisted cashless exercise arrangement (subject to the loan prohibition provisions of the Sarbanes-Oxley Act of 2002), (6) any combination of the foregoing methods of payment, or (7) such other consideration and method of payment for the issuance of Shares to the extent permitted under applicable law. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. In the case of an Incentive Stock Option, the method of payment shall be limited to the method(s) expressly permitted by the applicable stock option agreement, however, such agreement may provide that the methods set forth in Sections 9(b)(3) and 9(b)(4) are only available at the discretion of the Administrator.

10. Exercise of Option.

(a)

Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, including, without limitation, performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan.

An Option may not be exercised for a fraction of a Share.

An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 9(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly

authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate as soon as reasonably practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 14 of the Plan.

Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

(b)		Termination of Status as an Employee, Director or Consultant. In the event of termination of an Optionee’s Continuous Status as an Employee, Director or Consultant, such Optionee may, but only within ninety (90) days (or such other period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the Optionee does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate.

(c)		Disability of Optionee. Notwithstanding the provisions of Section 10(b) above, in the event of termination of an Optionee’s Continuous Status as an Employee, Director or Consultant as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Code), he or she may, but only within six (6) months (or such other period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) from the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. To the extent that he or she was not entitled to exercise the Option at the date of termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate.

(d)		Death of Optionee. In the event of the death of an Optionee:

(i)		during the term of the Option who is at the time of his death an Employee, Director or Consultant and who shall have been in Continuous Status as an Employee, Director or Consultant since the date of grant of the Option, the Option may be exercised, at any time within six (6) months (or such other period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as an Employee, Director or Consultant six (6) months (or such other period of time as is determined by the Administrator as provided above in this subparagraph (i)) after the date of death, subject to the limitation set forth in Section 5(b); or

(ii)		within ninety (90) days (or such other period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the termination of Continuous Status as an Employee, Director or Consultant, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination.

11. Withholding Taxes. As a condition to the exercise of Options granted hereunder, the Optionee shall make such arrangements as the Administrator may require for the timely satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise, receipt or vesting of such Option (the “Withholding Obligations”). The Company shall not be required to issue any Shares under the Plan until such withholding obligations are fully satisfied.

12. Stock Withholding to Satisfy Withholding Obligations. Optionees shall timely satisfy the Withholding Obligations in such manner permitted by the Administrator, which may include, at the discretion of the Administrator, one or some combination of the following methods: (a) cash payment by the Optionee, (b) deduction from the Optionee’s current compensation, (c) surrender by the Optionee to the Company of Shares that, in the case of Shares previously acquired from the Company, have been owned by the Optionee for more than six months on the date of surrender or (d) the Optionee’s election to have the Company withhold Shares from the Shares to be issued upon exercise of the Option. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date the Option is exercised.

All elections by an Optionee to have Shares withheld to satisfy tax withholding obligations shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions:

(a)		the election must be made on or prior to the applicable Option exercise date;

(b)		all elections shall be subject to the consent or disapproval of the Administrator.

13. Non-Transferability of Options. Except as otherwise provided in the applicable stock option agreement (in the case of a Nonstatutory Stock Option), the Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution. Except as otherwise provided in the applicable stock option agreement (in the case of a Nonstatutory Stock Option), an Option may be exercised, during the lifetime of the Optionee, only by the Optionee or by the guardian or legal representative of the Optionee. An Option granted under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily, involuntarily or by operation of law. Any act in violation of this Section 13 shall be void.

14. Adjustments Upon Changes in Capitalization or Merger. Subject to any required action by the shareholders of the Company (a) the number and class of shares of Common Stock or other stock or securities covered by each outstanding Option, (b) the number and class of shares of Common Stock or other stock or securities that have been authorized for issuance under Section 3 of the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, (c) the maximum number of Shares for which Options may be granted to any employee under Section 8 of the Plan, and (d) the per Share exercise price of each outstanding Option, may be appropriately adjusted (if at all) in the event of a subdivision of the outstanding Shares, stock split, reverse stock split, stock dividend, dividend payable in a form other than Shares in an amount that has a material effect on the price of the Shares, consolidation, combination or reclassification of the Shares, recapitalization, merger, liquidation, spin-off, split-up, distribution, exchange of Shares, repurchase of Shares, change in corporate structure or other similar occurrence. Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive, and the Administrator may determine that no adjustment is appropriate and that none shall be made.

If by reason of an adjustment pursuant to this Section 14, an Optionee’s Option shall cover additional or different shares of stock or securities, then such additional or different shares and the Option in respect thereof shall be subject to the terms, conditions and restrictions which were applicable to the Option prior to such adjustment.

In the event of the proposed dissolution or liquidation of the Company, the Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Administrator and give the Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable.

In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Option shall be assumed, or a substantially equivalent option shall be substituted, by the successor corporation or a parent or subsidiary of such successor corporation, unless (a) the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option as to some or all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable or (b) if the Option is otherwise fully exercisable, the Administrator determines in its sole discretion that the Option shall not be assumed or substituted. If the Administrator makes an Option exercisable in lieu of assumption or substitution in the event of a merger or sale of assets (or if the Option is otherwise fully exercisable and the Administrator determines in its sole discretion that the Option shall not be assumed or substituted), the Administrator shall notify the Optionee that the Option shall be exercisable for a period of thirty (30) days from the date of such notice, and the Option will terminate upon the expiration of such period.

15. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination to grant such Option or such other date as is determined by the Administrator. Notice of the determination shall be given to each Optionee to whom an Option is so granted within a reasonable time after the date of such grant, except that persons subject to Section 16 of the Exchange Act shall be notified of their Option grant in a manner to facilitate timely reporting under Section 16 of the Exchange Act.

16. Amendment and Termination of the Plan.

(a)		Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable, subject to any shareholder approval required by applicable law or deemed advisable by the Board for purposes of qualifying Options granted hereunder as performance-based compensation under Section 162(m) of the Code or for any other purpose deemed advisable by the Board.

(b)		Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company.

17. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law.

18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

19. Option Agreement. Options shall be evidenced by written option agreements in such form as the Administrator shall approve. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Administrators deems appropriate for inclusion in an option agreement. The option agreement shall specify whether the Option is intended to be an Incentive Stock Option or a Nonstatutory Stock Option. The provisions of the various option agreements entered into under the Plan need not be identical. Options may be granted in consideration of a reduction in the Optionee’s other compensation.

20. Shareholder Approval.

(a)

Effectiveness of this Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after March 5, 2004 (the date of the Board’s adoption of the Plan). Such shareholder approval shall be obtained in the manner and to the degree required under applicable federal and state law.

21. Execution

To record the adoption of the Plan by the Board on March 5, 2004, the Company has caused its duly authorized officer to execute the same.


	LASERSCOPE
	By:	/s/ Eric M. Reuter
	Title: President and Chief Executive Officer

EX-10.4 3 f18535exv10w4.htm EXHIBIT 10.4 exv10w4

Exhibit 10.4

2006 Director Compensation Plan

On December 21, 2005, the Human Resources Committee of the Board approved the terms of the Company’s 2006 Director Compensation Plan as follows:

In 2006, each non-management Board member (other than the Chairman of the Board), will be paid an annual retainer of $20,000 and $500 for attendance at each Board meeting including telephonic Board meetings. The Chairman of the Board will be paid an annual retainer of $27,500 and $2,000 for attendance at each Board meeting. In addition, the Chairman of each Committee of the Board will each be paid a supplemental annual retainer of $5,000. All Board compensation is paid quarterly, as earned. Telephonic Committee meetings are not considered “Board Meetings” for purposes of calculating Board compensation.

EX-10.5 4 f18535exv10w5.htm EXHIBIT 10.5 exv10w5

Exhibit 10.5

LASERSCOPE

2006 INCENTIVE COMPENSATION PLAN

Effective as of December 21, 2005

This Laserscope 2006 Incentive Compensation Plan (the “Incentive Plan”) has been approved by the Laserscope (the “Company”) Board of Directors (the “Board”) and is hereby established by the Company effective as of December 21, 2005.

1. Purpose. The purpose of this Incentive Plan is to motivate and provide a financial incentive for selected Company employees (including managers, directors and executives, but not commissioned sales representatives) by providing cash bonuses for the successful achievement of specified Company strategic objectives and goals.

2. Eligibility & Participation. All United States based employees of the Company are eligible to participate in this Incentive Plan and only those employees designated by the “Committee” (as defined below) to participate in this Incentive Plan shall be “Participants” in this Incentive Plan. The Committee may designate eligible employees to participate in this Incentive Plan at any time by listing such employees in Appendix A attached hereto, which Appendix may be amended at any time by the Committee. Participation in this Incentive Plan does not guarantee that any bonus payments will ever be made under this Incentive Plan. A Participant’s rights hereunder may not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to seizure for the payment of Participant’s debts, judgments, alimony, or separate maintenance or transferable, whether voluntarily, involuntarily or by operation of law, in the event of Participant’s bankruptcy, insolvency, divorce or separation.

3. Bonus Amounts. Bonuses, if any, will be based on the formulas set forth in parts 1 through 4 of Appendix B attached hereto which will take into account the Participant’s base salary and the degree of satisfaction of certain objective performance goals which must be achieved by or over a specified period of time (the “Performance Period”), all of which shall be established by the Committee. Notwithstanding the foregoing, the Chief Executive Officer of the Company may grant additional, discretionary, bonuses, subject to specified maximums and in consultation with the Committee. Appendix B may be amended by the Committee, in its sole discretion, at any time and for any reason; provided that no such amendment shall materially and adversely affect the then existing rights of any Participant.

4. Bonus Payment.

(a) The Committee shall, in its sole discretion, determine the degree to which the specified performance goals are satisfied and bonuses, if any, are earned for any Performance Period. Any bonus payable to a Participant under this Incentive Plan will be paid in a single-lump sum cash payment as soon as practicable after such determination is made, provided that (a) if the Performance Period is based on one or more calendar years, the bonus, if any, will be paid during the calendar year immediately following the end of the Performance Period, and (b) if the Performance Period is based on some other period of time, the bonus, if any, shall be paid no later than the 15th day of the third month following the end of the later of the Participant’s taxable year during which the bonus is earned and the Company’s fiscal year during which the bonus is earned. All bonus payments will be reduced by any required tax withholding and/or other

deductions. In no event shall the Company (or any person connected therewith) be liable to any person for the failure of any Participant to be entitled to any particular tax consequence with respect to this Incentive Plan or any bonus paid pursuant to this Incentive Plan.

(b) If bonuses are earned and are payable for any given Performance Period, the Company will pay such bonuses first to non-executive employees, including managers and directors, and then to executives. In the event the Company is unable to pay all bonuses for any given Performance Period to all the non-executive employees, the bonuses will be paid to such non-executive employees on a pro rata basis. Bonuses, if any, to executives, including the Company’s Chief Executive Officer, will be paid only after bonuses earned by non-executives have been paid. In the event the Company is unable to pay all bonuses for any given Performance Period to all the executive employees after paying satisfying non-executive bonuses, the executive bonuses will be paid to such executive employees on a pro rata basis. If the Company is unable to pay in full bonuses earned for a given Performance Period, the Company shall pay such shortfall at the end of any subsequent Performance Period, if it is able to do so.

5. Changes in Employment Status. The rules set forth in this Section 5 will apply to any Participant who is newly hired or terminates employment during the applicable Performance Period. However, notwithstanding anything stated herein, the Committee has the authority, in its sole and absolute discretion, to deviate from these rules for individual Participants.

(a) New Hires. Any bonus payable under this Incentive Plan to a Participant who is hired and selected for participation in this Incentive Plan during a Performance Period shall be pro-rated based on the base pay earned by the Participant during the Performance Period.

(b) Terminations. A Participant will not be eligible for any bonus payment unless the Participant is an employee of the Company as of the bonus payment date (even if the applicable performance goals were partly or entirely satisfied), unless the Participant is on a Company-approved leave of absence and subject to any rights a Participant may have pursuant to another written agreement with the Company. Notwithstanding the foregoing, if a Participant terminates employment before a bonus payment date as a result of his or her death or permanent disability, such Participant will be eligible for a bonus that is pro-rated based on the base pay earned by the Participant during the Performance Period.. For purposes of this Incentive Plan, “permanent disability” shall have the meaning (i) utilized in any Company long-term disability plan or (ii) as defined in Internal Revenue Code Section 22(e) if no such disability plan exists.

(c) Leaves of Absence. Any bonus payable under this Incentive Plan to a Participant who is on a Company-approved leave of absence during any part of the Performance Period shall be pro-rated based on the base pay earned by the Participant during the Performance Period.

6. Administration. This Incentive Plan shall be administered by the Board or an independent committee of the Board appointed by the Board to administer this Incentive Plan (the “Committee”). Subject to the provisions of this Incentive Plan, the Committee shall have the full authority and discretion to: (a) determine who will participate in this Incentive Plan, (b) determine the time or times at which bonuses may be paid, (c) prescribe, amend and rescind rules and regulations relating to this Incentive Plan; (d) take any actions it deems necessary or advisable for the administration of this Incentive Plan; and (e) make all other determinations necessary or advisable

for Incentive Plan administration. All decisions, interpretations and other actions of the Committee shall be final, conclusive and binding on all parties who have an interest in this Incentive Plan. Notwithstanding the foregoing, no decision by the Committee shall have the effect of impairing the then existing rights of a Participant under this Incentive Plan without such Participant’s consent.

7. Indemnification. No member of the Committee shall be personally liable for (i) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken, failure to act, determination or interpretation made in good faith with respect to this Incentive Plan and (ii) any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Articles of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless.

8. Amendment and Termination. This Incentive Plan may be amended or terminated at any time by the Board for any reason or no reason. No payments shall be made under this Incentive Plan after the plan is terminated. Unless affirmatively terminated by the Board, this Incentive Plan shall continue to remain in effect even if Performance Periods or performance goals are not established on a recurring basis. Moreover, there is no requirement that Performance Periods or performance goals be established whether on a one-time basis or a recurring basis.

9. No Employment Rights. No provision of this Incentive Plan shall be construed to give any person any right to become, to be treated as, or to remain an employee or consultant of the Company. The Company reserves the right to terminate any Participant’s employment or service at any time and for any reason or for no reason, with or without cause, and with or without advance notice.

10. Effect on Other Benefits. Any payments made pursuant to this Incentive Plan shall not be counted as compensation for purposes of any other employee benefit plan, program or agreement sponsored, maintained or contributed by the Company unless expressly provided for in such employee benefit plan, program or agreement.

11. Unfunded, Unsecured Obligation; No Equity Interest. This Incentive Plan shall at all times be entirely unfunded and no provision of this Incentive Plan shall require the Company, for purpose of satisfying any obligations under this Incentive Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Additionally, nothing contained herein shall be construed as giving a Participant, his or her beneficiary, or any other person, any equity or other interest of any kind in any assets of the Company, nor any rights commonly associated with any such interest, including, but not limited to, the right to vote on any matters put before the Company’s shareholders, or creating a trust of any kind or a fiduciary relationship of any kind between the Company and any such person. As to any

claim for any unpaid amounts under this Incentive Plan, a Participant, his or her beneficiary, and any other person having a claim for payment shall be general unsecured creditors.

12. Integration. This Incentive Plan represents the entire plan and agreement as to the matters described herein. This Incentive Plan shall supersede all prior or contemporaneous plans or arrangements or understandings between the Company and any Participants or other persons, whether written or oral, express or implied, with respect to any subject covered by this Incentive Plan.

13. Enforceability. Whenever possible, each provision or portion of any provision of this Incentive Plan shall be interpreted in such manner as to be effective and valid under applicable law but the invalidity or unenforceability of any provision or portion of any provision of this Incentive Plan in any jurisdiction shall not affect the validity or enforceability of the remainder of this Incentive Plan in that jurisdiction or the validity or enforceability of this Incentive Plan, including that provision or portion of any provision, in any other jurisdiction. In addition, should a court or arbitrator determine that any provision or portion of any provision of this Incentive Plan, is not reasonable or valid, such provision should be interpreted and enforced to the maximum extent which such court or arbitrator deems reasonable or valid.

14. Governing Law. The Incentive Plan shall be governed by, and interpreted, construed, and enforced in accordance with, the laws of the State of California without regard to its or any other jurisdiction’s conflicts of laws provisions.

15. Execution. To record the adoption of this Incentive Plan, the Company has caused its authorized officer to execute the same.


	LASERSCOPE
	By:

	Title:

APPENDIX A

PARTICIPANTS

All United States based employees of the Company, including managers, directors and executives, but not commissioned sales representatives.

A-1

APPENDIX B-1: DIRECTORS

Directors will be eligible for quarterly and year-end bonuses as set forth below.

2006 Financial Plan

The 2006 Financial Plan provides that once the Company meets certain target earnings goals for a given quarter, an amount equal to the Company’s earnings in excess of such target (the “Quarterly Over Plan Amount”) is available for payment of quarterly bonuses. Target earnings are equal to the Company’s consolidated pretax earnings budget as approved by the Board on 12/21/05. For purpose of calculating whether actual pretax earnings exceed the pretax earnings budget, the actual pretax earnings will not include charges for the bonus or for equity compensation pursuant to FAS 123R.

Quarterly Bonus Payments to Directors

Quarterly bonuses, if any, will be earned and paid under this Incentive Plan based on the successful achievement at or above planned performance levels as defined in the 2006 Financial Plan. The maximum amount of any quarterly bonus that a director can earn is equal to 25% of the director’s applicable quarterly base pay (the “Maximum Bonus”).

The actual amount of a quarterly bonus earned by a director is the sum of (50% x Maximum Bonus) + (50% x A x Maximum Bonus), where:

= A director’s individual performance assessment determined by a director’s direct supervisor that may range from 0% to a maximum of 100%.

Year-End Bonus Payments to Directors

If pre-tax earnings for the year exceed the 2006 Financial Plan by more than the sum of all quarterly bonus that have been earned and paid to Participants (the “Excess Earnings”), then directors may be eligible to receive a year-end bonus payment.

The amount of any year-end bonus to a director will be equal to the product of 15% x Excess Earnings x B, where:

= The proportion of the total quarterly bonuses the director earned (pro rated based on base pay earned by the director during the Performance Period).

* * * *
Illustrative and Hypothetical Example

Assumptions:

	•		Adequate amount in Quarterly Over Plan Amount for payment of all quarterly bonuses.

	•		Performance assessment of 50% for discretionary portion of quarterly bonus.

	•		Director’s quarterly base pay at end of applicable quarter is $50,000.

Quarterly Bonus Calculation:

	•		Maximum Bonus: 25% x $50,000 = $12,500

	•		Quarterly Bonus Earned:


Ø	Non-Discretionary Bonus:	50% * $12,500 =	$	6,250
Ø	Discretionary Bonus:	50% * 50% * $12,500 =	$	3,125

Ø	Total Quarterly Bonus Earned:		$	9,375

B-4

APPENDIX B-2: MANAGERS

Managers will be eligible for quarterly and year-end bonuses as set forth below.

2006 Financial Plan

Quarterly Bonus Payments to Managers

Quarterly bonuses, if any, will be earned and paid under this Incentive Plan based on the successful achievement at or above planned performance levels as defined in the 2006 Financial Plan. The maximum amount of any quarterly bonus that a manager can earn is equal to 12% of the manager’s applicable quarterly base pay (the “Maximum Bonus”).

The actual amount of a quarterly bonus earned by a manager is the sum of (50% x Maximum Bonus) + (50% x A x Maximum Bonus), where:

= A manager’s individual performance assessment as determined by a manager’s direct supervisor that may range from 0% to a maximum of 100%.

Year-End Bonus Payments to Managers

If pre-tax earnings for the year exceed the 2006 Financial Plan by more than the sum of all quarterly bonus that have been earned and paid to Participants (the “Excess Earnings”), then managers may be eligible to receive a year-end bonus payment.

The amount of any year-end bonus to a manager will be equal to the product of 15% x Excess Earnings x B, where:

= The proportion of the total quarterly bonuses the manager earned (pro rated based on base pay earned by the manager during the Performance Period).

* * * *
Illustrative and Hypothetical Example

Assumptions:

	•		Adequate amount in Quarterly Over Plan Amount for payment of all quarterly bonuses.

	•		Performance assessment of 50% for discretionary portion of quarterly bonus.

	•		Manager’s quarterly base pay at end of applicable quarter is $25,000.

Quarterly Bonus Calculation:

	•		Maximum Bonus: 12% * $25,000 = $3,000

	•		Quarterly Bonus Earned:


Ø	Non-Discretionary Bonus:	50% * $3,000 =	$	1,500
Ø	Discretionary Bonus:	50% * 50% * $3,000 =	$	750

Ø	Total Quarterly Bonus Payable:		$	2,250

B-4

APPENDIX B-3: OTHER NON-EXECUTIVE EMPLOYEES

Other non-executives will be eligible for quarterly and year-end bonuses as set forth below.

2006 Financial Plan

Quarterly Bonus Payments to General Employees

Quarterly bonuses, if any, will be earned and paid under this Incentive Plan based on the successful achievement at or above planned performance levels as defined in the 2006 Financial Plan. The maximum amount of any quarterly bonus that other non-executive employees can earn is equal to 6% of such employee’s applicable quarterly base pay (the “Maximum Bonus”).

The actual amount of a quarterly bonus earned by other non-executive employees is the sum of (50% x Maximum Bonus) + (50% x A x Maximum Bonus), where:

= Such employees’ individual performance assessment as determined by his/her direct supervisor that may range from 0% to a maximum of 100%.

Year-End Bonus Payments to General Employees

If pre-tax earnings for the year exceed the 2006 Financial Plan by more than the sum of all quarterly bonus that have been earned and paid to Participants (the “Excess Earnings”), then other non-executive employee may be eligible to receive a year-end bonus payment.

The amount of any year-end bonus to such an employee will be equal to the product of 15% x Excess Earnings x B, where:

= The proportion of the total quarterly bonuses such other employee earned (pro rated based on base pay earned by the employee during the Performance Period).

* * * *
Illustrative and Hypothetical Example

Assumptions:

	•		Adequate amount in Quarterly Over Plan Amount for payment of all quarterly bonuses.

	•		Performance assessment of 50% for discretionary portion of quarterly bonus.

	•		General Employee’s quarterly base pay at end of applicable quarter is $20,000.

Quarterly Bonus Calculation:

	•		Maximum Bonus: 6% * $20,000 = $1,200

	•		Quarterly Bonus Earned:


Ø	Non-Discretionary Bonus:	50% * $1,200 =	$	600
Ø	Discretionary Bonus:	50% * 50% * $1,200 =	$	300

Ø	Total Quarterly Bonus Payable:		$	900

B-4

APPENDIX B-4: EXECUTIVES

Executives will be eligible for quarterly and year-end bonuses as set forth below.

2006 Financial Plan

Quarterly Bonus Payments to Executives

Quarterly bonuses, if any, will be earned and paid under this Incentive Plan based on the successful achievement at or above planned performance levels as defined in the 2006 Financial Plan. The maximum amount of any quarterly bonus that an executive can earn is 50% of the executive’s applicable quarterly base pay (the “Maximum Bonus”).

The actual amount of a quarterly bonus earned by an executive is the sum of (50% x Maximum Bonus) + (50% x A x Maximum Bonus), where:

= An executive’s individual performance assessment as determined by the CEO (and the Compensation Committee in the case of the CEO) that may range from 0% to a maximum of 100%.

Year-End Bonus Payments to Executives

If pre-tax earnings for the year exceed the 2006 Financial Plan by more than the sum of all quarterly bonus that have been earned and paid to Participants (the “Excess Earnings”), then executives may be eligible to receive a year-end bonus payment.

The amount of any year-end bonus to an executive will be equal to the product of 15% x Excess Earnings x B, where:

= The proportion of the total quarterly bonuses the executive earned (pro rated based on base pay earned by the executive during the Performance Period).

* * * *
Illustrative and Hypothetical Example

Assumptions:

	•		Adequate amount in Quarterly Over Plan Amount for payment of all quarterly bonuses.

	•		Performance assessment of 50% for discretionary portion of quarterly bonus.

	•		Executive’s quarterly base pay at end of applicable quarter is $75,000.

Quarterly Bonus Calculation:

	•		Maximum Bonus: 50% * $75,000 = $37,500

	•		Quarterly Bonus Earned:


Ø	Non-Discretionary Bonus:	50% * $37,500 =	$	18,750
Ø	Discretionary Bonus:	50% * 50% * $37,500 =	$	9,375

Ø	Total Quarterly Bonus Payable:		$	28,125

B-4

EX-21.1 5 f18535exv21w1.htm EXHIBIT 21.1 exv21w1

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

Laserscope (UK) Ltd.

Laserscope France S.A.

Laserscope International, Inc.

EX-23.1 6 f18535exv23w1.htm EXHIBIT 23.1 exv23w1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-55843 and 333-32252) and S-8 (No. 33-38831, 33-40506, 33-53052, 33-53158, 33-63603, 33-82524, 333-07089, 333-07101, 333-07103, 333-07095, 333-11787, 333-11795, 333-31213 and 333-31233, 333-47372, 333-60441, 333-60443, 333-60445, 333-92713, 333-72530, 333-101212, 333-110492, 333-118062 and 333-130221) of Laserscope of our report dated March 15, 2006 relating to the financial statements, financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
San Jose, California
March 15, 2006

EX-31.1 7 f18535exv31w1.htm EXHIBIT 31.1 exv31w1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER,
AS REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.

I, Eric M. Reuter, certify that:

1. I have reviewed this report on Form 10-K of Laserscope;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


	Date: March 15, 2006
	/s/ Eric M. Reuter
	Eric M. Reuter
	Chief Executive Officer (Principal Executive Officer)

EX-31.2 8 f18535exv31w2.htm EXHIBIT 31.2 exv31w2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER,
AS REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.

I, Derek Bertocci, certify that:

1. I have reviewed this report on Form 10-K of Laserscope;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


	Date: March 15, 2006
	/s/ Derek Bertocci
	Derek Bertocci
	Chief Financial Officer (Principal Financial Officer)

EX-32.1 9 f18535exv32w1.htm EXHIBIT 32.1 exv32w1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER,
AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.

I, Eric M. Rueter, hereby certify pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

(i)		The accompanying annual report on Form 10-K for the year ended December 31, 2005 fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

(ii)		The information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Laserscope.


	Date: March 15, 2006
	/s/ Eric M. Reuter
	Eric M. Reuter
	Chief Executive Officer (Principal Executive Officer)

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of this report.

EX-32.2 10 f18535exv32w2.htm EXHIBIT 32.2 exv32w2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER,
AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.

I, Derek Bertocci, hereby certify pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

(i)		The accompanying annual report on Form 10-K for the year ended December 31, 2005 fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

(ii)		The information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Laserscope.


	Date: March 15, 2006
	/s/ Derek Bertocci
	Derek Bertocci
	Chief Financial Officer (Principal Financial Officer)

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of this report.

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