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 ¨ No x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

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

Number of shares outstanding of the registrant’s common stock, $0.001 par value, as of ~~October 29, 2004: 24,396,000.~~August 31, 2005: 23,206,649

BIOLASE^®, and WaterLase^® are registered trademarks, and Waterlase MD^™, Diolase Plus^™ and HydroPhotonics^™ are trademarks of BIOLASE Technology, Inc.


	September 30, 2004			December 31, 2003			MARCH 31, 2005			DECEMBER 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	3,993,000		$	11,111,000		$	2,946,000		$	6,140,000
Short-term investments		32,175,000			—			9,903,000			25,326,000
Accounts receivable, less allowance of $65,000 and $64,000 in 2004 and 2003, respectively		6,305,000			5,771,000
Inventories		7,132,000			3,752,000
Deferred tax asset		1,079,000			1,079,000
Accounts receivable, less allowance of $635,000 and $384,000 in 2005 and 2004, respectively								12,551,000			9,635,000
Inventory								8,836,000			8,180,000
Prepaid expenses and other current assets		1,495,000			1,583,000			1,524,000			1,814,000

Total current assets		52,179,000			23,296,000			35,760,000			51,095,000
Long-term investments								9,948,000			—
Property, plant and equipment, net		2,169,000			1,973,000			3,035,000			3,025,000
Intangible assets, net		2,469,000			2,587,000			2,110,000			1,662,000
Goodwill		2,926,000			2,926,000			2,926,000			2,926,000
Deferred tax asset		12,583,000			12,678,000
Other assets		223,000			1,041,000			43,000			38,000

Total assets	$	72,549,000		$	44,501,000		$	53,822,000		$	58,746,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit							$	1,850,000		$	—
Accounts payable	$	4,449,000		$	3,813,000			7,679,000			7,147,000
Accrued liabilities		5,104,000			5,152,000			8,155,000			8,467,000
Line of credit		—			1,792,000
Accrued legal settlement								—			3,000,000
Deferred revenue		1,819,000			932,000			2,535,000			2,468,000
Deferred gain on sale of building – current portion		63,000			63,000
Debt		—			888,000
Current portion of deferred gain								63,000			63,000

Total current liabilities		11,435,000			12,640,000			20,282,000			21,145,000
Deferred gain on sale of building		32,000			79,000
Deferred gain								—			16,000
Deferred tax liability								226,000			161,000
Accrued legal settlement-net of current portion								—			3,446,000

Total liabilities		11,467,000			12,719,000			20,508,000			24,768,000
Commitments and contingencies (Note 9)

Stockholders’ equity:
Preferred stock, par value $0.001, 1,000,000 shares authorized, no shares issued and outstanding		—			—			—			—
Common stock, par value $0.001, 50,000,000 shares authorized; 24,394,000 and 21,559,000 shares issued; 22,869,000 and 21,559,000 outstanding in 2004 and 2003, respectively		24,000			22,000
Common stock, par value $0.001, 50,000,000 shares authorized; 24,919,000 shares and 24,482,000 shares issued; 22,955,500 and 22,518,500 outstanding in 2005 and 2004, respectively								25,000			25,000
Additional paid-in capital		101,796,000			59,188,000			105,481,000			101,562,000
Treasury stock (cost of 1,525,000 shares repurchased)		(13,435,000	)		—
Accumulated other comprehensive loss		(177,000	)		(147,000	)		(534,000	)		(225,000	)
Accumulated deficit		(27,126,000	)		(27,281,000	)		(55,259,000	)		(50,985,000	)

								49,713,000			50,377,000
Treasury stock (cost of 1,963,500 shares repurchased)								(16,399,000	)		(16,399,000	)

Total stockholders’ equity		61,082,000			31,782,000			33,314,000			33,978,000

Total liabilities and stockholders’ equity	$	72,549,000		$	44,501,000		$	53,822,000		$	58,746,000


	Three Months Ended September 30,					Nine Months Ended September 30,					THREE MONTHS ENDED MARCH 31,
	2004			2003		2004			2003		2005			2004
Revenue	$	12,038,000		$	13,453,000	$	41,426,000		$	33,042,000
Cost of sales		4,979,000			5,024,000		15,700,000			12,386,000
Net revenue											$	16,834,000		$	14,530,000
Cost of revenue												7,465,000			5,686,000

Gross profit		7,059,000			8,429,000		25,726,000			20,656,000		9,369,000			8,844,000

Other income, net												16,000			16,000

Operating expenses:
Sales and marketing		5,931,000			3,729,000		17,534,000			10,962,000		6,126,000			5,336,000
General and administrative		2,387,000			1,527,000		5,838,000			3,407,000		4,486,000			1,667,000
Engineering and development		1,045,000			629,000		2,523,000			1,662,000		3,038,000			772,000

Total operating expenses		9,363,000			5,885,000		25,895,000			16,031,000		13,650,000			7,775,000

Income (loss) from operations		(2,304,000	)		2,544,000		(169,000	)		4,625,000
Non-operating income, net		272,000			23,000		423,000			135,000
(Loss) income from operations												(4,265,000	)		1,085,000
Non-operating income (loss), net												63,000			(61,000	)

Income (loss) before income taxes		(2,032,000	)		2,567,000		254,000			4,760,000
Benefit (provision) for income taxes		799,000			—		(99,000	)		—
(Loss) income before income taxes												(4,202,000	)		1,024,000
Provision for income taxes												(72,000	)		(408,000	)

Net income (loss)	$	(1,233,000	)	$	2,567,000	$	155,000		$	4,760,000
Net (loss) income											$	(4,274,000	)	$	616,000

Net income (loss) per share:
Net (loss) income per share:
Basic	$	(0.05	)	$	0.12	$	0.01		$	0.23	$	(0.19	)	$	0.03

Diluted	$	(0.05	)	$	0.11	$	0.01		$	0.21	$	(0.19	)	$	0.03

Shares used in the calculation of net income (loss) per share:
Shares used in the calculation of net (loss) income per share:
Basic		23,409,000			21,535,000		23,380,000			20,796,000		22,830,000			22,443,000

Diluted		23,409,000			23,448,000		25,252,000			22,813,000		22,830,000			23,777,000

The unaudited consolidated financial statements include the accounts of BIOLASE Technology, Inc. and its consolidated subsidiaries and have been prepared on a basis consistent with the December 31, ~~2003~~2004 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments and the elimination of all material intercompany transactions and balances, necessary to fairly present the information set forth therein. These unaudited, interim, consolidated financial statements do not include all the footnotes, presentations and disclosures normally required by accounting principles generally accepted ~~accounting principles~~ in the United States of America (“GAAP”) for complete financial statements. ~~These financial statements should be read in conjunction with~~We previously restated the ~~audited consolidated financial statements~~results of operations for the ~~year~~three months ended ~~December~~March 31, ~~2003 and notes thereto included~~2004. The restatement is further described in ~~our Annual Report~~Note 3 of the Consolidated Financial Statements on Form ~~10-K~~10-Q/A for the three months ended March 31, 2004 filed with the Securities and Exchange Commission (“SEC”) on ~~March 3, 2004.~~July 19, 2005.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ materially from those estimates.

The results of operations for the three ~~and nine~~ months ended ~~September 30, 2004~~March 31, 2005 are not necessarily indicative of the results to be expected for the full fiscal year.

We sell products domestically to customers through our direct sales force, and internationally through a direct sales force and through distributors. We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104 which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to our customer or services have been rendered; (3) the price is fixed and determinable; and (4) collectibility is reasonably assured.

Through August 2003, we recognized revenue for products sold domestically when we received a purchase order, the price was fixed or determinable, and payment was received due to a clause in our purchase order that stated title transferred upon payment in full. We recognized revenue for products sold internationally through our direct sales force when we received a purchase order, the price was fixed or determinable, collectibility of the resulting receivable was probable and installation was completed, which was when the customer became obligated to pay. We recognized revenue for products sold through our distributors internationally when we received a purchase order, the price was fixed or determinable, collectibility of the resulting receivable was probable and the product was delivered. In August 2003, we modified the sales arrangements with our customers so that title transfers to the customer upon shipment for domestic sales, and there is an enforceable obligation to pay upon shipment for international direct sales. Beginning in August 2003, we have been recordingrecord revenue for all sales upon ~~shipment.~~shipment, assuming all other revenue recognition criteria are met.

Although all sales are final, we accept returns of products in certain circumstances and record a provision for sales returns based on historical experience concurrent with the recognition of revenue. The sales returns allowance is recorded as a reduction of accounts receivable, revenue and cost of revenue. As of March 31, 2005 and December 31, 2004, respectively, $569,000 and $420,000 was recorded as a reduction of accounts receivable.

WeOn July 1, 2003, we adopted ~~EITF~~Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple ~~Deliverables”, on July 1, 2003,~~Deliverables,” which requires us to evaluate whether the separate deliverables in our arrangements can be unbundled. We determined that the sales of our Waterlase^{^®} system includes separate deliverables consisting of the product, disposables used with the Waterlase, installation and training. WeFor these sales, we apply the residual value method, which requires us to allocate the total arrangement consideration less the fair value of the undelivered elements to the delivered element. We determined that the sales of our Diode system include separate deliverables consisting of the product, disposables and training. For these sales, we apply the relative fair value method, which requires us to allocate the total arrangement consideration to the relative fair value of each element. Included in deferred revenue as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003 was $1,275,000~~2004 is $1,816,000 and ~~$590,000,~~$1,871,000, respectively, of deferred revenue attributable to ~~advanced~~the undelivered elements which primarily consist of training ~~courses~~ and ~~undelivered elements.~~installation.

Extended warranty contracts, which are sold to our non-distributor customers, are recorded as revenue on a straight-line basis over the period of the contracts, which is one year. Included in deferred revenue as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003~~2004 is ~~$544,000~~$719,000 and ~~$342,000,~~$597,000, respectively, of deferred revenue for our extended warranty contracts.

Although all sales are final, we accept returns of products in certain, limited circumstances and record a provision for sales returns based on historical experience concurrent with the recognition of revenue. The sales returns allowance is recorded as a reduction of accounts receivable, revenue and cost of goods sold. As of September 30, 2004 and December 31, 2003, respectively, $234,000 and $327,000 was recorded as a reduction of accounts receivable.

We ~~recognized~~recognize revenue for royalties under licensing agreements for our patented ~~technology. On a quarterly basis, we~~technology when the product using our technology is sold. We estimate and recognize the amount ~~earned~~sold based on historical performance and current knowledge about the business operations of ~~the~~our licensees. Our estimates have been historically consistent with amounts ~~recorded.~~reported by the licensees. Revenue from royalties was ~~$135,000~~$82,000 and ~~$407,000~~$151,000 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2005 and, 2004, ~~respectively, and $20,000 for the three and nine months ended September 30, 2003.~~respectively.

Products sold directly to ~~end-users~~end users are under warranty against defects in material and workmanship for a period of one year. Products sold internationally to distributors are covered by a warranty on parts for up to fourteen ~~months with additional coverage on certain components for up to two years.~~months. We estimate warranty costs at the time of product shipment based on historical experience. Estimated warranty expenses are recorded as an accrued liability, with a corresponding provision to cost of ~~sales.~~revenue.

Changes in the product warranty accrual, including expenses incurred under our initial and extended warranties, for the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and 2004 ~~and 2003~~ were as follows:


	Nine Months Ended September 30,						Three Months Ended March 31,
	2004			2003			2005			2004
Beginning balance	$	727,000		$	625,000		$	911,000		$	727,000
Provision for estimated warranty cost		1,816,000			970,000			903,000			585,000
Warranty expenditures		(1,644,000	)		(853,000	)		(851,000	)		(499,000	)

Ending balance	$	899,000		$	742,000		$	963,000		$	813,000

We measure compensation expense for stock-based employee compensation plans using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25. As the exercise price of all options granted under these plans was equal to the fair market price of the underlying common stock on the grant date, no stock-based employee compensation cost is recognized in the consolidated statements of ~~income.~~operations.

On December 31, 2002, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued Statement of Financial Accounting ~~Standards~~Standard (“SFAS”) No. 148, “Accounting for Stock Based Compensation Transition and Disclosure,” which amends SFAS No. 123.” SFAS No. 148 requires more prominent and more frequent disclosures about the effects of stock-based compensation by presenting pro forma net (loss) income ~~(loss),~~ pro forma net (loss) income ~~(loss)~~ per share and other disclosures concerning our stock-based compensation plan.

The following table illustrates the effect on net income ~~(loss)~~ and net income ~~(loss)~~ per share if we had applied the fair value recognition provisions of SFAS No. 123 to options granted under our stock-based employee compensation plans.


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2004			2003			2004			2003			2005			2004
Reported net income (loss)	$	(1,233,000	)	$	2,567,000		$	155,000		$	4,760,000
Reported net (loss) income													$	(4,274,000	)	$	616,000
Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(520,000	)		(418,000	)		(1,452,000	)		(1,079,000	)		(1,052,000	)		(477,000	)

Pro-forma net income (loss)	$	(1,753,000	)	$	2,149,000		$	(1,297,000	)	$	3,681,000
Pro-forma net (loss) income													$	(5,326,000	)	$	139,000

Basic net income (loss) per share:
Basic net (loss) income per share:
Reported	$	(0.05	)	$	0.12		$	0.01		$	0.23		$	(0.19	)	$	0.03
Pro-forma	$	(0.07	)	$	0.10		$	(0.06	)	$	0.18		$	(0.23	)	$	0.01
Diluted net income (loss) per share:
Diluted net (loss) income per share:
Reported	$	(0.05	)	$	0.11		$	0.01		$	0.21		$	(0.19	)	$	0.03
Pro-forma	$	(0.07	)	$	0.09		$	(0.06	)	$	0.16		$	(0.23	)	$	0.01

The pro forma amounts were estimated using the Black-Scholes option-pricing model with the following assumptions:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2004			2003			2004			2003			2005			2004
Expected term (years)		3.50			3.50			3.50			3.50			4.00			3.50
Volatility		66	%		80	%		66	%		80	%		62	%		66	%
Annual dividend per share		0.02	%		0.00	%		0.02	%		0.00	%	$	0.06		$	0.00
Risk free interest rate		2.90	%		2.30	%		2.96	%		2.02	%		3.65	%		2.33	%
Weighted average fair value	$	4.23		$	6.41		$	5.91		$	5.67		$	4.77		$	8.75

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Our options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.

Basic net (loss) income ~~(loss)~~ per share is computed by dividing net (loss) income ~~(loss)~~ by the weighted average number of common shares outstanding for the period. In computing diluted ~~earnings~~ (loss) income per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities.

Stock options totaling ~~1,053,000~~4,146,000 and ~~92,000~~37,000 shares were not included in the diluted (loss) earnings ~~(loss)~~ per share amounts for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2005 and March 31, 2004, respectively, as their effect would have been anti-dilutive.


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended March 31,
	2004	2003	2004	2003	2005	2004
Weighted average shares outstanding—basic	23,409,000	21,535,000	23,380,000	20,796,000	22,830,000	22,443,000
Dilutive effect of stock options and warrants	—	1,913,000	1,872,000	2,017,000	—	1,334,000

Weighted average shares outstanding—diluted	23,409,000	23,448,000	25,252,000	22,813,000	22,830,000	23,777,000

We value ~~inventories~~inventory at the lower of cost or market (determined by the first-in, first-out method). We periodically evaluate the carrying value of ~~inventories~~inventory and maintain an allowance for obsolescence to adjust the carrying value to the lower of cost or market, based on physical and technical functionality as well as other factors affecting the recoverability of the asset through future sales. The allowance for obsolescence is adjusted based on such evaluation, with a corresponding provision included in cost of ~~sales.~~revenue. Components of ~~inventories,~~inventory, net of an allowance for excess and obsolete items of ~~$354,000~~$1,020,000 and ~~$246,000~~$687,000 as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, respectively, were as follows:


	September 30, 2004		December 31 2003		March 31, 2005		December 31, 2004
Materials	$	3,264,000	$	1,669,000	$	5,035,000	$	4,842,000
Work-in-process		991,000		894,000		1,731,000		887,000
Finished goods		2,877,000		1,189,000		2,070,000		2,451,000

Inventories	$	7,132,000	$	3,752,000
Inventory					$	8,836,000	$	8,180,000

We state property, plant and equipment at acquisition cost less accumulated depreciation and amortization. The cost of property, plant and equipment is depreciated using the straight-line method over the estimated useful lives of the respective assets, except for leasehold improvements, which are amortized over the lesser of the estimated useful lives of the respective assets or the related lease terms. Maintenance and repairs are expensed as incurred. Upon sale or disposition of assets, any gain or loss is included in the consolidated statements of income.

We continually monitor events and changes in circumstances, which could indicate that the carrying balances of property, plant and equipment may exceed the undiscounted expected future cash flows from those assets. If such a condition were to exist, we ~~will~~would recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

~~Costs incurred to establish~~In accordance with SFAS No. 142, “Goodwill and defend patents, trademarks and licenses and to acquire products and process technologies are capitalized and amortized over their estimated useful lives. Useful lives are based on our estimate of the period that the assets will generate revenue or otherwise productively support our business.

~~Goodwill~~Other Intangible Assets,” goodwill and other intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the ~~assets~~asset might be impaired. We conducted our annual impairment ~~test on~~analysis of our goodwill and trade names as of June 30, 2004 and ~~no impairment was noted. We will continue to test for impairment annually as of June 30th or when events occur that may trigger~~concluded there had not been an impairment. During the fourth quarter of 2004, we changed our strategy to focus our sales efforts on high-end laser products such as the new Waterlase MD^™ product, which was first sold during the fourth quarter of 2004. This conclusion was due to the increased competition for relatively low-priced laser devices. As a result, the actual sales of Diolase Plus™ were below our original expectations and we expect this trend to continue. We estimated the fair value of the Diolase Plus trade name using our revised strategy and based on a relief from royalty approach using discounted cash flows from revised projected Diolase Plus revenue. The $747,000 excess of the carrying value over the asset’s estimated fair value has been recorded as a charge to operations during the year ended December 31, 2004.

Intangible assets with finite lives continue to be subject to amortization, and any impairment is determined in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We believe no event has occurred that would trigger an impairment of these intangible assets. We recorded amortization expense for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2005 and March 31, 2004 of ~~$62,000~~$82,000 and ~~$187,000, respectively,~~$63,000, respectively. Other intangible assets consist of an acquired customer list and ~~$58,000 and $95,000, respectively, for the same periods of 2003.~~a non-compete agreement.

The following table presents details of our intangible assets, related accumulated amortization ~~expected useful lives,~~ and ~~goodwill. Other intangible assets consist of acquired customer lists and a non-compete agreement.~~goodwill:

~~The following table presents the amortization of the intangible assets over the next five years.~~


	Remaining of 2004		2005		2006		2007		2008		2009		As of March 31, 2005							As of December 31, 2004
Patents (10 years)	$	33,000	$	130,000	$	121,000	$	117,000	$	117,000	$	117,000
													Adjusted Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Impair- ment			Net
Patents (4 –10 years)													$	1,814,000	$	(335,000	)	$	1,479,000	$	1,284,000	$	(280,000	)	$	—		$	1,004,000
Trademarks (6 years)		1,000		—		—		—		—		—		—		—			—		69,000		(69,000	)		—			—
Other (4 to 6 years)		27,000		109,000		109,000		109,000		100,000		—
Trade names (Indefinite life)														232,000		—			232,000		979,000		—			(747,000	)		232,000
Other (4 –6 years)														593,000		(194,000	)		399,000		593,000		(167,000	)		—			426,000

Total	$	61,000	$	239,000	$	230,000	$	226,000	$	217,000	$	117,000	$	2,639,000	$	(529,000	)	$	2,110,000	$	2,925,000	$	(516,000	)	$	(747,000	)	$	1,662,000

Goodwill (Indefinite life)													$	2,926,000	$	—		$	2,926,000	$	2,926,000	$	—		$	—		$	2,926,000

Non-operating income (loss), net consists of interest income and expense and foreign currency gains and losses. The operations and cash flows of our German subsidiary, for which the ~~euro~~Euro is the functional currency, are translated to U.S. dollars at average exchange rates during the period and its assets and liabilities are translated ~~using~~at the end-of-period exchange rates. Translation gains or losses related to ~~our~~the net assets located in Germany ~~subsidiary~~ are shown as a component of accumulated other comprehensive ~~income (loss)~~loss in stockholders’ equity. Foreign currency gains or losses relating to sales and purchase transactions which are denominated in other than ~~the functional currency~~U.S. dollars are shown as a net gain or loss in the consolidated statements of ~~operations.~~income.

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs,” which amends part of Accounting Research Bulletin (“ARB”) No. 43, “Inventory Pricing,” concerning the treatment of certain types of inventory costs. The provisions of ARB No. 43 provided that certain inventory-related costs, such as double freight and re-handling might be “so abnormal” that they should be charged against current earnings rather than be included in the cost of inventory. As amended by SFAS No. 151, the “so-abnormal” criterion has been eliminated. Thus, all such (abnormal) costs are required to be treated as current-period charges under all circumstances. In addition, fixed production overhead should be allocated based on the normal capacity of the production facilities, with unallocated overhead charged to expense when incurred. SFAS No. 151 is required to be adopted for fiscal years beginning after June 15, 2005. We do not believe its adoption will have a material impact on our financial position, results of operations or cash flows.

In December ~~2003,~~2004, the FASB revised and reissued SFAS No. 123-R, “Share-Based Payment,” which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based payment transactions using APB No. 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of operations. The standard was to become effective July 1, 2005. In March 2005, the SEC released Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment,” to provide public companies additional guidance in applying the provisions of SFAS No. 123-R. Among other things, the SAB describes the staff’s expectations in determining the assumptions that underlie the fair value estimates and discusses the interaction of SFAS No. 123-R with certain existing staff guidance. SAB No. 107 should be applied upon the adoption of SFAS No. 123-R. In April 2005, the SEC amended Regulation S-X to provide a six-month adoption deferral period for public companies. Therefore, SFAS No. 123-R will not

become effective for BIOLASE until January 1, 2006. The new rules provide for one of two transition elections, either prospective application or restatement (back to January 1, 1995). The company plans to adopt SFAS No. 123-R on January 1, 2006. We currently are evaluating the impact of this pronouncement on our consolidated financial position, results of operations and cash flows.

In December 2004, the FASB issued FASB ~~Interpretation~~Staff Position FAS No. ~~46R, Consolidation~~109-1, “Application of ~~Variable Interest Entities~~FASB Statement No. 109, ‘Accounting for Income Taxes,’ to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004,” (“~~FIN 46R”~~AJCA”). ~~FIN 46R requires~~The AJCA introduces a special 9% tax deduction on qualified production activities. FAS No. 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with Statement No. 109. Pursuant to the ~~application of either FIN 46 or FIN 46R by Public Entities~~AJCA, the Company will not be entitled to ~~all Special Purpose Entities (“SPE”) created prior~~this special deduction in 2005, as the deduction is applied to ~~February 1, 2003 as of December 31, 2003 for calendar year-end companies. FIN 46R is applicable to all non-SPEs created prior to February 1, 2003 at~~taxable income after taking into account net operating loss carryforwards, and we have significant net operating loss carryforwards that will fully offset taxable income. We do not expect the ~~end of the first interim or annual period ending after March 15, 2004. For all entities created subsequent to January 31, 2003, Public Entities were required to apply the provisions of FIN 46R. The~~ adoption of ~~FIN 46R did not~~this new tax provision to have ana material impact toon our consolidated financial position, results of operations or cash flows.

In March 2004, the Financial Accounting Standards Board (FASB) approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The Issue’s objective is to provide guidance for identifying other-than-temporarily impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting provisions of EITF 03-1 are effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for annual periods ending after June 15, 2004. In SeptemberDecember 2004, the FASB issued a FASB Staff Position ~~(FSP) EITF 03-1-1 that delays~~FAS No. 109-2, “Accounting and Disclosure Guidance for the ~~effective date~~Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004.” The AJCA introduces a limited time 85% dividends received deduction on the ~~measurement~~repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FAS No. 109-2 provides accounting and ~~recognition~~disclosure guidance ~~in EITF 03-1 on certain impaired debt securities until after further deliberations~~for the repatriation provision. To achieve the deduction, the repatriation must occur by the ~~FASB.~~end of 2005. We have not completed our analysis and do not expect to be able to make a decision on the amount of such repatriations, if any, until the fourth quarter of 2005. Among other things, the decision will depend on the level of earnings outside the United States, the debt level between our U.S. and non-U.S. affiliates, and administrative guidance from the Internal Revenue Service.

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB No. 20 and FAS No. 3.” SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 is required to be adopted in fiscal years beginning after December 15, 2005. We do not believe its adoption ~~of this pronouncement did not~~will have a material impact ~~the Company’s~~on our financial position, results of operations or ~~financial position.~~cash flows.

Our investments are comprised of U.S. government notes and bonds and have been categorized as available-for-sale. We ~~have~~account for our marketable securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments classified ~~our available-for-sale securities~~ as ~~either short-term or long-term based on management’s expectations of when the funds will be used. Unrealized~~“available for sale” are reported at fair value with unrealized gains (losses) onrecorded as a component of comprehensive loss until realized. In the ~~investments are included in~~event the fair value of an investment declines and is deemed to be other ~~comprehensive income (loss) in stockholders’ equity.~~than temporary, we write down the carrying value of the investment to its fair value. As of ~~September 30, 2004, we recorded an unrealized loss of $6,000.~~March 31, 2005, no securities were impaired. The following summarizes our investments as of ~~September 30, 2004:~~March 31, 2005:


	Amortized Cost		Unrealized Gain/(Loss)			Fair Value		Amortized Cost		Unrealized (Loss)			Fair Value
U.S. Treasury debt securities:
Short-term								$	10,068,000	$	(165,000	)	$	9,903,000
U.S. Government bond	$	32,181,000	$	(6,000	)	$	32,175,000
Long-term									10,039,000		(91,000	)		9,948,000

Total investments in marketable securities	$	32,181,000	$	(6,000	)	$	32,175,000	$	20,107,000	$	(256,000	)	$	19,851,000

Accounts payable includes ~~$34,000~~$74,000 and ~~$223,000~~$126,000 of customer deposits at ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, respectively.


	September 30, 2004		December 31, 2003		March 31, 2005		December 31, 2004
Payroll and benefits	$	1,753,000	$	1,894,000	$	2,602,000	$	2,733,000
Warranty expense		899,000		727,000		963,000		911,000
Sales taxes		344,000		897,000
Sales tax						1,192,000		1,185,000
Amounts due to customers		333,000		205,000		452,000		414,000
Professional services						2,215,000		2,407,000
Other		1,775,000		1,429,000		731,000		817,000

Total accrued liabilities	$	5,104,000	$	5,152,000	$	8,155,000	$	8,467,000

We reimburse our customers for their costs related to certain marketing programs. On our purchase orders we state the amount that we will reimburse the customers, which is recorded as a reduction of revenue when revenue of the purchase order is recognized. Amounts due to customers represent our obligation to reimburse our customers for these programs.

On May 21, 2003, we acquired the American Dental Laser (“ADL”) assets from American Medical Technologies, Inc. (“AMT”) for approximately $5.8 million, in order to leverage our marketing, strengthen our portfolio of intellectual property and expand our product lines. The assets acquired included inventory, dental laser patents, customer lists, brand names and other intellectual property, as well as laser products. No liabilities of AMT were assumed in the transaction. The consideration paid by us consisted of approximately $1.8 million in cash, $215,000 in transaction costs directly attributable to the acquisition and 308,000 shares of common stock with a fair value of approximately $3.8 million. For purposes of computing the purchase price, the value of the common stock of $12.38 per share was determined by taking the average closing price of our common stock as quoted on NASDAQ between May 19, 2003 and May 23, 2003. The total purchase price has been allocated to the acquired tangible and intangible assets of ADL based on the fair values with the balance allocated to goodwill. The acquisition was accounted for as a purchase under SFAS No. 141, “Business Combinations.” The amount allocated to the intangible assets was determined using estimates of discounted cash flow for the patents, trademarks, trade name and non-competition agreement; and the cost approach was used to estimate the value of the customer list. The total intangible assets acquired include approximately $2.9 million for goodwill (which is deductible for tax purposes), $979,000 for trade names and trademarks, $1.2 million for patents, $432,000 for a customer list and $91,000 for a non-compete agreement. The patents are being amortized over ten years, the customer list over six years, and the non-compete agreement over four years. The trade names were determined to have indefinite lives.

The following unaudited data summarizes the results of operations for the period indicated as if the ADL acquisition had been completed as of the beginning of the period presented. The pro forma data gives effect to actual operating results prior to the acquisition, adjusted to include the pro forma effect of amortization of identifiable intangible assets:

In January 2004, we acquired PAClive, a continuing education program for dentists, from Discus Dental, Inc. for $70,000. The assets acquired were trademarks and a customer list along with minor equipment and supplies. We have recorded this acquisition as an increase in intangible assets with a useful life of five years.

Shares issued as a result of stock option exercises for the three months ended March 31, 2005 and 2004 totaled 29,000 and 195,000 shares, respectively, which resulted in proceeds of $172,000 and $448,000, respectively.

In January 2005, we issued 361,664 shares of common stock and a five-year warrant exercisable into 81,037 shares of common stock and an additional 45,208 shares of common stock placed into escrow related to the legal settlement with Diodem LLC, (“Diodem”). See Note 8—COMMITMENTS AND CONTINGENCIES.

In March 2004, as a result of the completion of a public underwritten offering, we issued 2,500,000 shares of common stock at an offering price of $18.50 per share. Gross proceeds from the offering were $46,250,000, before ~~deducting~~ underwriting discount and commissions of $2,875,000. In connection with the offering, we incurred direct expenses of ~~$1,507,000,~~$1,498,000, which had been included in other assets and were reclassified as a reduction of additional paid-in capital ~~after~~when the ~~closing of the offering.~~common stock was issued.

~~Shares issued as a result of stock option exercises for the three and nine months ended September 30,~~In July 2004, ~~totaled 90,000 and 335,000, respectively, which resulted in proceeds of approximately $284,000 and $977,000, respectively.~~

~~On July 19, 2004, we announced that~~ our Board of Directors authorized a 1.25 million share repurchase program. ~~Pursuant to the authorization, we may purchase shares from time to time in the open market or through privately negotiated transactions over the next 12 months. On~~In August 9, 2004, ~~we announced that~~ our Board of Directors authorized the repurchase of an additional 750,000 shares of our common stock, increasing the total shares repurchase program to 2.0 million shares of our common stock. ~~These additional shares may be purchased from time to time in~~During the ~~open market or through privately negotiated transactions over the next 12 months. As of September 30,~~year ended December 31, 2004, we repurchased approximately ~~1.5 million~~1,963,500 shares at an average price of ~~$8.81~~$8.35 per share. No repurchase was made during the three months ended March 31, 2005.

OnIn July ~~27,~~ 2004, we announced a ~~dividend~~ policy to pay a ~~regular~~ cash dividend of $0.01 per share every other month payable to the stockholders of record ~~at the time~~ when declared by the Board of Directors. The dividend policy ~~will remain~~was discontinued by our Board of Directors in ~~place for an indefinite period of time. The first dividend totalling $235,000 was~~August 2005 (see Note 12—SUBSEQUENT EVENTS). Dividends totaling $689,000 were declared and paid ~~on August 30,~~in 2004 to stockholders of record ~~on August 16, 2004.~~under this program. For the three months ended March 31, 2005, dividends totaling $229,000 were declared and paid to stockholders of record under this program.

AsBased upon our operating losses during 2004 and the available evidence, management determined that it is more likely than not that the deferred tax assets as of December 31, ~~2003,~~2004 would not be realized. Consequently, we recorded a valuation allowance for our net deferred tax asset in the amount of $21,100,000 as of December 31, 2004. In this determination, we considered factors such as our earnings history, future projected earnings and tax planning strategies. If sufficient evidence of our ability to generate sufficient future taxable income becomes apparent, we may reduce our valuation ~~reserves on~~allowance, resulting in income tax benefits in our statement of operations and in additional paid-in-capital. Management continues to evaluate the potential realization of our deferred tax assets ~~were reduced~~ and assesses the need for reducing the valuation allowance periodically. As of March 31, 2005 we determined that a valuation allowance is still required. As a result of the valuation allowance, we recognized ~~an income~~a modest tax ~~benefit~~provision that primarily related to our foreign operations and ~~established net~~certain U.S. deferred tax assets of $13.8 million. We have recorded a benefit for income tax of $799,000 and a provision for income tax expense of $99,000 for the three and nine months ended September 30, 2004, respectively, which adjustedliabilities that could not be offset against our deferred tax assets. ~~Income taxes~~We will ~~not~~continue to evaluate the potential realization of our deferred tax assets during the remainder of 2005 to determine whether the valuation allowance should be payable, subject to any alternative minimum tax, until we have utilized our net operating loss carryforwards, which were approximately $32.5 million as of December 31, 2003. For the three and nine months ended September 30, 2003, we realized our operating loss carryforwards to reduce our income tax liability to zero.reduced.

We lease our manufacturing ~~administration and headquarter~~ facilities in San Clemente, California, certain equipment and automobiles under operating lease arrangements. Future minimum rental commitments under operating leases and under other contractual obligations as of ~~September 30, 2004~~March 31, 2005 for each of the years ending December 31 are as follows:


Remainder of 2004	$	106,000
2005		421,000
Remainder of 2005			$	457,000
2006		90,000		240,000
2007				62,000
2008				31,000
2009				25,000
2010				25,000

Total	$	617,000	$	840,000

In February 2005, we purchased licensed technology in the field of presbyopia totaling $2,000,000 including related transaction costs, from Surgilight, Inc. (“Surgilight”). Additional consideration totaling $200,000 will be expensed as incurred in 2006 through 2010, in accordance with FAS No. 2, “Accounting for Research and Development Costs.” We utilized the services of a professional firm in determining the fair value of the licensed technology and to determine the appropriate accounting treatment for this purchase.

Certain executive officers and managers have employment agreements that provide us with the ability to terminate their employment at will. However, under the terms of the agreements we are obligated to pay them severance compensation in the event we terminate their employment. Additionally, we have agreements with certain employees to pay bonuses based on targeted performance criteria and specified service retention periods.

We are currently involved in a patent lawsuit with Diodem, LLC, a California limited liability company. The claims in this lawsuit were originally part of two separate lawsuits in U.S. District Court. On May 2, 2003,In August 2004, we initiated a civil action in the U.S. District Court for the Central District of California against Diodem. In this lawsuit we are seeking a judicial declaration against Diodem that technology we use in laser systems does not infringe four patents owned by Diodem. Diodem claims to have acquired the four patents at issue in the case from Premier Laser. In 2000, we initiated a patent infringement lawsuit against Premier Laser Systems, Inc. seeking damages and to prevent Premier from selling competing dental lasers on the grounds that they infringed on certain of our patents. The lawsuit was stayed by the bankruptcy court after Premier filed for bankruptcy.

Diodem’s lawsuit against us alleges that our Waterlase product infringes upon the four patents that Diodem acquired from Premier Laser. Diodem also alleges that the products sold by OpusDent and Hoya ConBio also infringe upon the patents. Diodem’s infringement suit seeks treble damages, a preliminary and permanent injunction from further alleged infringement, attorneys’ fees and other unspecified damages. If Diodem successfully asserts an infringement claim against us, our operations may be significantly impacted, especially to the extent that it affects our right to use the technology incorporated in our Waterlase system, which accounted for approximately 81% of our revenue for the first nine months of 2004 and approximately 83% of our revenue for the year ended December 31, 2003. If Diodem successfully asserts an infringement claim against Hoya ConBio and OpusDent, it could reduce or eliminate royalties we might receive under licenses to those products, which have totaled approximately $627,000 since the acquisition of the American Dental Laser assets in May 2003. The litigation is in the late stages of pre-trial preparation. No trial date has been set. A trial date in 2005 is likely. This combined lawsuit may proceed for an extended period of time. Although the outcome of these actions cannot be determined with any certainty, we believe our technology and products do not infringe any valid patent rights owned by Diodem, and we intend to continue to vigorously defend against Diodem’s infringement action and pursue our declaratory relief action against Diodem. No amounts have been recorded in the consolidated financial statements relating to the outcome of this matter.

We and certain of our officers ~~have been recently~~were named as defendants in several putative shareholder class action lawsuits filed in the United States District Court for the Central District of California. The complaints purport to seek unspecified damages on behalf of an alleged class of persons who purchased our common stock between October 29, 2003 and July 16, 2004. The complaints allege that we and our officers violated federal securities laws by failing to disclose material information about the demand for our products and the fact that ~~the Company~~we would not achieve the alleged forecasted growth. The claimed misrepresentations include certain statements in our press releases and the registration statement we filed in connection with our public offering of stock in March 2004. In addition, three stockholders have filed derivative actions in

the state court in California seeking recovery on behalf of ~~Biolase,~~BIOLASE, alleging, among other things, breach of fiduciary duties by those individual defendants and by the members of ~~the Biolase board~~our Board of ~~directors.~~Directors.

We have not yet formally responded to any of the actions and no discovery has been conducted by any of the parties. However, based on the facts presently known, our management believes we have meritorious defenses to these actions and ~~intend~~intends to vigorously defend them. As of ~~September 30, 2004,~~March 31, 2005, no amounts have been recorded in the ~~accompanying~~consolidated financial statements for these matters since management believes that it is not probable we have incurred a loss contingency.

In January 2005, we acquired the ~~Company~~intellectual property portfolio of Diodem, consisting of certain U.S. and international patents of which four were asserted against us, and settled the existing litigation between us and Diodem, for consideration of $3,000,000 in cash, 361,664 shares of common stock, (valued at the common stock fair market value on the closing date of the transaction for a total of approximately $3,500,000), and a five-year warrant exercisable into 81,037 shares of common stock at an exercise price of $11.06 per share. In addition, if certain criteria specified in the purchase agreement are satisfied on or before July 2006, 45,208 additional shares we have placed in escrow may be released to Diodem and we will incur an expense equal to the fair market value of those shares at the time of their release. The common stock issued, the escrow shares and the warrant shares have certain registration rights. The total consideration was estimated to have a value of approximately $7,000,000 excluding the value of the shares held in escrow, which are contingent in nature, but including the value of the patents acquired in January 2005. As of December 31, 2004, we accrued approximately $6,400,000 for the settlement of the existing litigation with $3,000,000 included in current liabilities and $3,400,000 recorded as a long-term liability. In January 2005, we recorded an intangible asset of $530,000 representing the estimated fair value of the intellectual property acquired. The estimated fair value of the patents was determined with the assistance of an independent evaluation expert using a relief from royalty and a discounted cash flow methodology. As a result of the acquisition, Diodem immediately withdrew its patent infringement claims against us and the case was formally dismissed on May 31, 2005. We did not pay and have no obligation to pay any royalties to Diodem on past or future sales of our products, but we agreed to pay additional consideration if any of the acquired patents or certain other patents held by us are licensed to a third party. In order to secure performance by us of these financial obligations, the parties entered into an intellectual property security agreement, pursuant to which, subject to the rights of existing creditors and the rights of any future creditors to the extent provided in the agreement, we granted Diodem a security interest in all of their right, title and interest in the royalty patents. In addition, we will be required, by January, 2006, to provide Diodem a ten-year letter of credit from a bank in the amount of $500,000 as additional security.

We determined the fair value of the warrants, which totaled $443,000 using the Black-Scholes model with the following assumptions:

In late 2004, we were notified by Refocus Group, Inc., or Refocus, that certain of our planned activities in the field of presbyopia may infringe one or more claims of a patent held by Refocus. In February 2005, we filed a lawsuit in the U.S. District Court for the Central District of California against Refocus in order to obtain declaratory relief that certain of our planned activities in the field of presbyopia will not infringe the claims of a patent held by Refocus and/or that the claims are invalid. These claims were dismissed by the court in July 2005 without prejudice on the basis that we do not have a product that has been commercialized and, therefore, Refocus’ alleged infringement claims are not ripe. As of March 31, 2005, no amounts have been recorded in the accompanying consolidated financial statements for this matter since management believes that it is not probable we have incurred a loss contingency.

From time to time, we are involved in other legal proceedings incidental to our business, but at this time we are not party to any ~~such~~other litigation that is material to our business.

Following the restatement of our financial statements in September 2003, we received, in late October 2003, and subsequently in 2003 and 2004, informal requests from the SEC to voluntarily provide information relating to the restatement. We have provided information to the SEC and ~~when we receive any additional requests, we would further~~intend to continue to cooperate in ~~responding.~~responding to the inquiry. In accordance with its normal practice, the SEC has not advised us when its inquiry ~~might~~may be ~~concluded.~~concluded, and we are unable to predict the outcome of this inquiry.

~~NOTE 10 – CONCENTRATIONS~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Many of our customers finance their purchases through third-party leasing companies. In these transactions, the leasing company is considered the purchaser. Revenues generated from dentists who financed their purchase through one leasing company were approximately 33% and 32%, respectively, for the three and nine months ended September 30, 2004, and 30% and 32%, respectively, for the same periods of 2003. Other than these transactions, no distributor or customer accounted for more than 10% of consolidated sales for the three months ended September 30, 2004 and September 30, 2003.

Financial instruments that subject us to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. We maintain our cash accounts with established commercial banks. Such cash deposits periodically exceed the Federal Deposit Insurance Corporation insured limit of $100,000 for each account.

Accounts receivable concentrations have resulted from sales activity to the one leasing company mentioned above. Accounts receivable for the one leasing company totaled $608,000 or 9.6% of accounts receivable at September 30, 2004 and $742,000 or 12.9% of accounts receivable at December 31, 2003. No other single customer accounted for more than 10% of our accounts receivable at September 30, 2004 or December 31, 2003.

We currently operate in a single business segment. Revenue ~~from the sale~~ of our Waterlase system, our principal product, represented ~~81%~~86% and ~~81%, respectively,~~77% of ~~total~~ revenue for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2005 and 2004, respectively. For the three months ended March 31, 2005 and ~~80%~~2004, sales in Europe, Middle East and ~~80%~~Africa (“EMEA”) accounted for approximately 9% and 12%, respectively, of our revenue, and sales in Canada, Asia, Latin America and Pacific Rim countries accounted for approximately 15% and 15%, respectively, of the ~~same periods of 2003.~~revenue. Revenue by geographic location based on the location of customers ~~were~~was as follows:

Many of our customers finance their purchases through third-party leasing companies. In these transactions, the leasing company is considered the purchaser, although it is the dentist who is our customer and to whom we market and sell and from whom we receive the initial binding purchase commitment. Approximately 31% and 37% of our revenue for the three months ended March 31, 2005 and March 31, 2004, respectively, were generated from customers who financed their purchase through one leasing company. Other than these transactions, no distributor or customer accounted for more than 10% of consolidated net revenue for the three months ended March 31, 2005 and March 31, 2004.

Accounts receivable concentrations have resulted from sales activity to the one leasing company mentioned above. Accounts receivable for the one leasing company totaled $3,791,000 and $815,000, respectively, at March 31, 2005 and March 31, 2004. No other single customer accounted for more than 10% of our accounts receivable at March 31, 2005 or March 31, 2004.

Certain components of our products, particularly specialized components used in our lasers, are currently available only from a single source or limited sources. We have no written supply contracts with our key suppliers; instead, we purchase certain materials and components using purchase orders that are subject to change, deferral or cancellation with only limited notice to the suppliers.

At March 31, 2005, we have a $10.0 million credit facility with a bank. The credit facility has recently been extended and currently expires on September 30, 2006. At March 31, 2005, $1.9 million was borrowed on the credit facility. Borrowings under the facility bear interest at LIBOR plus 2.25% for minimum borrowing amounts of $500,000 and with two business days notice or at a variable rate equivalent to prime rate for amounts below $500,000 or with less than two business days notice and are payable on demand upon expiration of the facility. All borrowings during the first quarter of 2005 were at prime rate. We have granted the bank a security interest in and to all equipment, inventory, accounts receivable and other assets of the company. During the quarter ended March 31, 2005, we were subject to certain covenants under the previous credit facility, including, among other things, maintaining a minimum balance of cash (including investments in U.S. Treasuries) and tangible net worth, a specified ratio of current assets to current liabilities and a covenant to remain profitable. In April 2005, we became non-compliant with our covenant relating to timely reporting and certification requirements due to the late filing of our Form 10-K for the 2004 fiscal year. In July 2005, we obtained a waiver of this covenant and subsequently filed our Form 10-K on July 19, 2005. We also became non-compliant with respect to the late filing of this Form 10-Q for the quarter ended March 31, 2005 and the second quarter Form 10-Q for the quarter ended June 30, 2005. In addition, we were in default with covenants related to tangible net worth and quarterly profitability. In September 2005, we obtained a waiver to all of these covenants. We intend to seek additional waivers until all of our late periodic reports have been filed and for any other non-compliant covenants when and if any become necessary.

In ~~November~~April 2005, we received a notification from The NASDAQ Stock Market, Inc. concerning our failure to comply with the requirement for continued listing set forth in NASD Marketplace Rule 4310(c) (14), which requires that a listed company file with NASDAQ all reports and other documents filed or required to be filed with the SEC. In July 2005 the NASDAQ granted us an extension of time until August 1, 2005 in which to file our Form 10-K for the fiscal year ended December 31, 2004, certain restatements with respect to our historical financial statements, this Form 10-Q for the fiscal quarter ended March 31, 2005 and to otherwise meet all necessary listing standards of the NASDAQ National Market. On July 19, 2005, we ~~were notified by~~filed (i) our ~~bank that we were in default under our covenants~~Form 10-K for ~~our $10.0 million line of credit~~the fiscal year ended December 31, 2004 which included consolidated financial statements for the year ended December 31, 2004 and restated consolidated financial statements as of December 31, 2003 and the two years then ended and (ii) amended Form 10-Qs for the fiscal quarters ended March 31, 2004, June 30, 2004 and September 30, 2004 ~~due to our operating loss~~which included restated financial statements for the ~~three months~~prior comparative periods as well. In July 2005, we requested an additional extension of time from NASDAQ in which to file this Form 10-Q and our Form 10-Q for the fiscal quarter ended June 30, 2005. In August 2005, we received additional notices from NASDAQ regarding the late filing of the second quarter Form 10-Q and granting us the requested extension of time until September 30, ~~2004.~~ 2005 in which to file both this Form 10-Q and our second quarter Form 10-Q, and to otherwise meet all necessary listing standards.

In ~~November~~April 2005, our Board of Directors declared a regular cash dividend of $0.01 per share. The dividend was payable May 9, 2005 to shareholders of record on April 25, 2005 for a total payment of approximately $230,000. In June 2005, our Board of Directors declared a regular cash dividend of $0.01 per share. The dividend was payable July 12, 2005 to shareholders of record on June 28, 2005 for a total payment of approximately $230,000. On August 22, 2005, we announced that our Board of Directors voted to discontinue our current dividend policy of paying a cash dividend of $0.01 per share every other month.

In June 2005, our Board of Directors resolved to make a one-time payment of $90,000 to Mr. George d’Arbeloff in connection with his service as audit committee chair and the extraordinary efforts he contributed in connection with the 2004 ~~we obtained a waiver to this covenant as~~audit. This amount will be recorded in the third quarter of ~~September 30, 2004. There were no borrowings~~2005 when earned by the filing of our Form 10-K on ~~the line of credit as of September 30, 2004. In November of 2004, we borrowed $3.5 million under this line of credit.~~July 19, 2005.

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.~~

Cautionary Statement With Respect To ~~Forward-looking~~Forward-Looking Information

~~You should read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial Statements and related Notes thereto contained elsewhere in this quarterly report on~~This Form 10-Q ~~(the “Report”).~~ contains forward-looking statements that involve a number of risks and uncertainties. These forward-looking statements include, but are not limited to, statements and predictions regarding our operating expenses, sales and operations, anticipated cash needs, capital requirements and capital expenditures, needs for additional financing, use of working capital, plans for future products and services and for enhancements of existing products and services, anticipated growth strategies, ability to attract customers, sources of net revenue, anticipated trends and challenges in our business and the markets in which we operate, the adequacy of our facilities, the impact of economic and industry conditions on our customers and our business, customer demand, our competitive position, the outcome of any litigation against us, the perceived benefits of any technology acquisitions, critical accounting policies and the impact of recent accounting pronouncements. Additional forward-looking statements include, but are not limited to, statements pertaining to other financial items, plans, strategies or objectives of management for future operations, our financial condition or prospects, and any other statement that is not historical fact, including any statement which is preceded by the word “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” or similar words. For all of the foregoing forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, the impact of changes in demand for our products, our effectiveness in managing manufacturing costs and expansion of our operations, the impact of competition and of technological advances, the risks set forth below under “Risk Factors,” and other risks detailed in reports we filed with the SEC. These forward-looking statements represent our judgment as of the date hereof. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

The information contained in this ~~Report~~Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this ~~Report~~Form 10-Q and in our other reports filed with the ~~Securities~~SEC.

The following discussion and ~~Exchange Commission, including~~analysis gives effect to the restatements of our ~~Annual Report on~~unaudited consolidated financial statements contained in Form ~~10-K~~10-Q/A for the ~~year~~three months ended ~~December~~March 31, 2003, and other filings that discuss our business in greater detail. This Report contains forward-looking statements that can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “potential,” “continue,” and variations of these words or similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Examples of these forward-looking statements include, but are not limited to, statements concerning our expected sales and operating results, market acceptance of our product, our ability to protect our intellectual property and succeed in our current litigation, our ability to attract and retain key personnel, the potential of our market and our position in it, our manufacturing capacity, estimates concerning asset valuation and loss contingencies and expectations concerning future costs and cash flow, and our ability to successfully finance our business. Our actual results could differ materially from those anticipated in the forward looking statements based on a variety of factors, including, among others: market acceptance of new products, continued acceptance of existing products, the timing of projects due to the variability in size, scope and duration of projects, clinical study results2004 which lead to reductions or cancellations of projects, obtaining regulatory approvals for new products, regulatory delays, the availability of competitive products, risks associated with competition and competitive pricing pressures and economic conditions generally, any of which may cause revenues and income to fall short of anticipated levels, and other factors, including estimates made by management with respect to our critical accounting policies, adverse results in litigation, general economic conditions and regulatory developments not within our control and other risks detailed from time to time in the reportswe filed ~~by us~~ with the ~~Securities and Exchange Commission, including our annual report~~SEC on ~~Form 10-K. These forward-looking statements are based on our current expectations, estimates and projections about our industry, and reflect our beliefs and~~July 19, 2005. Accordingly, certain ~~assumptions made by us. These statements speak only as~~ of the date of this Report and are based upon the information available to us at this time. Such information is subject to change, and we will not necessarily inform you of such changes. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which aredata set forth in ~~“Risk Factors,” below. We undertake no obligation~~this section is not comparable to ~~revise or update publicly any forward-looking statements~~discussions and data in our previously filed Form 10-Q for ~~any reason.~~the corresponding periods.

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. See the discussion of significant accounting policies in our Annual Report on Form 10-K for the year ended December 31, ~~2003~~2004 as well as the Summary of Significant Accounting Policies in Note 2 to the unaudited Consolidated Financial Statements included in this report. For the quarter ended ~~September 30, 2004,~~March 31, 2005, there were no unusual uncertainties of a material nature involved in the application of these principles nor any unusual, material variation in estimates related to these principles.

The following discussion includes the operations of BIOLASE Technology, Inc. and its subsidiaries for each of the periods discussed.

We are the world’s leading dental laser company. We design, manufacture and market proprietary dental laser systems that allow dentists, periodontists, endodontists, oral surgeons and other specialists to perform a broad range of ~~common~~ dental procedures, including cosmetic and complex surgical applications. ~~We believe our~~Our systems are designed to provide clinically superior performance for many types of dental procedures, with less pain and faster recovery times than are generally achieved with drills, scalpels and other dental instruments. We have clearance from the ~~U. S.~~U.S. Food and Drug Administration, or FDA, to market our laser systems in the United ~~States. We~~States and also have the necessary approvals ~~necessary~~ to sell our laser systems in Canada, the European Union and other international markets. We are currently pursuing regulatory approval to market and sell our

Waterlase system in Japan. Since 1998, we have sold more than ~~3,000~~3,630 Waterlase^{^®} systems and approximately ~~4,100~~4,850 laser systems in ~~total in~~ over 2545 countries.

We ~~have the following product lines:~~offer two categories of laser system products: (i) Waterlase ~~system;~~system and (ii) ~~LaserSmile~~^™ ~~system; (iii) American Dental Laser products, including the Diolase, the new DioLase Plus~~^™ ~~and Pulsemaster systems, and (iv) related accessories and disposables for use with our laser systems.~~Diode system. Our ~~principal~~flagship product category, the Waterlase system, ~~is used for hard~~uses a patented combination of water and ~~soft tissue dental procedures, and can be used~~laser to perform most procedures currently performed using dental drills, scalpels and other traditional dental ~~instruments.~~instruments for cutting soft and hard tissue. We also offer a family of Diode laser system products to perform soft tissue and cosmetic procedures, including tooth whitening.

Waterlase system. We refer to our patented interaction of water with laser as YSGG Laser HydroPhotonics^™. YSGG is a shortened abbreviation referring to the unique crystal (Er, Cr: YSGG) laser used in the Waterlase system, which contains the elements erbium, chromium and yttrium, scandium, gallium and garnet. This unique crystal laser produces energy with specific absorption and tissue interaction characteristics optimized for dental applications. HydroPhotonics refers to the interaction of laser with water to produce energy to cut tissue. Through YSGG Laser HydroPhotonics, the Waterlase system can precisely cut hard tissue, such as bone and teeth, and soft tissue, such as gums, with minimal or no damage to surrounding tissue. The ~~LaserSmile~~Waterlase system is ~~used~~one of the world’s best selling dental laser systems.

Diode system. We also offer a family of Diode system products, which use a semiconductor diode laser to perform soft tissue and cosmetic procedures, including tooth whitening. Our Diode system serves the growing markets for cosmetic and hygiene procedures.

The Diode system, together with our Waterlase system, offers practitioners a broad product line with a range of ~~soft tissue procedures~~features and ~~tooth whitening. The Diolase, DioLase Plus and Pulsemaster systems are primarily used for soft tissue procedures.~~price points. We also manufacture and sell accessories and disposables for our laser systems, such as ~~handpieces,~~hand pieces, laser tips and tooth whitening ~~gel,~~gel. The Waterlase system comprised 86% and 77% of our total revenue for ~~use with~~the three months ended March 31, 2005 and 2004, respectively. The Diode system comprised 8% and 13% of our ~~dental laser systems.~~total revenue for the same periods.

~~In January 2004, we acquired PAClive from Discus~~We believe there is a large market for our products in the United States and abroad. According to the American Dental Inc. for $70,000. Assets acquired include trademarks and a customer list, which were recorded as an increase to intangible assets. PAClive is one of the leading live-patient, hands-on continuing dental education programsAssociation, there are over 160,000 practicing dentists in the United States. According to the World Federation of Dentistry, an international dental organization, there are at least 700,000 dentists worldwide, and we believe that a substantial percentage of them practice in major international markets outside the United States. The ~~addition~~use of ~~PAClive~~lasers in dentistry is ~~part~~growing. However, we believe only a small percentage of dentists currently use laser systems, and that there is a significant opportunity to increase sales of our ~~commitment~~products worldwide.

Our goal is to ~~education~~establish our laser systems as ~~a means of demonstrating~~essential tools in dentistry and to continue our leading position in the dental laser market. Our sales and marketing efforts focus on educating dental professionals and patients on the benefits of ~~lasers~~our laser systems, particularly our Waterlase system. In 2002, we founded the World Clinical Laser Institute, or WCLI, an association that includes prominent dental industry leaders, to formalize our efforts to educate and train dentists, specialists, hygienists and staff personnel in laser dentistry.

~~In February 2004, we received clearance from the Food~~ We participate in numerous other symposia and ~~Drug Administration for several new bone, periodontal and soft tissue procedures: osteoplasty and osseous recontouring (removal of bone~~dental industry events to correct osseous defects and create physiologic osseous contours); ostectomy (resection of bone to restore bony architecture, resection of bone for grafting, etc); osseous crown lengthening; flap preparation — incision of soft tissue to prepare a flap and expose unerupted teeth (hard and soft tissue impactions); full thickness flap; partial thickness flap; split thickness flap; removal of granulation tissue from bony defects; and laser soft tissue curettage of the post-extraction tooth sockets and the periapical area during apical surgery. Additionally, we received clearancestimulate demand for our ~~Waterlase system~~products. We are continuing efforts to ~~perform soft tissue curettage. Our LaserSmile diode laser was previously cleared~~develop new relationships and expand existing relationships with dental schools, research facilities and dental institutions, in the United States and abroad, which use our products for ~~laser soft tissue curettage in October 2003.~~clinical treatments, research, education or training. We believe this will expand awareness of our products among new generations of dental professionals as well as with opinion leaders and researchers.

In March 2004, we leased additional office and manufacturing space next door to our headquarters in San Clemente, California. This facility gives us added capacity in manufacturing, customer support, and marketing to support our continued growth. This move brings our leased facilities in the U.S. to approximately 40,000 sq. ft. in addition to 20,000 sq. ft. of space we own in Germany.

~~In May of~~Three months ended March 31, 2005 compared with three months ended March 31, 2004 we introduced the DioLase Plus, our first dental laser product that results from the integration of the American Dental Laser value platform we acquired in May of 2003 with our own technology. The DioLase Plus is being marketed as an entry level laser with applications in cosmetic, soft tissue and periodontal dentistry.

~~For~~Net revenue for the ~~nine months ended September 30, 2004 we saw a continuation~~first quarter of 2005 increased from $14.5 million to $16.8 million, or 15.9% over the ~~increase in demand that we have been experiencing although a slowdown in demand accrued in the third~~first quarter of 2004. ~~Net sales increased for the nine months ended September 30, 2004 by 25.4% compared to the nine months ended September 30, 2003. For the third quarter ended September 30, 2004 we experienced a 10.5%~~The rate of increase in revenue growth quarter-over-quarter has declined from historical trends. This decrease in ~~net sales compared to~~ the ~~same period~~historical rate of ~~2003. Our priority continues to be on market penetration, which~~growth was first observed in the second quarter of 2004 and has continued through the first quarter of 2005. While we have identified a number of factors that could have influenced the change in the rate of growth, at this point in time we believe that the change is ~~crucial given~~not an aberration but rather a shift in our growth rate. We believe this shift involves the ~~large~~makeup of our end customer, whereby we are in a transition from selling to “innovators” to a larger more sustainable “early adoptor” market segment. This market segment is typically associated with a longer selling cycle. The size of the potential market, ~~(over 500,000 practicing dentists~~our position within that market and the expected long-term quality and reliability of our product offerings are fundamentally unchanged; however, the change in the ~~developed countries~~rate of ~~the world), the low penetration of~~growth has caused us to examine our ~~laser technology~~sales and marketing strategies. In

addition, we have experienced some slow down in ~~dentistry,~~buying activity due to start up issues and design changes associated with our Waterlase MD product, which we believe is causing some of our customers to ~~be less than 3%~~defer their ultimate purchasing decision. We expect revenue growth in 2005, but not at levels we have historically experienced.

We incurred an operating loss of ~~dentists in~~$4.3 million during the ~~United States and other developed countries. Based on the sales results~~first quarter of 2005 compared to an operating profit of $1.1 million for the first ~~nine months, we now expect sales for 2004 to be in the range~~quarter of ~~approximately $58.0 million to $61.0 million, compared to $49.1 million in 2003.~~

~~Operating income for the nine months ended September 30, 2004 was $0.2 million compared to $4.6 million for the same period~~2004. Our cost of 2003. Operating loss for the three months ended September 30, 2004 was $2.3 million compared to operating income of $2.5 million for the same period of 2003. The decrease in operating income in 2004 related to higher fixed operating expenses in all functional areasrevenue has been impacted by start up costs of our ~~business as a result~~new Waterlase MD^™ product and the cost of ~~our overall growth during the past twelve months. Additionally, we have experienced higher operating expenses~~training. Our sales and marketing expense has increased in absolute dollars due to ~~increases in marketing promotions~~increased commissions, increased convention and speaker fees and general overhead costs. General and administrative ~~expenses related~~expense increased due to ~~higher legal~~headcount increases and ~~professional~~the cost of audit fees ~~insurance costs~~for our 2004 year end audit and ~~stockholder communication~~ expenses associated with our ~~proxy~~Sarbanes-Oxley Section 404 compliance. Engineering and ~~annual report distribution. Legal fees include~~development expense included costs of $2.0 million related to the ~~Diodem patent litigation~~purchase of a license from Surgilight for technology related to the field of presbyopia and the ~~putative shareholder class action lawsuits. The legal costs~~related expenses of ~~these lawsuits have affected and are expected to continue to affect our operating income this year.~~the transaction.

We had a net loss of $4.3 million or $0.19 per diluted share. Net income for the ~~nine months ended September 30,~~first quarter of 2004 was ~~$ 0.2 million with earnings~~$616,000 or $0.03 per diluted share of $0.01 compared to net income of $4.8 million with earnings per diluted share of $0.21 for the same period of 2003. Net income included a provision for income tax expense of $0.1 million for the nine months ended September 30, 2004 with no income tax provision for the same period of 2003. Income taxes will not be payable, subject to alternative minimum tax, until we have utilized our net operating loss carryforwards, which were approximately $32.5 million as of December 31, 2003. Net loss for the three months ended September 30, 2004 was $1.2 million with net loss per diluted share of $0.05 compared to net income of $2.6 million with net earnings per diluted share of $0.11 for the same period of 2003.

The completion of our public offering of 2.5 million shares of common stock in March of 2004 resulted in net proceeds of approximately $41.9 million and strengthened our financial position and liquidity. We intend to use the majority of this capital over the next several years to support the continued growth of the Company. In July 2004, our Board of Directors approved a stock repurchase program which we believe is a use of capital that can enhance stockholder value. Therefore, in July of 2004, we announced a stock repurchase program to acquire up to 1.25 million shares over the next 12 months. Also in August of 2004, the Board of Directors authorized the repurchase of an additional 750,000 shares of our common stock, increasing the total share repurchase program to 2.0 million shares of our common stock. These shares may be purchased from time to time on the open market or through privately negotiated transactions over the next 12 months. As of September 30, 2004 we have repurchased approximately 1.5 million shares at an average price of $8.81 per share. In July of 2004, the Board of Directors established a dividend policy that will remain in effect for an indefinite period of time and pays a regular cash dividend of $0.01 per share every other month when declared by the Board of Directors. The first dividend totalling $235,000 was declared and paid August 30, 2004 to stockholders of record on August 16, 2004 and a second declared dividend totalling $229,000 was paid October 27, 2004 to stockholders of record on October 13, 2004.

The following table sets forth comparative statements of operations data ($000):

Revenue increased for the nine months ended September 30, 2004 by 25.4% compared to the nine months ended September 30, 2003. This increase reflects the continued demand for our products, and our expanded marketing efforts to generate increased market penetration. For the third quarter ended September 30, 2004 we experienced a 10.5% decrease in net sales compared to the same periodSales of ~~2003. We believe this decrease was attributed in part to two factors. The first factor was the pending introduction~~lasers were seasonally slower in the ~~fourth~~first quarter of ~~our new advanced Waterlase MD that may have caused potential customers to postpone~~2005 than the purchase of a laser system. The second factor was the series of devastating hurricanes that struck the Gulf region of the United States resulting in the cancellation of the New Orleans Dental Conference and other scheduled sales events that are important vehicles for securing new orders. We expect increased net sales in thepreceding fourth quarter of 2004, ~~from the third quarter as a result~~in line with our historical pattern of ~~generally stronger seasonal~~seasonality. However, sales ~~in the fourth quarter.~~

~~Revenue generated outside of the United States were approximately 16% and 20%~~ for the ~~three and nine months ended September 30, 2004, respectively, compared to approximately 20% and 21% for~~first quarter of 2005 increased 15.9% over the same periods of 2003. We continue to expand our international marketing efforts. During the nine months ended September 30, 2004, we hosted World Clinical Laser Institute symposiums and seminars in the Asia Pacific region, Mexico, Japan and India. We expect international sales to represent similar percentages of total revenue for the fourthfirst quarter of 2004.

~~Product mix also stayed relatively constant. Revenue from~~Both domestic and international sales grew at approximately the same rate with domestic sales comprising approximately 77% of total sales for the first quarter of 2005 and 72% of total sales for the first quarter of 2004. We expect this trend to continue.

Sales of our Waterlase ~~units, our principal product, represented 81% or $33.7 million~~system accounted for approximately 86% of ~~total~~net revenue for the first ~~nine months~~quarter of ~~2004~~2005 compared to ~~80% or $26.4 million in~~approximately 77% for the same period of ~~2003.~~2004. For the year ended December 31, 2004, Waterlase system sales were 84% of net revenue. We expect that our Waterlase system ~~and our new Waterlase MD~~ will continue to account for approximately ~~80%~~85% of ~~total~~net revenue for ~~the fourth quarter of 2004.~~2005.

Significant estimates affecting ~~revenues~~sales include the reserve for sales returns. The reserve is based on historical experience from 1998 through the present. ~~For~~Our historical trend stayed consistent for the ~~nine months ended September 30, 2004, the~~first quarter of 2005. Our reserve ~~decreased slightly~~for sales returns increased $149,000 from ~~$327,000~~$420,000 at December 31, ~~2003 to $234,000 at September 30, 2004.~~

Gross margins decreased to 58.6% and 62.1% for the three and nine months ended September 30, 2004, respectively, compared to 62.7% and 62.5% for the same periods of 2003, respectively. The lower gross margins were the result of a lower level of revenue in the third quarter of 2004 to ~~absorb our fixed manufacturing costs, together with lower~~$569,000 at March 31, 2005.

Gross margin ~~revenue related~~decreased from 61% to after-sale services primarily for advanced training. Our manufacturing cost structure, except for the cost of materials, is relatively fixed and increased slightly during the third quarter with the addition of a new manufacturing facility brought online in the second quarter of 2004. Significant estimates affecting gross margin include the allowance for inventory obsolescence and accrued warranty expense. During56% from the first ~~nine months of 2004, the allowance for inventory obsolescence increased from $246,000 at December 31, 2003 to $354,000. The provision for warranty expense was $1.8 million in the first nine months~~quarter of 2004 compared to ~~$970,000~~the first quarter of 2005 as a result of higher production costs and the costs of training associated with our multiple element arrangements which are classified as cost of revenue. Training negatively impacted gross margins for the first ~~nine months~~quarter of ~~2003. Warranty expenses are variable in nature and will fluctuate from time to time due~~2005 by 6%, compared to the ~~number~~impact on gross margins in the first quarter of ~~units under warranty, product reliability~~2004 of 3%. We believe that our gross margin will continue to be impacted until our Waterlase MD reaches a mature state of production, which could impact the full fiscal year of 2005. In addition, as compared to the first quarter of 2004, we have increased the costs of our fixed manufacturing infrastructure, including quality control, materials management and ~~life cycle.~~other support activities. We expect that increased manufacturing costs associated with the new Waterlase MD will continue until our factory has achieved a proper balance between all products and throughput efficiency is maximized. During the first quarter of 2005, we increased our reserve for excess and obsolete inventory by $417,000 related to unusable raw materials resulting from design changes to the Waterlase MD during the quarter. This addition to the reserve decreased our gross margin approximately 2%. We believe our gross margin for 2005 will experience continued pressure until the aforementioned items reach a level of stability, which is not expected until early next year.

Sales and marketing expense increased $790,000 for the quarter ended March 31, 2005 compared to the comparable prior year period. As a percentage of net revenue, sales and marketing expense decreased from 36.7% for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2004 ~~was $5.9 million and $17.5 million, respectively, compared~~ to ~~$3.7 million and $11.0 million, respectively,~~36.4% for the ~~same periods~~three months ended March 31, 2005. While some of ~~2003. Sales~~our sales and marketing ~~expense as a percentage of sales~~costs are fixed, most are discretionary expenditures aimed at furthering our market penetration and positioning us for ~~2004 was 49.3%~~sustained long-term growth. Therefore, we did not reduce our discretionary expenditure level in the ~~third~~first quarter ~~and 42.3%~~of the fiscal year. Approximately $275,000 of the increase in absolute dollars for the first ~~nine months~~quarter of 2005 compared to the first quarter of 2004 is directly related to additional salary expense and higher commission expense on higher sales. Marketing expense, including advertising, direct mailing fees, trade shows and seminars increased approximately $413,000, as compared to the first quarter of 2004. ~~The~~Additionally, we incurred an increase of $102,000 in the first quarter of 2005 compared to the same period of 2004 related to the overall infrastructure support costs attributed to sales and marketing. During the first quarter and continuing into the second quarter, we realigned our domestic sales force effecting sales representative commission and territory configurations. As part of this planned process, we experienced some involuntary and voluntary attrition in the sales force. While we feel that the effects of these changes will allow us to better service our customers, especially those in the “early adoptor” market segment, there will be an impact on product sales as the newly configured sales force ramps up to a full state of productivity. As of March 31, 2005, we had 32 direct sales staff in North America and seven direct sales staff covering Europe. We expect our sales and marketing expenses ~~compared~~ to ~~the same periods~~continue to increase, in large part due to increases in expenses associated with education and training of ~~the prior year reflect our continued marketing efforts to expand consumer awareness to the benefits~~potential customers which is an essential component of our ~~products~~effort to increase market acceptance of laser technology and ~~to develop new marketing territories, particularly in areas outside of the United States.~~our products. We expect sales and marketing expense ~~for the fourth quarter of 2004,~~to increase slightly as a percentage of ~~revenues, to be lower than the third quarter of 2004.~~revenue in 2005.

Although ~~we believe~~ we are the market leader in ~~laser dentistry,~~our industry, we must continue to invest ~~not only~~ in traditional marketing ~~but also in education to accomplish the broad adoption of lasers in dentistry that we seek.~~and education. This is the reason we formed the World Clinical Laser Institute ~~(WCLI)~~(“WCLI”) and why we continually seek to form alliances with teaching programs in the U.S. and globally. The WCLI is now the world’s largest teaching institute for laser dentistry. In the first quarter of ~~2004,~~2005, the WCLI held its largest ever conference with over ~~650~~600 participants and over the course of ~~2004,~~2005, through an additional six ~~multi-day~~ conferences, expects to reach a participation level of ~~1,700 of~~greater than 1,000 existing and potential customers as well as researchers and academicians. Although we charge ~~a nominal~~ tuition to customers which is included in revenue to help offset the cost of these conferences, the increasing number and size of WCLI conferences ~~represents~~represented a ~~substantial share~~total cost to us in the first quarter of ~~our total~~2005 of approximately $2.5 million, of which approximately 49% is included in cost of revenue, as described above, and approximately 51% is included in sales and marketing expense. In comparison, the costs for the first quarter of 2004 were approximately $1.4 million of which 36% was included in cost of revenue and 64% was included in sales and marketing expense.

In 2003, we began piloting consumer marketing campaigns in California and other selected markets in the U.S. These pilots often involve a sharing of cost on the part of participating customers. Based on the positive feedback we have received, we intend to continue these pilots and may increase these efforts depending on the results achieved.

General and administrative ~~expenses were $2.4~~expense of $4.5 million ~~and $5.8~~in the first quarter of 2005 increased significantly as compared to $1.7 million for the ~~three and nine months ended September 30,~~first quarter of 2004, ~~respectively, compared to $1.5~~an absolute dollar increase of $2.8 million and ~~$3.4 million~~increased from 11.5% of net revenue for the same periods of 2003, respectively. In general, we are experiencing a need to increase human resources and organizational infrastructure necessary to support our growth. We expect that we will be able to leverage off of the fixed nature of these costs. In addition, specific increases in general and administrative expenses are primarily related to legal and professional fees, insurance costs, and stockholder communication expenses related to the proxy and annual report. For the three and nine months ended September 30, 2004, legal fees increased by approximately $595,000 and $1.2 million, respectively, compared to the same periods of 2003. The increase in legal fees was primarily related to the Diodem lawsuit and the putative shareholder class action lawsuits. Administrative wages, insurance, consulting fees related to our Section 404 Sarbanes-Oxley internal controls project and investor relations costs increased approximately $286,000 and $1.2 million, respectively, for the three and nine months ended September 30, 2004 compared to the same periods of 2003. We expect costs in these categories for the fourthfirst quarter of 2004 to ~~be slightly higher than~~26.6% of net revenue for the ~~third~~first quarter of ~~2004.~~2005. The most significant portions of this increase related to professional fees totaling $1.0 million associated with the audit of 2004 and the restated financial statements, and costs of approximately $769,000 related to compliance with the Sarbanes-Oxley Act, which included professional fees as well as temporary labor. Other personnel and administrative costs increased approximately $870,000 representing increased infrastructure in finance, information technology, human resources and administration, both in response to meeting the ongoing compliance standards related to the Sarbanes-Oxley Act and to meet growth needs. In addition, we booked a net additional reserve of $251,000 for uncollectible accounts. The increase in our general and administrative expense during the first quarter of 2005 was offset by a gain in the amount of $71,000 on the abatement of penalties and interest on sales tax. We expect general and administrative expense to continue to increase on an absolute basis, principally as a result of professional fee expense required to maintain and continue to improve internal controls under the Sarbanes-Oxley Act.

~~Engineering and development expenses include engineering personnel salaries, prototype supplies and contract services.~~ Engineering and development expense for the three ~~and nine~~ months ended ~~September 30, 2004 were $1.0~~March 31, 2005 increased $2.3 million ~~and $2.5 million, respectively,~~ compared to ~~$629,000~~the same period of 2004, as a percentage of net revenue, engineering and ~~$1.7 million~~development expense increased from 5.3% for the ~~same periods~~first quarter of 2004 ~~respectively.~~to 18% for the first quarter of 2005. This increase is primarily the result of our purchase of licensed technology totaling $2.0 million from Surgilight in the field of presbyopia and the related expenses of the transaction. Under the terms of the agreement, we will pay an additional $200,000 in total to Surgilight commencing in 2006 through 2010. The ~~increases are due~~entire consideration, including the transaction costs, has been expensed as in-process research and development. The remaining $200,000 will be expensed as incurred, in accordance with FAS No. 2, “Accounting for Research and Development Costs”. We utilized the services of a professional firm in determining the fair value of the licensed technology and to ~~increased levels~~determine the appropriate accounting treatment for this purchase. The balance of ~~activity in product development related~~the increase relates to ~~our new Waterlase MD product~~higher employee costs and ~~general overall growth.~~patent fees. We expect to modestly increase our spending in product development ~~for~~during the ~~fourth~~remainder of 2005, excluding the cost of this license during the first quarter of ~~2004 to be similar to costs incurred in the third quarter of 2004 and will average between 5% to 6% of total net sales for 2004.~~2005.

We ~~experienced~~realized a net non-operating gain of ~~$272,000 and $423,000, respectively,~~$63,000 for the ~~three and nine months ended September 30, 2004~~first quarter of 2005 compared to a net non-operating ~~gain~~loss of ~~$23,000 and $135,000, respectively,~~$61,000 for the ~~same periods~~first quarter of ~~2003, respectively. The increase is primarily~~2004. Interest income increased by $160,000 due to higher ~~interest income related to~~average cash balances during the ~~increase in cash, cash equivalents and investments in~~entire first quarter of 2005. In the prior year, proceeds of $46.3 million from our stock offerings did not occur until the end of the first quarter of 2004. Interest expense did not change materially. We incurred a loss on sale of marketable securities ~~as a result~~ of ~~the $41.9 million in net proceeds received from our public offering~~$16,000 in the first quarter of ~~2004. Included in the non-operating gain were gains on foreign currency transactions of $12,000 and $46,000, respectively, for the three and nine months ended September 30, 2004~~2005 compared to ~~$27,000 and $135,000, respectively,~~$0 for the same ~~periods~~period in 2004. A portion of ~~2003.~~the net non-operating gain/loss represents a foreign currency transaction loss of $73,000 for the first quarter of 2005 compared to a loss of $47,000 in the first quarter of 2004. Due to the relatively low volume of transactions denominated in currencies other than the U.S. dollar, we have not engaged in hedging transactions to offset foreign currency fluctuations. Therefore, we are at risk for changes in the value of the dollar relative to the value of the ~~euro,~~Euro, which is the only non-U.S. dollar denominated currency in which we have transacted business. The non-operating gain varies from quarter to quarter due to certain economic conditions such as interest rates and foreign currency exchange rates. Although we do not expect significant changes that may affect the non-operating gain, we do anticipate some variation in the gain during the fourth quarter of 2004, primarily due to lower interest income.

For the year ended December 31, 2003, we recorded an income tax benefit of $11.4 million as a result of reducing the valuation allowance on deferred tax assets which was included in our consolidated statements of income and an income tax benefit for the exercise of stock options of $2.3 million which was recorded to additional paid-in capital. The deferred tax assets consist primarily of net operating loss carryforwards. They had been fully reserved in prior periods due to the uncertainty of whether we would generate sufficient taxable income to realize the benefits of the assets. Based upon ~~the level of~~ our ~~historical taxable income~~operating losses during 2004 and the ~~projection for future taxable income, we concluded~~available evidence, management determined that it ~~was~~is more likely than not that wethe deferred tax assets as of December 31, 2004 would ~~realize the benefits of these assets. We~~not be realized. Consequently, we recorded a ~~benefit~~valuation allowance for our net deferred tax asset in the amount of $21.1 million as of December 31, 2004. In this determination, we considered factors such as our earnings history, future projected earnings and tax planning strategies. If sufficient evidence of our ability to generate sufficient future taxable income becomes apparent, we may reduce our valuation allowance, resulting in income tax benefits in our statement of ~~$799,000~~operations and in additional paid-in-capital. Management continues to evaluate the potential realization of our deferred tax assets and assesses the need for reducing the ~~three months ended September 30, 2004~~valuation allowance periodically. As of March 31, 2005, we determined that a valuation allowance is still required. As a result of the valuation allowance, we recognized a modest tax provision that primarily related to our foreign operations and ~~a provision for income~~certain U.S. deferred tax ~~expense of $99,000 for the nine months ended September 30, 2004 with a corresponding reduction of~~liabilities that could not be offset against our deferred tax assets. ~~There was no provision for income tax expense in~~We will continue to evaluate the ~~three and nine months ended September 30, 2003 due to the uncertainty at that time~~potential realization of ~~whether we would generate sufficient taxable income to realize the benefits of the~~our deferred tax ~~assets. Although we record a provision for income taxes, income taxes will not~~assets during the remainder of 2005 to determine whether the valuation should be ~~payable, subject to any alternative minimum tax, until we have utilized our net operating loss carryforwards, which were approximately $32.5 million at December 31, 2003.~~reduced.

At ~~September 30, 2004,~~March 31, 2005, we had ~~$40.7~~approximately $15.5 million in net working capital, ~~an increase~~a decrease of ~~$30.0~~$14.5 million from ~~$10.7~~$30.0 million at December 31, ~~2003.~~2004, which is partially attributed to our shift of $9.9 million of investments from short-term to long-term instruments. During the quarter we paid the $3.0 million cash portion of our obligation under the legal settlement with Diodem LLC (“Diodem”), $2.0 million to Surgilight, related to the purchase of the license of technology related to the field of presbyopia, and we used approximately $5.0 million in operations, net of the payments for Diodem and Surgilight. For the three months ended March 31, 2005, our sources of cash were net borrowings on our line of credit of $1.9 million and $172,000 from the exercise of stock options. Our principal source of liquidity at ~~September 30, 2004~~March 31, 2005 consisted of our cash ~~balance~~and cash equivalents of ~~$4.0~~$2.9 million, short-term and long-term investments of $19.9 million and ~~investments in marketable securities of $32.2 million. For the nine months ended September 30, 2004,~~ our ~~sources of cash were~~ net ~~proceeds of $41.9~~availability under our credit facility.

Accounts receivable increased 30% or $2.9 million from ~~our public offering and $977,000 from~~ the ~~exercise~~end of stock options. Principal uses of cash for the nine months ended September 30, 2004 were investments in marketable securities of $32.2 million, funds used to repurchase common stock of $13.4 million, payments totaling approximately $2.7 million to pay off debt outstanding at December 31, 2003, additions to long term assets of approximately $492,000 and dividends paid of $235,000. Operating activities used $880,000 of cash for the nine months ended September 30, 2004, consisting of approximately $762,000 in cash generated from net income adjusted for non-cash items, offset by approximately $1.6 million of cash used through changes in assets and liabilities. For further details, see the Unaudited Consolidated Statements of Cash Flows included in this Report.

Principal among the changes in assets and liabilities which used cash were increases in accounts receivable and inventory. Accounts receivable at September 30, 2004 increased approximately $534,000 from December 31, 2003. Our days sales in accounts receivable increased from 46 days for the second quarter of 2004 to 48 days for the third quarter of 2004. Inventories increased approximately $3.4 million from December 31, 2003. This increase was primarily due to increased levels of production in the third quarter which was geared to meet sales at a level comparable with our expected rates of growth. Since that level of sales did not occur in the third quarter, inventory turnover for the third quarter fell to 3.3 from 4.5 in the second quarter of 2004. Although we anticipate certain fluctuations in our inventory levels during the fourth quarter of 2004 to ~~meet~~the end of the first quarter of 2005. Days sales outstanding (DSO) in accounts receivable were 59 days when measured at March 31, 2005. The increase in accounts receivable is primarily attributable to the timing of shipments (for the first quarter) due to capacity constraints related to new product ~~demands~~transition, a majority of which were executed in March. We believe that accounts receivable will revert back to historical trends for the ~~Waterlase MD and higher revenue growth, we expect our ending~~remainder of 2005. Net inventory ~~at December 31,~~increased 8% or $656,000 from the end of the fourth quarter of 2004 to ~~be similar or slightly lower than~~ the ~~amount~~end of the first quarter of 2005. Inventory turnover equals 3.6 turns per year when measured at ~~September 30, 2004.~~March 31, 2005.

OnDuring the quarter ended March ~~3, 2004,~~31, 2005, we completed a public offering of 2.5 million shares of common stock. Net proceeds from the offering were $41.9 million. We have subsequently invested the proceeds in marketable securities consisting of US Treasury bills with durations of less than one year. We also incurred legal, accounting and related costs of approximately $1.5 million which we had capitalized in Other Assets. After the closing of the offering, we reclassified these capitalized costs from Other Assets to Additional Paid-in Capital. We used a portion of the net proceeds to repay $1.8 million on the line of credit and $888,000 in debt and expect to use the balance of the net proceeds of the offering for general corporate purposes, working capital, and capital expenditures, including expenditures for expansion of our production capabilities, acquisition or investment in complementary businesses or products or the right to use complementary technologies. The proceeds have been invested, pending their use as described, in short-term, interest bearing securities and debt instruments in compliance with our investment policy. In addition, the Board of Directors concluded that a stock repurchase program currently represents a use of capital that can enhance stockholder value. Therefore, in July of 2004, we announced a stock repurchase program to acquire up to 1.25 million shares over the next 12 months. In August of 2004, the Board of Directors authorized the repurchase of an additional 750,000issued 361,664 shares of our common stock ~~increasing the total share repurchase program to 2.0 million~~(valued at approximately $3.5 million) and a five-year warrant (valued at approximately $443,000) exercisable into 81,037 shares of ~~our~~ common ~~stock. These~~stock at an exercise price of $11.06 per share, in addition to the $3.0 million cash payment, for the legal settlement with Diodem. In addition, if certain criteria specified in the agreement are satisfied before July 2006, 45,208 additional shares we have placed

in escrow may be ~~purchased from~~released to Diodem and we will incur an expense equal to the fair market value of those shares at the time of their release. The common stock issued, the escrow shares and the warrant shares have certain registration rights. The total consideration was estimated to ~~time on~~have a value of approximately $7.0 million, excluding the ~~open market or through privately negotiated transactions over~~value of the ~~next 12 months.~~shares held in escrow, which are contingent in nature, but including the value of the patents acquired in January 2005. As of ~~September 30,~~December 31, 2004, we accrued approximately $6.4 million for the settlement of the existing litigation. In January 2005, we recorded an intangible asset of $530,000 representing the estimated fair value of the intellectual property acquired. As a result of the acquisition, Diodem immediately withdrew its patent infringement claims against us and the case was formally dismissed on May 31, 2005. We did not pay and have ~~repurchased approximately 1.5 million shares at~~no obligation to pay any royalties to Diodem on past or future sales of our products, but we agreed to pay additional consideration if any of the acquired patents or certain other patents held by us are licensed to a third party. In order to secure performance by us of these financial obligations, the parties entered into an ~~average price~~intellectual property security agreement, pursuant to which, subject to the rights of ~~$8.81 per share. Also~~existing creditors and the rights of any future creditors to the extent provided in ~~July~~the agreement, we granted Diodem a security interest in all of ~~2004,~~their right, title and interest in the ~~Board~~royalty patents. In addition, we will be required, by January, 2006, to provide Diodem a ten-year letter of ~~Directors established~~credit from a ~~dividend policy that will remain~~bank in ~~effect for an indefinite period~~the amount of time and pays a regular cash dividend of $0.01 per share every other month when declared by the Board of Directors. The first dividend totalling $235,000 was declared and paid on August 30, 2004 to stockholders of record on August 16, 2004.$500,000 as additional security.

At ~~December~~March 31, ~~2003~~2005, we ~~had $1.8~~have a $10.0 million ~~outstanding under a $5.0 million revolving~~ credit facility with a bank, which was due to expire at June 30, 2004. In the first quarter of 2004 we used a portion of the net proceeds from our March 3, 2004 public offering to repay the $1.8 million outstanding on the line of credit.bank. The credit facility has recently been extended ~~to June 30, 2005~~ and ~~increased to $10.0 million. As of~~currently expires on September 30, ~~2004, there were no amounts~~2006. At March 31, 2005, $1.9 million was borrowed on the credit facility. Borrowings under the facility bear interest at LIBOR plus 2.25% for minimum borrowing amounts of $500,000 and with two business days notice or at a variable rate equivalent to prime rate for amounts below $500,000 or with less than two business days notice and are payable on demand upon expiration of the facility. ~~Borrowings also~~We have granted the bank a security interest in and to all equipment, inventory, accounts receivable and other assets of the company. All borrowings during the first quarter of 2005 were at prime rate. During the quarter ended March 31, 2005, we were subject us to certain covenants under the previous credit facility, including, among other things, maintaining a minimum balance of cash (including investments in USU.S. Treasuries) and tangible net worth, a specified ratio of current assets to current liabilities and a covenant to remain profitable. In April 2005, we became non-compliant with our covenant relating to timely reporting and certification requirements due to the late filing of our Form 10-K for the 2004 fiscal year. In July 2005, we obtained a waiver of this covenant and subsequently filed our Form 10-K on July 19, 2005. We ~~were compliant~~also became non-compliant with respect to the ~~covenants under~~late filing of this Form 10-Q for the ~~agreement with~~quarter ended March 31, 2005 and the ~~exception to remain profitable on a quarterly basis.~~second quarter Form 10-Q for the quarter ended June 30, 2005. In ~~November of 2004, we were notified by our bank that~~addition, we were in default ~~under our~~with covenants ~~as of~~related to tangible net worth and quarterly profitability. In September ~~30, 2004 due to our operating loss for the three months ended September 30, 2004. In November of 2004,~~2005, we obtained a waiver to ~~this covenant as~~all of ~~September 30, 2004. There were no borrowings on the line~~these covenants. We intend to seek additional waivers until all of ~~credit as of September 30, 2004. In November of 2004, we borrowed $3.5 million under this line of credit.~~our late periodic reports have been filed and for any other non-compliant covenants when and if any become necessary.

We had no material commitments for capital expenditures as of ~~September 30, 2004~~March 31, 2005 and have not entered into any material commitments after that date.

The following table presents our expected cash requirements for contractual obligations outstanding as of ~~September 30, 2004~~March 31, 2005, the nine months ending December 31, 2005, and for the years ending December 31:

We believe that our current cash balances, investments, and ~~marketable securities plus cash expected to be generated from our operations~~borrowing capability will be adequate to meet our capital requirements and sustain our operations ~~including the payment of our planned dividend and payments under the stock repurchase plan, for at least the next twelve months.~~through October 2006. Our future capital requirements will depend on many factors, including the extent and timing of the ~~deployment of the capital raised in our public offering and the~~ rate at which our business ~~continues to grow,~~grows, if at all, with corresponding demands for working capital and manufacturing capacity. We ~~could~~may be required ~~or may elect~~ to seek additional funding through either debt financing, or public or private equity, or ~~debt financing.~~a combination of funding methods to meet our capital requirements and sustain our operations. However, additional funds may not be available on terms acceptable to us or at all.

In ~~December 2003,~~November 2004, the Financial Accounting Standards Board (“FASB”) issued ~~FASB Interpretation~~SFAS No. ~~46R, Consolidation~~151, “Inventory Costs,” which amends part of ~~Variable Interest Entities~~Accounting Research Bulletin (“~~FIN 46R”~~ARB”)~~. FIN 46R requires~~ No. 43, “Inventory Pricing,” concerning the ~~application~~treatment of ~~either FIN 46 or FIN 46R~~ certain types of inventory costs. The provisions of ARB No. 43 provided that certain inventory-related costs, such as double freight and re-handling might be “so abnormal” that they should be charged against current earnings rather than be included in the cost of inventory. As amended

by ~~Public Entities~~SFAS No. 151, the “so-abnormal” criterion has been eliminated. Thus, all such (abnormal) costs are required to be treated as current-period charges under all Special Purpose Entities (“SPE”) created prior to February 1, 2003 as of December 31, 2003 for calendar year-end companies. FIN 46R is applicable to all non-SPEs created prior to February 1, 2003 atcircumstances. In addition, fixed production overhead should be allocated based on the ~~end~~normal capacity of the ~~first interim or annual period ending after March 15, 2004. For all entities created subsequent~~production facilities, with unallocated overhead charged to ~~January 31, 2003, Public Entities were~~expense when incurred. SFAS No. 151 is required to ~~apply~~be adopted for fiscal years beginning after June 15, 2005. We do not believe its adoption will have a material impact on our financial position, results of operations or cash flows.

In December 2004, the FASB revised and reissued SFAS No. 123-R, “Share-Based Payment,” which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based payment transactions using APB No. 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of operations. The standard was to become effective July 1, 2005. In March 2005, the SEC released Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment,” to provide public companies additional guidance in applying the provisions of ~~FIN 46R. The~~SFAS No. 123-R. Among other things, the SAB describes the staff’s expectations in determining the assumptions that underlie the fair value estimates and discusses the interaction of SFAS No. 123-R with certain existing guidance. SAB No. 107 should be applied upon the adoption of ~~FIN 46R did~~SFAS No. 123-R. In April 2005, the SEC amended Regulation S-X to provide a six-month adoption deferral period for public companies. Therefore, SFAS No. 123-R will not become effective until January 1, 2006. The new rules provide for one of two transition elections, either prospective application or restatement (back to January 1, 1995). The company plans to adopt SFAS No. 123-R on January 1, 2006. We currently are evaluating the impact of this pronouncement on our consolidated financial position, results of operations and cash flows.

In December 2004, the FASB issued FASB Staff Position FAS No. 109-1, “Application of FASB Statement No. 109, ‘Accounting for Income Taxes,’ to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“AJCA”).” The AJCA introduces a special 9% tax deduction on qualified production activities. FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with Statement No. 109. Pursuant to the AJCA, the Company will not be entitled to this special deduction in 2005, as the deduction is applied to taxable income after taking into account net operating loss carryforwards, and we have ansignificant net operating loss carryforwards that will fully offset taxable income. We do not expect the adoption of this new tax provision to have a material impact toon our consolidated financial position, results of operations or cash flows.

In March 2004, the Financial Accounting Standards Board (FASB) approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The Issue’s objective is to provide guidance for identifying other-than-temporarily impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting provisions of EITF 03-1 are effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for annual periods ending after June 15, 2004. In SeptemberDecember 2004, the FASB issued a FASB Staff Position ~~(FSP) EITF 03-1-1 that delays~~No. FAS 109-2, “Accounting and Disclosure Guidance for the ~~effective date~~Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004.” The AJCA introduces a limited time 85% dividends received deduction on the ~~measurement~~repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FAS No. 109-2 provides accounting and ~~recognition~~disclosure guidance ~~in EITF 03-1 on certain impaired debt securities until after further deliberations~~for the repatriation provision. To achieve the deduction, the repatriation must occur by the ~~FASB.~~end of 2005. We have not completed our analysis and do not expect to be able to make a decision on the amount of such repatriations, if any, until the fourth quarter of 2005. Among other things, the decision will depend on the level of earnings outside the United States, the debt level between our U.S. and non-U.S. affiliates, and administrative guidance from the Internal Revenue Service.

~~Investing~~An investment in our common stock involves ~~a high degree of~~significant risk. You should carefully consider the following risks and all the other information in this report, in addition to other information contained in our other filings with the U.S. Securities and Exchange Commission, before making an investment decision about our common stock. While the risks described below are the ones we believe are most important for you to consider, these risks are not the only ones that we face. If events anticipatedor SEC. Our business, financial condition and results of operations could be harmed by any of the following ~~risks actually occur, our business, operating results or financial condition could suffer, the~~risks. The trading price of our common stock could decline due to any of these risks, and you could lose ~~all~~part or ~~part~~all of your investment.

~~Our quarterly sales and operating results may fluctuate in future periods and we may fail to meet expectations, which may cause the price of our common stock to decline.~~

Our quarterly sales and operating results have fluctuated and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. If our quarterly sales or operating results fall below the expectations of investors, securities analysts or our previously stated financial guidance, the price of our common stock could decline substantially. Factors that might cause quarterly fluctuations in our sales and operating results include, but are not limited by the following:

The amount of expenses we incur, in part, depends on our expectations regarding future sales. In particular, we expect to continue incurring substantial expenses relating to the marketing and promotion of our products. Since many of our costs are fixed in the short term, if we have a shortfall in sales, we may be unable to reduce expenses quickly enough to avoid losses. Accordingly, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance. Additionally, as a result of the change in our revenue recognition policy in the third quarter of 2003, our quarterly sales and operating results for each of the three quarters ending September 30, 2004, may not be directly comparable to corresponding periods in the preceding year due to the difference in the timing of revenue recognition.

~~We may not have effective internal controls if we fail to remedy any deficiencies we may identify in our system of internal controls.~~

In preparation for the annual report of management regarding our evaluation of our internal controls that is required to be included in our annual report for the year ended December 31, 2004 by Section 404 of the Sarbanes-Oxley Act of 2002, we have engaged outside consultants and adopted a project work plan to assess the adequacy of our internal control, remediate any weaknesses that may be identified, validate that controls are functioning as documented and implement a continuous reporting and improvement process for internal controls. We may discover deficiencies that require us to improve our procedures, processes and systems in order to ensure that our internal controls are adequate and effective and that we are in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. If the deficiencies are not adequately addressed, or if we are unable to complete all of our testing and any remediation in time for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the SEC rules under it, we would be unable to conclude that our internal controls over financial reporting are designed and operating effectively, which could adversely affect our investor confidence in our internal controls over financial reporting. If we do not complete our testing with sufficient time for our independent accountants to complete their audit of internal controls, we may not be compliant with all of the requirements under Section 404 of the Sarbanes-Oxley Act since we may not receive an independent accountants report.

~~Regulatory proceedings relating to the restatement of our consolidated financial statements could divert management’s attention and resources.~~

We restated our previously issued financial statements in September of 2003 to reflect a change in the timing of revenue recognition. In late October of 2003 and subsequently, we received informal requests from the Securities and Exchange Commission to voluntarily provide information relating to the restatement of our consolidated financial statements. We have provided information to the Securities and Exchange Commission and, when we receive any additional requests for information, we will continue to do so. In accordance with its normal practice, the Securities and Exchange Commission has not advised us when its inquiry might be concluded. If the Securities and Exchange Commission elects to request additional information from us or commences further proceedings, responding to such requests or proceedings could divert management’s attention and resources. Additionally, any negative developments arising from such requests or proceedings could harm our business and cause the price of our common stock to decline.

~~The loss of or a substantial reduction in, or change in the size or timing of, orders from distributors could harm our business.~~

Our international sales are principally comprised of sales through independent distributors, although we sell products in certain European countries through direct sales representatives. A significant amount of our sales may consist of sales through distributors. For the first nine months of 2004, net sales to distributors accounted for approximately 13% of our total sales. No distributor accounted for more than 10% of our net sales in 2004. The loss of a substantial number of our distributors or a substantial reduction in, cancellation of or change in the size or timing of orders from our current distributors could harm our business, financial condition and results of operations. The loss of a key distributor could affect our operating results due to the potential length of time that might be required to locate and qualify a new distributor or to retain direct sales representatives for the territory. There is no assurance that our distributors will perform as expected and we may experience lengthy delays and incur substantial costs if we are required to replace distributors in the future.

~~Variation in demand for our products due to seasonality can cause our operating results to fluctuate from quarter to quarter during the year.~~

We have experienced fluctuations in sales from quarter to quarter due to seasonality. In our experience, sales in the first quarter typically are lower than average and sales in the fourth quarter typically are stronger than average due to the buying patterns of dental professionals. For example, the fourth quarter of 2003 accounted for 33% of our net sales for the year, whereas the first quarter of 2003 accounted for 19% of net sales for the year. In addition, sales in the third quarter of the year

may be affected by vacation patterns which can cause sales to be flat or lower than in the second quarter of the year. As a result, sequential quarter-to-quarter comparisons of our operating results may not be an indication of our performance for the year and may cause our results of operations and stock price to fluctuate.

Dentists and patients may be slow to adopt laser technologies, which could limit the market acceptance of our products.

Our dental laser systems represent relatively new technologies in the dental market. Currently, only a small percentage of dentists use lasers to perform dental procedures. Our future success will depend on our ability to increase demand for our products by demonstrating ~~to a broad spectrum of dentists and patients~~ the potential performance advantages of our laser systems over traditional methods of treatment and over competitive laser ~~systems. Dentists~~systems to a broad spectrum of dentists and patients. Historically, we have ~~historically~~experienced long sales cycles because dentists have been, and may continue to be, slow to adopt new technologies on a widespread basis. ~~This leads to long sales cycles and requires us~~As a result, we generally are required to invest a significant amount of time and resources to educate customers about the benefits of our products ~~and how they compare~~in comparison to competing products and technologies. Our sales personnel may be required to spend a substantial amount of time answering questions from potential customers and attending multiple in-person meetings over the course of several monthstechnologies before completing a sale. In addition, on occasion, our customers ask to return products after completing the purchase. Although all sales are final, we may accept product returns from customers in certain, limited circumstances. If requests for product returns become more pervasive, they could seriously harm our reputation, business, financial condition and results of operations.sale, if any.

Factors that may inhibit adoption of laser technologies by dentists include cost and concerns about the safety, efficacy and reliability of lasers. For example, the selling price of our Waterlase product is approximately $50,000, which is substantially above the cost of competing non-laser technologies. In order to make an investment in a Waterlase product, a dentist generally would need to invest time to ~~gain an understanding of~~understand the technology, ~~and how that~~the benefits of such technology ~~will produce a return on investment. Similarly, although medical lasers are generally accepted in other specialties, a dentist generally would want~~with respect to ~~understand how the use of laser technology can improve the~~ clinical outcomes and patient satisfaction, and the return on investment of ~~his or her own patients before making a substantial investment.~~the product. Absent an immediate competitive motivation, a dentist may not feel compelled to invest the time required to learn about the potential benefits of using a ~~laser.~~laser system. In addition, ~~a dentistry practice, like any business, needs to make capital allocation decisions in which our product might compete with an unrelated alternative capital expenditure. Economic~~economic pressure, caused for example by an economic slowdown, changes in healthcare reimbursement or by competitive factors in a specific market place, may make dentists reluctant to purchase substantial capital equipment or invest in new technologies. Patient acceptance will depend ~~in part~~ on the recommendations of dentists and specialists, as well as other factors, including without limitation, the relative effectiveness, safety, reliability and comfort of our systems as compared ~~with those of~~to other instruments and methods for performing dental procedures. The failure of dental lasers to achieve broad market acceptance would limit sales of our products and have an adverse effect on our business ~~financial condition~~ and results of operations. ~~We cannot assure you~~

Fluctuations in our revenue and operating results on a quarterly and annual basis could cause the market price of our common stock to decline.

Our revenue and operating results fluctuate from quarter to quarter due to a number of factors, many of which are beyond our control. Historically, we have experienced fluctuations in revenue from quarter to quarter due to seasonality. Revenue in the first quarter typically is lower than average and revenue in the fourth quarter typically is stronger than average due to the buying patterns of dental professionals. In addition, revenue in the third quarter may be affected by vacation patterns which can cause revenue to be flat or lower than in the second quarter of the year. If our quarterly revenue or operating results fall below the expectations of investors, analysts or our previously stated financial guidance, the price of our common stock could decline substantially. Factors that ~~we will successfully achieve broad market acceptance~~might cause quarterly fluctuations in our revenue and operating results include, among others, the following:

The expenses we incur are based, in large part, on our expectations regarding future revenue. In particular, we expect to continue to incur substantial expenses relating to the marketing and promotion of our products. Since many of our costs are fixed in the short term, we may be unable to reduce expenses quickly enough to avoid losses if we experience a decrease in revenue. Accordingly, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance.

We may have difficulty ~~managing our growth.~~achieving profitability and may experience additional losses.

We ~~have been experiencing significant growth~~recorded a net loss of $4.3 million for the first quarter of 2005, due in large part to our professional fees related to the ~~scope of our operations~~2004 audit and ~~the number of our employees. This growth has placed significant demands on our management~~restated financial statements and Sarbanes-Oxley Act as well as $2.0 million related to the purchase of license technology from Surgilight, Inc. including the transaction costs. We also experienced a loss in fiscal 2004 of $23.2 million, of which $14.4 million was attributable to expense associated with our ~~financial and operational resources.~~deferred tax assets. In order to achieve profitability, we must control our ~~business objectives, we anticipate that we will need~~costs and increase net revenue through new sales. Failure to ~~continue to grow. If this growth occurs, it will continue to place additional significant demands on~~increase our management and our financial and operational resources, and will require that we continue to develop and improve our operational, financial and other internal controls both in the United States and internationally. In particular, our increased growth has and, if it continues, will further increase the challenges involved in implementing appropriate operational and financial systems, expanding manufacturing capacity and scaling up production, expanding our sales and marketing infrastructure and capabilities, providing adequate training and supervision to maintain high quality standards, and preserving our culture and values. The main challenge associated with our growth has been, and we believe will continue to be, our ability to recruit and integrate skilled sales, manufacturing and management personnel. Our inability to scale our business appropriately or otherwise adapt to growth would cause our business, financial condition and results of operations to suffer.

~~If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur expenses to enforce our rights.~~

Our future success will depend, in part, on our ability to obtain and maintain patent protection for our products and technology, to preserve our trade secrets and to operate without infringing the intellectual property of others. In part, we rely on patents to establish and maintain proprietary rights in our technology and products. While we hold a number of issued patents and have other patent applications pending on our products and technology, we cannot assure you that any additional patents will be issued, that the scope of any patent protection will be effective in helping us address our competition or that any of our patents will be held valid if subsequently challenged. Other companies also may independently develop similar products, duplicate our products or design products that circumvent our patents. Additionally, the laws of foreign countries may not protect our products or intellectual property rights to the same extent as do the laws of the United States.

We face substantial uncertainty regarding the impact that other parties’ intellectual property positions will have on the markets for dental and other medical lasers. Competitors may claim that we have infringed their current or future intellectual property rights. The medical technology industry has in the past been characterized by a substantial amount of litigation and related administrative proceedings regarding patents and intellectual property rights. We may not prevail in any future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. Any claims, with or without merit, could be time-consuming and distracting to management, result in costly litigation, cause product shipment delays, or require us to enter into royalty or licensing agreements. Additionally, if an intellectual property claim against us is successful, we might not be able to obtain a license on acceptable terms or license a substitute technology or redesign our products to avoid infringement. Any of the foregoing adverse events could seriously harm our business, financial condition and results of operations.

~~We are a party to a patent infringement lawsuit involving patents relating to our core technology, which if determined adversely to us, could have a significant negative effect on our earnings.~~

We are currently involved in a patent lawsuit with Diodem, LLC, a California limited liability company, which was founded by Collete Cozean, the former chief executive officer of Premier Laser Systems, Inc. The claims in this lawsuit were originally part of two separate lawsuits initiated in U.S. District Court. On May 2, 2003, we initiated a civil action in the U.S. District Court for the Central District of California against Diodem to obtain a judicial declaration against Diodem that technology used in our laser systems does not infringe four patents allegedly owned by Diodem. Diodem claims to have acquired the patents from Premier Laser Systems, Inc., which filed for bankruptcy protection in March 2000. On May 5, 2003, Diodem added us as a party to an infringement lawsuit it had previously filed in the U.S. District Court for the Central District of California. These lawsuits were consolidated into the currently pending lawsuit in August 2003. Diodem alleges that our technology, including the technology used in our Waterlase system, infringes the four noted patents. Diodem seeks treble damages, a preliminary and permanent injunction from further alleged infringement, attorneys’ fees and other unspecified damages. This lawsuit is in the discovery phase of litigation, and may proceed for an extended period of time. There can be no assurance that our technology will not be found to infringe any of the patents at issue in this proceeding or that we will not be liable for some or all of the damages alleged by Diodem or subject to some or all of the relief requested by Diodem.

In addition, this lawsuit could result in significant expenses and diversion of management’s time and other resources. If Diodem successfully asserts an infringement claim against us, our operations may be severely impacted, especially to the extent that it affects our right to use the technology incorporated in our Waterlase system, which accounted for approximately 81% of our revenue for the nine months ended September 30, 2004, approximately 83% of our revenue in 2003 and approximately 77% of our revenue in 2002. This proceeding could also result in significant limitations on our ability to manufacture, market, and sell our products, including our Waterlase system, as well as delays and costs associated with redesigning our products and payments of license fees, monetary damages and other payments. Additionally, we may be enjoined from incorporating certain technology into our products, all of which could significantly impede our operations, increase operating expenses, reduce ournet revenue and ~~cause us to incur losses.~~

~~We are party to securities and derivative litigation that distracts~~decrease our ~~management, is expensive to conduct and seeks a damage award against us.~~

We and certain of our officers have been recently named as defendants in several putative shareholder class action lawsuits filed in the United States District Court for the Central District of California. The complaints purport to seek unspecified damages on behalf of an alleged class of persons who purchased our common stock between October 29, 2003 and July 16, 2004. The complaints allege that we and our officers violated federal securities laws by failing to disclose material information about the demand for our products and the fact that the Company would not achieve the alleged forecasted growth. The claimed misrepresentations include certain statements in our press releases and the registration statement we filed in connection with our public offering of stock in March 2004. In addition, three stockholders have filed derivative actions in the state court in California seeking recovery on behalf of Biolase, alleging, among other things, breach of fiduciary duties by those individual defendants and members of the Biolase board of directors. We have not yet formally responded to any of the actions and no discovery has been conducted by any of the parties. This litigation presents a distraction to our management, is expensive to conduct, and if we are unsuccessful in defending this litigation, may result in damage awards against us that would harm our financial condition and operating results.

~~We depend on a limited number of suppliers and if we cannot secure alternate suppliers, the amount of sales in any period could be adversely affected.~~

We purchase certain materials and components included in our Waterlase system and other products from a limited group of suppliers using purchase orders, and we have no written supply contracts with our key suppliers. Our business depends in part on our ability to obtain timely deliveries of materials and components in acceptable quality and quantities from our suppliers. For example, the introduction of our LaserSmile system in 2001 was delayed due to an interruption in the supply of components for the system. Certain components of our products, particularly specialized components used in our lasers, are currently available only from a single source or limited sources. For example, the crystal, fiber and handpieces used in our Waterlase system are each supplied by a separate single supplier. We have not experienced material delays from these suppliers, however, an unexpected interruption in a single source supplier could create manufacturing delays, and disrupt sales and cash flow as we sought to replace the supplier. Such an interruptioncosts could cause our ~~business, financial condition and results of operations~~stock price to ~~suffer.~~

~~We have significant international sales and are subject to risks associated with operating in international markets.~~

International sales comprise a significant portion of our net sales and we intend to continue to pursue and expand our international business activities. For the nine months ended September 30, 2004, international sales accounted for approximately 20% of our revenue, approximately 20% of our revenue in our 2003 fiscal year and approximately 23% of our revenue in our 2002 fiscal year. Political and economic conditions outside the United States could make it difficult for us to increase our international sales or to operate abroad. International operations, including our facility in Germany, are subject to many inherent risks, including:

We believe that international sales will continue to represent a significant portion of our net sales, and we intend to further expand our international operations. Our direct sales in Europe are denominated principally in euros, while our sales in other international markets are in U.S. dollars. As a result, an increase in the relative value of the dollar against the euro would lead to less income from sales denominated in euros, unless we increase prices, which may not be possible due to competitive conditions in Europe. We realized a gain of $46,000 on foreign currency transactions for the the nine months ended September 30, 2004 and $232,000 for the year ended December 31, 2003, due to a decrease in the value of the dollar relative to the value of the euro. We could experience losses from European transactions if the relative value of the dollar were to increase in the future. We do not currently engage in any transactions as a hedge against risks of loss due to foreign currency fluctuations, although we may consider doing so in the future. We also expect that sales of products manufactured at our facility in Germany will account for an increasing percentage of our revenue, which will further increase our exposure to the above-described risks associated with our international operations. Sales of products manufactured at our German facility accounted for 8% of our revenue for nine months ended September 30, 2004, 12% of our revenue in our 2003 fiscal year and approximately 9% of our revenue in our 2002 fiscal year. Since expenses relating to our manufacturing operations in Germany are paid in euros, an increase in the value of the euro relative to the dollar would increase the expenses associated with our German manufacturing operations and reduce our earnings. In addition, we may experience difficulties associated with managing our operations remotely and complying with German regulatory and legal requirements for maintaining our manufacturing operations in that country. Any of these factors may adversely affect our future international sales and manufacturing operations and, consequently, negatively impact our business, financial condition and operating results.

~~If we are unable to meet customer demand or comply with quality regulations, our sales will suffer.~~

We manufacture our products at our California and German production facilities. In order to achieve our business objectives, we will need to significantly expand our manufacturing capabilities to produce the systems and accessories

necessary to meet demand. We may encounter difficulties in scaling-up production of our products, including problems involving production capacity and yields, quality control and assurance, component supply and shortages of qualified personnel. In addition, our manufacturing facilities are subject to periodic inspections by the U.S. Food and Drug Administration, state agencies and foreign regulatory agencies. Our success will depend in part upon our ability to manufacture our products in compliance with the U.S. Food and Drug Administration’s Quality System regulations and other regulatory requirements. Our business will suffer if we do not succeed in manufacturing our products on a timely basis and with acceptable manufacturing costs while at the same time maintaining good quality control and complying with applicable regulatory requirements.decline.

Any failure to significantly expand sales of our products will negatively impact our business.

We currently handle a majority of the marketing, distribution and sales of our ~~laser systems.~~products. In order to achieve our business objectives, we ~~will need~~intend to significantly expand our marketing and sales efforts on a ~~nationwide~~domestic and ~~global~~international basis. We ~~will~~ face significant challenges and risks in expanding, training, managing and retaining our sales and marketing teams, including managing geographically dispersed ~~efforts.~~operations. In addition, we ~~use third party~~rely on independent distributors to market and sell our products in a number of countries outside of the United ~~States, and are dependent on the sales and marketing efforts of these third party distributors.~~States. These distributors may not commit the necessary resources to effectively market and sell our ~~products.~~products, and they may terminate their relationships with us at any time with limited notice. If we are unable to expand our sales and marketing capabilities domestically and internationally, we may not be able to effectively commercialize our products, which could harm our business and cause the price of our common stock to decline.

~~Acquisitions could have unintended negative consequences,~~Components used in our products are complex in design, and any defects may not be discovered prior to shipment to customers, which could ~~harm~~result in warranty obligations, reducing our ~~business.~~revenue and increasing our cost.

~~As part~~In manufacturing our products, we depend upon third parties for the supply of various components. Many of these components require a significant degree of technical expertise to produce. If our suppliers fail to produce components to specification, or if the suppliers, or we, use defective materials or workmanship in the manufacturing process, the reliability and performance of our ~~business strategy,~~products will be compromised. We have experienced such non-compliance with manufacturing specifications in the past and may continue to experience such in the future.

If our products contain defects that cannot be repaired easily and inexpensively, we have experienced in the past and may ~~acquire~~experience:

The occurrence of any one or more ~~businesses, products or technologies. Acquisitions could require significant capital infusions and could involve many risks, including, but not limited to, the following:~~

We cannot assure you that we will be able to identify or consummate any future acquisitions on acceptable terms, or at all. If we do pursue any acquisitions, it is possible that we may not realize the anticipated benefits from such acquisitions or that the market will not positively view such acquisitions.business.

~~Material increases in interest rates~~Our distributors have and may ~~harm~~continue to cancel, reduce or delay orders of our ~~sales.~~products, any of which could reduce our revenue.

We ~~currently sell~~employ direct sales representatives in certain European countries; however, we rely on independent distributors for a substantial portion of our sales outside of the United States. For the three months March 31, 2005, revenue to distributors accounted for approximately 15% of our total sales, and no distributor accounted for more than 10% of our revenue. Our ability to maintain or increase our revenue will depend in large part on our success in developing and maintaining relationships with our distributors. The loss in the number of our distributors or a reduction in, cancellation of or change in the size or timing of orders from our distributors or any problems collecting accounts receivable from our distributors could reduce our revenue. In addition, we may experience lengthy delays and incur substantial costs if we are required to replace distributors or retain direct sales representatives for such territories in the future.

We must continue to procure materials and components on commercially reasonable terms and on a timely basis to manufacture our products ~~primarily to dentists~~profitably. We have some single-source suppliers.

We have no written supply contracts with our key suppliers; instead, we purchase certain materials and components included in ~~general practice. These dentists often purchase~~ our products ~~with funds they secure through various financing arrangements with third party financial institutions, including credit facilities~~from a limited group of suppliers using purchase orders. Our business depends in part on our ability to obtain timely deliveries of materials and ~~short term loans. If interest rates increase, these financing arrangements will be more expensive to~~components in acceptable quality and quantities from our ~~dental customers, which would effectively increase the price~~suppliers. Certain components of our products, particularly specialized components used in our lasers, are currently available only from a single source or limited sources. For example, the crystal, fiber and hand pieces used in our Waterlase system are each supplied by a separate single supplier and from time to ~~our customers~~time we have experienced quality deficiencies in these materials. Unexpected interruptions in a single source supplier or quality problems in products we received from a supplier create manufacturing delays or product failures, disrupt revenue and ~~thereby,~~cause additional expense relating to the procurement of another supplier. We may ~~decrease overall demand for our products. Any reduction~~not be successful in ~~the sales~~managing any shortage, delay of, ~~our products would~~or quality control issues with respect to materials or components that we experience, and any such event could cause our business and results of operations to suffer.

We may not be able to compete successfully, ~~against~~which will cause our ~~current~~revenue and ~~future competitors.~~market share to decline.

We compete with a number of ~~foreign~~domestic and ~~domestic~~foreign companies that market traditional dental products, such as dental drills, as well as ~~other~~ companies that market laser technologies in the dental and medical markets, ~~that we address,~~ including ~~companies such as~~ Hoya ConBio, a subsidiary of Hoya Photonics, ~~a large Japanese manufacturer primarily of optics and crystals,~~ OpusDent Ltd., a subsidiary of Lumenis, ~~Ka Vo,~~KaVo, Deka Dental Corporation, Ivoclar Vivadent AG, and Fotona d.d. If we do not compete successfully, our revenue and market share may decline. Some of our competitors have greater financial, technical, marketing or other resources than us, which may allow them to respond more quickly to new or emerging technologies and to devote greater resources to the acquisition or development and introduction of enhanced products than we can. The ability of our competitors to devote greater financial resources to product development requires us to work harder to distinguish our products through improving our product performance and pricing, protecting our intellectual property, continuously improving our customer support, accurately timing the introduction of new products and developing sustainable distribution channels worldwide. In addition, we expect the rapid technological changes occurring in the healthcare industry ~~are expected~~ to lead to the entry of new competitors, ~~especially~~particularly if dental and medical lasers gain increasing market acceptance. ~~Our ability~~We must be able to anticipate technological changes and to introduce enhanced products on a timely basis ~~will be a significant factor~~ in ~~our ability~~order to grow and remain competitive. New competitors or technological changes in laser products and methods could cause commoditization of our products, require price discounting or otherwise adversely affect our gross margins and our financial condition.

~~Rapid changes in technology~~Rapidly changing standards and competing technologies could harm ~~the~~ demand for our products or result in significant additional costs.

The markets in which our ~~laser systems~~products compete are subject to rapid technological change, evolving industry standards, changes in the regulatory environment, and frequent introductions of new ~~device introductions~~devices and evolving dental and surgical techniques. ~~These changes~~Competing products may emerge which could render our products uncompetitive or obsolete. The success of our existing and future products is dependent on the differentiation of our products from those of our competitors, the timely introduction of new products and the perceived benefit to the customer in terms of improved patient satisfaction and return on investment. The process of developing new medical devices is inherently complex and requires regulatory approvals or clearances that can be expensive, time consuming and uncertain. We cannot ~~assure you~~guarantee that we will successfully identify new product opportunities, identify new and innovative applications of our technology, or be financially or otherwise capable of completing the research and

development required to bring new products to market in a timely ~~manner~~manner. An inability to expand our product offerings or ~~that products~~the application of our technology could limit our growth. In addition, we may incur higher manufacturing costs if manufacturing processes or standards change, and ~~technologies developed by others will not render our products obsolete.~~we may need to replace, modify, design or build and install equipment, all of which would require additional capital expenditures.

~~The failure~~If we are unable to attract and retain ~~key~~ personnel necessary to operate our business, our ability to develop and market our products successfully could ~~adversely affect our business.~~be harmed.

~~Our~~We are heavily dependent on our current executive officers and management. The loss of any key employee or the inability to attract or retain qualified personnel, including engineers and sales and marketing personnel, could delay the development and introduction of, and harm our ability to sell our products and harm our reputation. We believe that our future success ~~depends in part~~is highly dependent on the ~~continued service~~contributions of ~~certain key personnel, including~~Robert E. Grant, our President and Chief Executive Officer, ~~(who is currently also our Interim Chief Financial Officer), our Executive Vice President responsible for sales,~~Jeffrey W. Jones, our Chief Technology Officer and our Vice President of Research and Development. We do not have employment agreements with any of our key employees, other than employment agreements with our Chief Executive Officer, our Chief Technology Officer,John W. Hohener, our Executive Vice President ~~responsible for sales~~ and ~~our newly hired~~ Chief Financial ~~Officer, who will be starting on November 23, 2004. The agreement~~Officer. We have employment agreements with each of these individuals ~~provides~~ that ~~we can~~provide us with the ability to terminate ~~his~~their employment at will, subject to certain severance ~~rights.~~rights; however, their knowledge of our business and industry would be extremely difficult to replace. Our ~~senior management will continue to need to manage our growth and operations in order for us to be successful.~~

~~Our~~future success ~~will~~ also ~~depend in large part~~depends on our ability to ~~continue to~~ attract and retain additional qualified management, engineering, sales and ~~motivate qualified engineering~~marketing, and other highly skilled technical personnel. Competition for certain employees, particularly development engineers, is intense despite the effects of the economic slowdown. We may be unable to continue to attract and retain sufficient numbers of such highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or more of our current key employees could adversely affect our business, financial condition and results of operations.

~~Product liability claims against us could be costly and could~~Any problems that we experience with our manufacturing operations may harm our ~~reputation.~~

The sale of dental and medical devices involves the inherent risk of product liability claims against us. We currently maintain product liability insurance on a per occurrence basis with a limit of $11.0 million per occurrence and $12.0 million in the aggregate for all occurrences. The insurance is subject to various standard coverage exclusions, including damage to the product itself, losses from recall of our product and losses covered by other forms of insurance such as workers compensation. There is no assurance that we will be able to obtain such insurance in the future on terms acceptable to us, or at all. We do not know whether claims against us with respect to our products, if any, would be successfully defended or whether our insurance would be sufficient to cover liabilities resulting from such claims. Any claims successfully brought against us would cause our business to suffer.

Section 382 of the Internal Revenue Code of 1986 generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. In 2003 we completed an analysis to determine the applicability of the annual limitations imposed by Section 382 caused by previous changes in our stock ownership and determined that such limitations should not be significant. Based on our analysis, we believe that, as of December 31, 2003, approximately $32.5 million of net operating loss carryforwards were available to us for federal income tax purposes. Of this amount, approximately $27.3 million is available to offset 2004 federal taxable income or the taxable income generated in future years. Additional net operating loss carryforwards will become available at the rate of approximately $1.0 million per year for the years 2005 through 2009. However, any ownership changes qualifying under Section 382 including changes resulting from or affected by our recent public offering or our stock repurchase plan may adversely affect our ability to use our remaining net operating loss carryforwards. If we lose our ability to use net operating loss carryforwards, any income we generate will be subject to tax earlier than it would be if we were able to use net operating loss carryforwards, resulting in lower profits.

~~We are exposed to risks associated with worldwide economic slowdowns and related uncertainties.~~

Concerns about decreased consumer and investor confidence, reduced corporate profits and capital spending, and international conflicts and terrorist and military activity have resulted in downturns in the equity markets and slowdowns in economic conditions, both domestically and internationally. Such unfavorable conditions could ultimately cause a slowdown in customer orders or cause customer order cancellations. In addition, political and social turmoil related to international conflicts and terrorist acts may put further pressure on economic conditions in the United States and abroad. Unstable political, social and economic conditions make it difficult for our customers, our suppliers and us to accurately forecast and plan future business activities. If such conditions persist, our business, financial condition and results of operations could suffer.

~~We may not be able to secure additional financing to meet our future capital needs.~~business.

We ~~expect to expend significant capital to further develop~~manufacture our products ~~increase awareness~~at our California and German facilities. In order to grow our business, we must significantly expand our manufacturing capabilities to produce the systems and accessories necessary to meet any demand we may experience. We may encounter difficulties in increasing production of our ~~laser systems~~products, including problems involving production capacity and yields, quality control and assurance, component supply and shortages of qualified personnel. In addition, our ~~brand names~~manufacturing facilities are subject to periodic inspections by the U.S. Food and Drug Administration (“FDA”), state agencies and foreign regulatory agencies. Our success will depend in part upon our ability to ~~expand~~manufacture our ~~operating~~products in compliance with the FDA’s Quality System regulations and management infrastructure as we increase sales in the United States and abroad. We may use capital more rapidly than currently anticipated. Additionally, we may incur higher operating expenses and generate lower revenue than currently expected, and we may be required to depend on external financing to satisfy our operating and capital needs, including the repayment of future debt obligations. We may be unable to secure additional debt or equity financing on terms acceptable to us, or at all, at the time when we need such funding.other regulatory requirements. If we do raise funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced, and the securities that we issue may have rights, preferences or privileges senior to those of the holders ofnot succeed in manufacturing our common stock or may be issued at a discount to the market price of our common stock which would result in dilution to our existing stockholders. If we raise additional funds by issuing debt, we may be subject to debt covenants, such as the debt covenants under our secured credit facility, which could place limitations on our operations including our ability to declare and pay dividends. Our inability to raise additional fundsproducts on a timely basis ~~would make it difficult for us to achieve~~and with acceptable manufacturing costs while at the same time maintaining good quality control and complying with applicable regulatory requirements, our business ~~objectives and would have a negative impact on our business, financial condition and results of operations.~~

~~We have adopted anti-takeover defenses that could delay or prevent an acquisition of our company and may affect the price of our common stock.~~

Certain provisions of our certificate of incorporation and stockholder rights plan could make it difficult for any party to acquire us, even though an acquisition might be beneficial to our stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

In December 1998, we adopted a stockholder rights plan pursuant to which one preferred stock purchase right is distributed to our stockholders for each share of our common stock held by them. In connection with the stockholder rights plan, the Board of Directors may issue up to 500,000 shares of Series B Junior Participating Cumulative Preferred Stock (which may be increased by up to 500,000 more shares out of undesignated preferred stock described in the paragraph below that is available under our certificate of incorporation). If any party acquires 15% or more of our outstanding common stock or commences a tender offer to acquire 15% or more of our outstanding stock, the holders of these rights (other than the party acquiring the 15% position or commencing the tender offer) will be able to purchase the underlying junior participating preferred stock as a way to discourage, delay or prevent a change in control of our company. Following the acquisition of 15% or more of our stock by any person, if we are acquired by or merged with any other entity, holders of these rights (other than the party acquiring the 15% position) will be able to purchase shares of common stock of the acquiring or surviving entity as a further means to discourage, delay or prevent a change in control of our company.

In addition, under our certificate of incorporation, the Board of Directors has the power to authorize the issuance of up to 500,000 shares of preferred stock that is currently undesignated, and to designate the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without further vote or action by the stockholders. Accordingly, our Board of Directors may issue preferred stock with terms that could have preference over and adversely affect the rights of holders of our common stock.

Changes in government regulation or the inability to obtain or maintain necessary government approvals could harm our business.

Our products are subject to extensive government regulation, both in the United States and in other countries. To clinically test, manufacture and market products for human use, we must comply with regulations and safety standards set by the ~~U.S. Food and Drug Administration~~FDA and comparable state and foreign agencies. Regulations adopted by the ~~U.S. Food and Drug Administration~~FDA are wide ranging and govern, among other things, product design, development, manufacture and testing, labeling, storage, advertising and sales. Generally, products must meet regulatory standards as safe and effective for their intended use before being marketed for human applications. The clearance process is expensive, time-consuming and uncertain. Failure to comply with applicable regulatory requirements of the ~~U.S. Food and Drug Administration~~FDA can result in an enforcement action which may include a variety of sanctions, including fines, injunctions, civil penalties, recall or seizure of our products, operating restrictions, partial suspension or total shutdown of production and criminal prosecution. The failure to receive or maintain requisite approvals for the use of our products or processes, or significant delays in obtaining such approvals, could prevent us from developing, manufacturing and marketing products and services necessary for us to remain competitive. In addition, unanticipated changes in existing regulatory requirements or the adoption of new requirements could impose significant costs and burdens on us, which could increase our operating expenses ~~reduce~~and harm our financial condition.

Regulatory proceedings relating to the restatement of our consolidated financial statements could divert management’s attention and resources.

We restated our previously issued financial statements in September of 2003 to reflect a change in the timing of revenue recognition. In addition, we restated our consolidated financial statements for the 2002 and ~~profits,~~2003 fiscal years, the four quarters of 2003 and ~~otherwise~~the first three fiscal quarters of 2004 due to a number of factors discussed in Note 3 to our audited consolidated financial statements contained in our Form 10-K for the year ended December 31, 2004. We have received informal requests from the SEC to voluntarily provide information relating to the September 2003 restatement of our consolidated financial statements. We have provided information to the SEC and, when we receive any additional requests for information, we intend to continue to do so. In accordance with its normal practice, the SEC has not advised us when its inquiry might be concluded. If the SEC elects to request additional information from us or commences further proceedings, including as a result of our recent restatement, responding to such requests or proceedings could divert management’s attention and resources. Additionally, any negative developments arising from such requests or proceedings could harm our business and cause the price of our common stock to decline.

If we experience growth in our operations, our operational and financial ~~condition.~~systems, procedures and controls may need to be expanded, which will place significant demands on our management, distract management from our business plan and increase expenses. Our success will depend substantially on the ability of our management team to manage any growth effectively. These challenges may include, among others:

In addition, we incur significant legal, accounting, insurance and other expenses as a result of being a public company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and NASDAQ, has required changes in corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect these rules and regulations to make it more difficult and more expensive for us to maintain director and officer insurance and, from time to time, we may be required to accept reduced policy limits and coverage or incur significantly higher costs to maintain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We continue to evaluate and monitor developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our revenue or increase our costs.

Our future success will depend, in part, on our ability to obtain and maintain patent protection for our products and technology, to preserve our trade secrets and to operate without infringing the intellectual property of others. We rely on patents to establish and maintain proprietary rights in our technology and products. We currently possess a number of issued patents and patent applications with respect to our products and technology; however, we cannot assure you that any additional patents will be issued, that the scope of any patent protection will be effective in helping us address our competition or that any of our patents will be held valid if subsequently challenged. It is also possible that our competitors may independently develop similar products, duplicate our products or design products that circumvent our patents. Additionally, the laws of foreign countries may not protect our products or intellectual property rights to the same extent as the laws of the United States. If we fail to protect our intellectual property rights adequately, our competitive position and financial condition may be harmed.

We may be sued by third parties for alleged infringement of their proprietary rights.

We face substantial uncertainty regarding the impact that other parties’ intellectual property positions will have on the markets for dental and other medical lasers. The medical technology industry has in the past been characterized by a substantial amount of litigation and related administrative proceedings regarding patents and intellectual property rights. From time to time, we have received, and expect to continue to receive, notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights. Some of these claims may lead to litigation. We may not prevail in any future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. Any claims, with or without merit, may be time-consuming and distracting to management, result in costly litigation or cause product shipment delays. Adverse determinations in litigation could subject us to significant liability and could result in the loss of proprietary rights. A successful lawsuit against us could also force us to cease selling or redesign products that incorporate the infringed intellectual property. Additionally, we could be required to seek a license from the holder of the intellectual property to use the infringed technology, and it is possible that we may not be able to obtain a license on acceptable terms, or at all. Any of the foregoing adverse events could seriously harm our business.

We have significant international revenue and are subject to risks associated with operating in international markets.

International revenue comprise a significant portion of our revenue and we intend to continue to pursue and expand our international business activities. For the three months ended March 31, 2005, international sales accounted for approximately 23% of our revenue, as compared to approximately 28% of our revenue for the same period in 2004. Political and economic conditions outside the United States could make it difficult for us to increase our international revenue or to operate abroad. International operations, including our operations in Germany, are subject to many inherent risks, including among others:

We believe that international revenue will continue to represent a significant portion of our revenue, and we intend to further expand our international operations. Our direct revenue in Europe is denominated principally in Euros, while our revenue in other international markets is in U.S. dollars. As a result, an increase in the relative value of the dollar against the Euro would lead to less income from sales denominated in Euros, unless we increase prices, which may not be possible due to competitive conditions in Europe. We could experience losses from European transactions if the relative value of the dollar were to increase in the future. We do not currently engage in any transactions as a hedge against risks of loss due to foreign currency fluctuations, although we may consider doing so in the future.

Revenue generated from products manufactured at our German facility accounted for 10% of our revenue for the three months ended March 31, 2005 and 13% of our revenue in fiscal 2004. Expenses relating to our manufacturing operations in Germany are paid in Euros; therefore, an increase in the value of the Euro relative to the dollar would increase the expenses associated with our German manufacturing operations and reduce our earnings. In addition, we may experience difficulties associated with managing our operations remotely and complying with German regulatory and legal requirements for maintaining our manufacturing operations in that country. Any of these factors may adversely affect our future international revenue and manufacturing operations and, consequently, negatively impact our business and operating results.

We may not address successfully problems encountered in connection with any future acquisition.

We expect to continue to consider opportunities to acquire or make investments in other technologies, products and businesses that could enhance our capabilities, complement our current products or expand the breadth of our markets or customer base. We have limited experience in acquiring other businesses and technologies. Potential and completed acquisitions and strategic investments involve numerous risks, including, among others:

If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our business may be disrupted and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our stockholders would be diluted.

If our customers cannot obtain third party reimbursement for their use of our products, they may be less inclined to purchase our products.

Our products are generally purchased by dental or medical professionals who have various billing practices and patient mixes. Such practices range from primarily private pay to those who rely heavily on third party payors, such as private insurance or government programs. In the United States, third party payors review and frequently challenge the prices charged for medical services. In many foreign countries, the prices for dental services are predetermined through government regulation. Payors may deny coverage and reimbursement if they determine that the procedure was not medically necessary, such as a cosmetic procedure, or that the device used in the procedure was investigational. We believe that most of the procedures being performed with our current products generally are reimbursable, with the exception of cosmetic applications, such as tooth whitening. For the portion of dentists who rely heavily on third party reimbursement, the inability to obtain reimbursement for services using our products could deter them from purchasing or using our products. We cannot predict the effect of future healthcare reforms or changes in financing for health and dental plans. Any such changes could have an adverse effect on the ability of a dental or medical professional to generate a return on investment using our current or future products. Such changes could act as disincentives for capital investments by dental and medical professionals and could have a negative impact on our business and results of operations.

We are party to securities and derivative litigation that distracts our management, is expensive to conduct and seeks a damage award against us.

We and certain of our current and former officers have been recently named as defendants in several putative shareholder class action lawsuits filed in the United States District Court for the Central District of California. The complaints purport to seek unspecified damages on behalf of an alleged class of persons who purchased our common stock between October 29, 2003 and July 16, 2004. The complaints allege that we and our officers violated federal securities laws by failing to disclose material information about the demand for our products and the fact that we would not achieve the alleged forecasted growth. The claimed misrepresentations include certain statements in our press releases and the registration statement we filed in connection with our public offering of stock in March 2004. In addition, three stockholders have filed derivative actions in the state court in California seeking recovery on behalf of BIOLASE, alleging, among other things, breach of fiduciary duties by those individual defendants and members of the our board of directors. We have not yet formally responded to any of the actions and no discovery has been conducted by any of the parties. This litigation presents a distraction to our management, is expensive to conduct, and if we are unsuccessful in defending this litigation, may result in damage awards against us that would harm our financial condition and operating results.

We currently sell our products primarily to dentists in general practice. These dentists often purchase our products with funds they secure through various financing arrangements with third party financial institutions, including credit facilities and short-term loans. If interest rates increase, these financing arrangements will be more expensive to our dental customers, which would effectively increase the price of our products to our customers and, thereby, may decrease overall demand for our products. Any reduction in the sales of our products would cause our business to suffer.

Product liability claims against us could be costly and could harm our reputation.

that our insurance will cover all liabilities resulting from such claims. In addition, there is no assurance that we will be able to obtain such insurance in the future on terms acceptable to us, or at all. Any product liability claims brought against us could harm our reputation and cause our business to suffer.

Section 382 of the Internal Revenue Code of 1986 generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. In 2003, we completed an analysis to determine the applicability of the annual limitations imposed by Section 382 caused by previous changes in our stock ownership and determined that such limitations should not be significant. Based on our analysis, we believe that, as of December 31, 2004, approximately $39.0 million of net operating loss carryforwards were available to us for federal income tax purposes. Of this amount, approximately $34.5 million is available to offset 2005 federal taxable income or the taxable income generated in future years. Additional net operating loss carryforwards will become available at the rate of approximately $1.0 million per year for the years 2005 through 2009. However, any ownership changes qualifying under Section 382 including changes resulting from or affected by our recent public offering or our stock repurchase plan may adversely affect our ability to use our remaining net operating loss carryforwards. If we lose our ability to use net operating loss carryforwards, any income we generate will be subject to tax earlier than it would be if we were able to use net operating loss carryforwards, resulting in lower profits.

Our business is capital intensive and the failure to obtain capital could require that we curtail capital expenditures.

To remain competitive, we must continue to make significant investments in the development of our products, the expansion of our sales and marketing activities and the expansion of our operating and management infrastructure as we increase sales domestically and internationally. We expect that substantial capital will be required to expand our operations and fund working capital for anticipated growth. We may need to raise additional funds through further debt or equity financings, which may affect the percentage ownership of existing holders of common stock and which may have rights, preferences or privileges senior to those of the holders of our common stock or may be issued at a discount to the market price of our common stock thereby resulting in dilution to our existing stockholders. We may not be able to raise additional capital on reasonable terms, or at all. If we cannot raise the required capital when needed, we may not be able to satisfy the demands of existing and prospective customers and may lose revenue and market share.

The following factors among others could affect our ability to obtain additional financing on favorable terms, or at all:

If we are unable to obtain sufficient capital in the future, we may have to curtail our capital expenditures. Any curtailment of our capital expenditures could result in a reduction in revenue, reduced quality of our products, increased manufacturing costs for our products, harm to our reputation, reduced manufacturing efficiencies or other harm to our business.

We have adopted anti-takeover defenses that could delay or prevent an acquisition of our company and may affect the price of our common stock. Certain provisions of our certificate of incorporation and stockholder rights plan could make it difficult for any party to acquire us, even though an acquisition might be beneficial to our stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. In December 1998, we adopted a stockholder rights plan pursuant to which one preferred stock purchase right is distributed to our stockholders for each share of our common stock held by them. In connection with the stockholder rights plan, the Board of Directors may issue up to 500,000 shares of Series B Junior Participating Cumulative Preferred Stock (which may be increased by up to 500,000 more shares out of undesignated preferred stock described in the paragraph below that is available under our certificate of incorporation). If any party acquires 15% or more of our outstanding common stock or commences a tender offer to acquire 15% or more of our outstanding stock, the holders of these rights (other than the party acquiring the 15%

position or commencing the tender offer) will be able to purchase the underlying junior participating preferred stock as a way to discourage, delay or prevent a change in control of our company. Following the acquisition of 15% or more of our stock by any person, if we are acquired by or merged with any other entity, holders of these rights (other than the party acquiring the 15% position) will be able to purchase shares of common stock of the acquiring or surviving entity as a further means to discourage, delay or prevent a change in control of our company.

Our common stock could be diluted by the conversion of outstanding convertible securities.

We have issued and will continue to issue outstanding convertible securities in the form of options and warrants as incentive compensation for services performed by our employees, directors, consultants and others. We have options to purchase 4,065,000 shares of our common stock outstanding, of which options to purchase 2,900,000 shares of common stock are exercisable. In addition, we have issued warrants to purchase an aggregate of 81,037 shares of common stock at an exercise price of $11.06 per share. If these options or warrants were exercised, it would dilute the ownership of our stock and could adversely affect our common stock’s market price.

Our financial outlook could be affected by changes in the accounting rules which govern the recognition of stock-based compensation expenses.

We measure compensation expense for our employee stock compensation plans under the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Under this method, we recognized no compensation charges related to stock compensation plans because the exercise price of all options granted under these plans was equal to the fair market value of the underlying common stock on the grant date, and therefore no stock-based employee compensation cost is recognized in the consolidated statements of operations. The Financial Accounting Standards Board has announced changes to accounting rules concerning the recognition of stock option compensation expense. Beginning in the first quarter of fiscal 2006 when these changes are expected to be implemented, we and other companies will be required to measure compensation expense using the fair value method, which will adversely affect our results of operations by increasing our compensation expenses by the additional amount of such stock option charges.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our 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 in accordance with generally accepted accounting principles. In making its assessment of internal control over financial reporting as of December 31, 2004, management used the criteria described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Management determined that material weaknesses in our internal control over financial reporting existed as of December 31, 2004, and these material weaknesses contributed to the restatement of our consolidated financial statements for the full 2002 fiscal year, the first, second, third and fourth quarters of 2003, the full 2003 fiscal year and the first, second and third fiscal quarters of 2004. These material weaknesses were discussed under Item 9A, “Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Because of these material weaknesses, management concluded that our internal control over financial reporting was not effective as of December 31, 2004 based on the criteria of the Internal Control—Integrated Framework. Further, the material weaknesses identified resulted in an adverse opinion by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting.

If we are unable to substantially improve our internal controls, our ability to report our financial results on a timely and accurate basis will continue to be adversely affected, which could have a material adverse affect on our ability to operate our business. If we fail to adequately remediate our material weaknesses by the end of our fiscal year, our management will be required to conclude that our internal control over financial reporting is ineffective. In addition, if we fail to remediate our significant deficiencies in our fiscal year, our management likely will be required to conclude that those significant deficiencies have become material weaknesses. Please see Item 9A, “Controls and Procedures” in our Annual Report on Form 10-K and Item 4 in this Form 10-Q for more information regarding the status of our remedial measures with respect to the deficiencies in our internal controls described in the Management’s Report On Internal Control Over Financial Reporting. The costs of remediating such deficiencies in our internal controls will adversely affect our results of operations. In addition, even after the remedial measures discussed in Item 9A, “Controls and Procedures,” and Item 4 in this Form 10-Q are fully implemented, our internal controls will not prevent all potential error and fraud, because any control system, no matter how well designed, can only provide reasonable and not absolute assurance that the objectives of the control system will be achieved.

Our failure to comply with certain conditions required for our common stock to be listed on The NASDAQ National Market could result in the delisting of our common stock from The NASDAQ National Market.

As a result of our failure to timely file our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and our Quarterly Reports on Forms 10-Q for the fiscal quarters ended March 31, 2005 and June 30, 2005, and certain required restatements of our financial statements for prior periods, we were not in full compliance with NASDAQ Marketplace Rule 4310(c)(14), which requires us to make, on a timely basis, all filings with the SEC required by the Securities Exchange Act of 1934, as amended. We are required to comply with NASDAQ Marketplace Rule 4310(c)(14) as a condition for our common stock to continue to be listed on The NASDAQ National Market (the “NASDAQ Market”).

In April 2005, we received a notification from NASDAQ with respect to the late Form 10-K, and in July 2005, the NASDAQ granted us an extension of time until August 1, 2005 in which to file our Form 10-K, the restatements with respect to our historical financial statements, this Form 10-Q for our first quarter ended March 31, 2005 and to otherwise meet all necessary listing standards of the NASDAQ Market. On July 19, 2005, we filed (i) our Form 10-K for the fiscal year ended December 31, 2004 which included consolidated financial statements for the year ended December 31, 2004 and restated consolidated financial statements as of December 31, 2003 and the two years then ended and (ii) Forms 10-Q/A for the fiscal quarters ended March 31, 2004, June 30, 2004 and September 30, 2004 which included restated financial statements for the prior comparative periods as well. In July 2005, we requested an additional extension of time from NASDAQ in which to file this Form 10-Q and our Form 10-Q for the fiscal quarter ended June 30, 2005. In August 2005, we received additional notices from NASDAQ regarding the late filing of the second quarter Form 10-Q and granting us the requested extension of time until September 30, 2005 in which to file both this Form 10-Q and our second quarter Form 10-Q, and to otherwise meet all necessary listing standards.

We cannot give any assurances as to what actions NASDAQ may take, but such actions could include delisting our shares from the NASDAQ Market. In addition, if we are unable to comply with any conditions for continued listing required by NASDAQ, then our shares of common stock are subject to immediate delisting from the NASDAQ Market. If our shares of common stock are delisted from the NASDAQ Market, they may not be eligible to trade on any national securities exchange or the over-the-counter market. If our common stock is no longer traded through a market system, it may not be liquid, which could affect its price. In addition, we may be unable to obtain future equity financing, or use our common stock as consideration for mergers or other business combinations.

Changes in government regulation or the inability to obtain or maintain necessary government approvals could harm our business.

processes and failure to receive clearance for the modification of existing products, or significant delays in obtaining such approvals, could prevent us from developing, manufacturing and marketing products and services necessary for us to remain competitive. In addition, unanticipated changes in existing regulatory requirements or the adoption of new requirements could impose significant costs and burdens on us, which could increase our operating expenses, reduce our revenue and profits, and result in operating losses.

If our customers cannot obtain third party reimbursement for their use of our products, they may be less inclined to purchase our products.

Our products are generally purchased by dental or medical professionals who have various billing practices and patient mixes. Such practices range from primarily private pay to those who rely heavily on third party payors, such as private insurance or government programs. In the United States, third party payors review and frequently challenge the prices charged for medical services. In many foreign countries, the prices for dental services are predetermined through government regulation. Payors may deny coverage and reimbursement if they determine that the procedure was not medically necessary, such as a cosmetic procedure, or that the device used in the procedure was investigational. Payors may also approve reimbursement for a medical procedure but reduce the amount of reimbursement drastically. We believe that most of the procedures being performed with our current products generally are reimbursable, with the exception of cosmetic applications such as tooth whitening. For the portion of dentists who rely heavily on third party reimbursement, a reduction in reimbursement levels, the inability to obtain reimbursement for services using our products could deter them from purchasing or using our products. We cannot predict the effect of future healthcare reforms or changes in financing for health and dental plans. Any such changes could have an adverse effect on the ability of a dental or medical professional to generate a return on investment using our current or future products. Such changes could act as disincentives for capital investments by dental and medical professionals and could have a negative impact on our business, financial condition and results of operations.

~~We do not engage in transactions to offset currency fluctuations, and we are at risk for changes in the value of the dollar relative to the euro.~~ Our ~~sales~~revenue in Europe ~~are~~is denominated principally in ~~euros,~~Euros, and our ~~sales~~revenue in other international markets ~~are~~is denominated in dollars. As a result, an increase in the relative value of the dollar to the ~~euro~~Euro would lead to less income from ~~sales~~revenue denominated in ~~euros,~~Euros, unless we increase prices, which may not be possible due to competitive conditions in Europe. Additionally, since expenses relating to our manufacturing operations in Germany are paid in ~~euros,~~Euros, an increase in the value of the ~~euro~~Euro relative to the dollar would increase the expenses associated with our German manufacturing operations and ~~adversely affect~~reduce our ~~financial condition~~earnings.

We currently have a line of credit in the amount of $10.0 million at the variable interest rate equivalent to the Prime rate for advances less than $500,000 and ~~results~~with less than two business days notice, and at LIBOR plus 2.25% for advances of ~~operations.~~$500,000 or more and with two business days notice. This line of credit currently expires on September 30, 2006. At March 31, 2005, we have an outstanding debt balance of $1.9 million.

Our primary objective in managing our cash balances has been preservation of principal and maintenance of liquidity to meet our operating needs. Most of our excess cash balances are invested in a money market account and U.S. treasury securities in which there is minimal interest rate risk.

~~ITEM 4. CONTROLS AND PROCEDURES.~~Changes in Internal Control Over Financial Reporting

~~(a) Evaluation~~Due to the delayed filing of our Form 10-K for the fiscal year ended December 31, 2004 and Forms 10-Q/A for the three quarters therein, and the quarter ended March 31, 2005, we have not implemented any additional Remedial Measures described in the Management’s Report on Internal Control Over Financial Reporting contained in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Management intends to implement these measures during the course of 2005 and 2006. We had indicated in our Form 10-K for the fiscal year ended December 31, 2004 that if we failed to adequately remediate our material weaknesses by the end of our fiscal year, our management will be required to conclude that our internal control over financial reporting is ineffective. We also indicated that if we failed to remediate our significant deficiencies in our fiscal year, our management likely will be required to conclude that those significant deficiencies have become material weaknesses. We have now concluded that for the quarter ended March 31, 2005, some significant deficiencies involving the accuracy of our perpetual inventory system have aggregated into a material weakness resulting in adjustments to our consolidated financial statements.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and ~~procedures. We maintain “disclosure controls and~~ procedures,” as such term is defined in

Rule 13a-15(e) promulgated under the ~~Securities~~ Exchange Act, as of ~~1934 (the “Exchange Act”),~~March 31, 2005. In light of the issues referenced in the Management’s Report on Internal Control Over Financial Reporting, contained in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, and the new material weakness noted above for the quarter ended March 31, 2005, our Chief Executive Officer and our Chief Financial Officer concluded that, ~~are designed to ensure~~as of the end of the period covered by this report, our disclosure controls and procedures were not effective at ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in ~~Securities and Exchange Commission~~the SEC’s rules and forms ~~and~~or (ii) that such information is accumulated and communicated to our management, including our ~~Chief Executive Officer~~principal executive and ~~Chief Financial Officer,~~principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure. ~~In designing~~However, our Chief Executive Officer, as our principal executive officer, and ~~evaluating~~our Chief Financial Officer, as our principal financial officer, believe that, once the Remedial Measures described in the aforementioned Management’s Report on Internal Control Over Financial Reporting are implemented, our internal controls will be effective to address the internal control deficiencies described in Management’s Report on Internal Control over Financial Reporting and allow us to conclude that our disclosure controls and procedures ~~management recognized that disclosure controls~~are effective at a reasonable level of assurance at future filing dates. In addition, in light of the material weaknesses previously identified, we performed additional analysis and other post-closing procedures ~~no matter how well conceived and operated, can provide only reasonable, not absolute, assurance~~in connection with the preparation of our consolidated financial statements in accordance with generally accepted accounting principles. Accordingly, we believe that the ~~objectives of the disclosure controls and procedures are met. Additionally,~~financial statements included in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

~~Based on their evaluation as of the end of the period covered by~~ this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the quarterly period ended September 30, 2004, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period for which this Quarterly Report on Form 10-Q was being prepared.periods presented.

(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation described in Item 4(a) above that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We are currently involved in two related patent lawsuits with Diodem, LLC, a California limited liability company. On May 2, 2003, we initiated a civil action in the U.S. District Court for the Central District of California against Diodem. In this lawsuit we are seeking a judicial declaration against Diodem that technology we use in our laser systems does not infringe four patents allegedly owned by Diodem. Diodem was founded by Collete Cozean, the former chief executive officer of Premier Laser Systems, Inc., a medical laser company which filed for bankruptcy protection in March 2000. Diodem claims to have acquired the four patents at issue in the case from Premier. In 2000, we initiated a patent infringement lawsuit against Premier Laser seeking damages and to prevent Premier from selling competing dental lasers on the grounds that they infringed on certain of our patents. The lawsuit was stayed by the bankruptcy court after Premier filed for bankruptcy.

In response to our lawsuit against Diodem, on May 5, 2003, Diodem added us as a party to an infringement lawsuit it had previously filed in the U.S. District Court for the Central District of California. The other parties to this lawsuit are American Medical Technologies, Inc. (“AMT”), Lumenis and its subsidiary OpusDent, Ltd., and Hoya Photonics and its subsidiary Hoya ConBio. OpusDent and Hoya ConBio manufacture and sell dental lasers pursuant to patents originally licensed to them by AMT. We acquired the licensed patents and related license agreements in our acquisition of the American Dental Laser product line from AMT. Diodem’s lawsuit against us alleges that our Waterlase product infringes upon the four patents that Diodem allegedly acquired from Premier. Diodem also alleges that the products sold by OpusDent and Hoya ConBio infringe upon the patents. Diodem’s infringement suit seeks treble damages, a preliminary and permanent injunction from further alleged infringement, attorneys’ fees and other unspecified damages. If Diodem successfully asserts an infringement claim against us, our operations may be significantly impacted, especially to the extent that it affects our right to use the technology incorporated in our Waterlase system, which accounted for approximately 81% of our revenue for the nine months ended September 30,August 2004, ~~and approximately 83% of our revenue of the year ended December 31, 2003. If Diodem successfully asserts an infringement claim against Hoya ConBio and OpusDent, it could reduce or eliminate royalties~~ we might receive under licenses to those products, which have totaled approximately $627,000 since the acquisition of the American Dental Laser assets in May 2003. The litigation is in the late pre-trial preparation. No trial date has been set. A trial date in 2005 is likely. This combined lawsuit may proceed for an extended period of time. Although the outcome of these actions cannot be determined with any certainty, we believe our technology and products do not infringe any valid patent rights owned by Diodem, and we intend to continue to vigorously defend against Diodem’s infringement action and pursue our declaratory relief action against Diodem. No amounts have been recorded in the consolidated financial statements relating to the outcome of this matter.

We and certain of our officers ~~have been recently~~were named as defendants in several putative shareholder class action lawsuits filed in the United States District Court for the Central District of California. The complaints purport to seek unspecified damages on behalf of an alleged class of persons who purchased our common stock between October 29, 2003 and July 16, 2004. The complaints allege that we and our officers violated federal securities ~~law~~laws by failing to disclose material information about the demand for our products and the fact that the Company would not achieve the alleged forecasted growth. The claimed misrepresentations include certain statements in our press releases and the registration statement we filed in connection with our public offering of stock in March 2004. In addition, three stockholders have filed derivative actions in the state court ofin California seeking recovery on behalf of ~~Biolase,~~BIOLASE, alleging, among other things, breach of fiduciary duties by those individual defendants and by the members of ~~the Biolase board~~our Board of ~~directors.~~Directors.

We have not yet formally responded to any of ~~these shareholder~~the actions and no discovery has been conducted by any of the parties. However, based on the facts presently known, our management believes we have meritorious defenses to these actions and intend to vigorously defend them. As of March 31, 2005, no amounts have been recorded in the consolidated financial statements for these matters since management believes that it is not probable we have incurred a loss contingency.

~~We are not currently subject to any other material pending or threatened legal proceedings.~~

~~ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES~~

~~Item 703. Purchases of Equity Securities by~~During the ~~Issuer and Affiliated Purchasers.~~

~~In the third~~ quarter ~~of 2004, the Board of Directors authorized a repurchase program for the purchase of up to 2.0 million~~ended March 31, 2005, we issued 361,664 shares of our common ~~stock.~~stock (valued at approximately $3.5 million) and a five-year warrant (valued at approximately $443,000) exercisable into 81,037 shares of common stock at an exercise price of $11.06 per share, in addition to the $3.0 million cash payment, for the legal settlement with Diodem. In addition, if certain criteria specified in the agreement are satisfied before July 2006, 45,208 additional shares we have placed in escrow may be released to Diodem and we will incur an expense equal to the fair market value of those shares at the time of their release. The common stock issued, the escrow shares and the warrant shares have certain registration rights. The total consideration was estimated to have a value of approximately $7.0 million, excluding the value of the shares held in escrow, which are contingent in nature, but including the value of the patents acquired in January 2005. As of ~~September 30,~~December 31, 2004, we ~~repurchased 1.5~~accrued approximately $6.4 million ~~shares in open-market transactions. Below is a summary~~for the settlement of the ~~repurchase activity:~~existing litigation. In January 2005, we recorded an intangible asset of $530,000 representing the estimated fair value of the intellectual property acquired. As a result of the acquisition, Diodem immediately withdrew its patent infringement claims against us and the case was formally dismissed on May 31, 2005. We did not pay and have no obligation to pay any royalties to Diodem on past or future sales of our products, but we agreed to pay additional consideration if any of the acquired patents or certain other patents or certain other patents held by us are licensed to a third party. In order to secure performance by us of these financial obligations, the parties entered into an intellectual property security agreement, pursuant to which, subject to the rights of existing creditors and the rights of any future creditors to the extent provided in the agreement, we granted Diodem a security interest in all of their right, title and interest in the royalty patents. In addition, we will be required, by January, 2006, to provide Diodem a ten-year letter of credit from a bank in the amount of $500,000 as additional security.

~~ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.~~planned activities in the field of presbyopia will not infringe the claims of a patent held by Refocus and/or that the claims are invalid. These claims were dismissed by the court in July 2005 without prejudice on the basis that we do not have a product that has been commercialized and, therefore, Refocus’ alleged infringement claims are not ripe. As of March 31, 2005, no amounts have been recorded in the accompanying consolidated financial statements for this matter since management believes that it is not probable we have incurred a loss contingency.

From time to time, we are involved in other legal proceedings incidental to our business, but at this time we are not party to any other litigation that is material to our business.

Pursuant to the requirements of the Securities Exchange Act of 1934, ~~as amended,~~ the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


~~Dated: November 9, 2004~~	BIOLASE TECHNOLOGY, INC., a Delaware corporation

By:	/s/ JOHN W. HOHENER
	~~By:~~	~~/s/ ROBERT E. GRANT~~John W. Hohener
		~~Robert E. Grant~~ ~~Chief~~ Executive ~~Officer~~Vice President and ~~Interim~~ Chief Financial Officer ~~(Principal Financial and Accounting Officer)~~


		Page
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Consolidated Balance Sheets as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003~~2004	3

	Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2005 and March 31, 2004 ~~and September 30, 2003~~	4

	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2005 and March 31, 2004 ~~and September 30, 2003~~	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1417

	Risk Factors	2024

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2834

Item 4.	Controls and Procedures	2834

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3035

Item 2.6.	~~Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities~~Exhibits	3037

~~Item 6.~~ Signatures		~~Exhibits and Reports on Form 8-K~~	31

	~~Signatures~~	3238


	Nine Months Ended September 30,
	2004			2003
Cash Flows From Operating Activities:
Net income	$	155,000		$	4,760,000
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		450,000			286,000
Gain on disposal of assets		(47,000	)		(51,000	)
Gain on foreign exchange contract		—			(22,000	)
Provision for uncollectible accounts		1,000			(138,000	)
Provision for inventory obsolescence		108,000			216,000
Deferred income tax		95,000			—
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		(535,000	)		(2,281,000	)
Inventory		(3,488,000	)		(835,000	)
Prepaid expenses and other assets		906,000			689,000
Accounts payable and accrued liabilities		588,000			894,000
Deferred revenue		887,000			(2,671,000	)

Net cash (used in) provided by operating activities		(880,000	)		847,000

Cash Flows From Investing Activities:
Purchase of investments		(32,181,000	)		—
Additions to property, plant and equipment		(492,000	)		(286,000	)
Business acquisition		(70,000	)		(1,825,000	)

Net cash used in investing activities		(32,743,000	)		(2,111,000	)

Cash Flows From Financing Activities:
Borrowings on line of credit		—			1,792,000
Payment on line of credit		(1,792,000	)		(1,792,000	)
Payments on debt		(888,000	)		—
Proceeds from issuance of common stock, net of expenses		41,868,000			—
Proceeds from exercise of stock options and warrants		977,000			3,513,000
Payment of dividends		(235,000	)		—
Repurchase of common stock		(13,435,000	)		—

Net cash provided by financing activities		26,495,000			3,513,000
Effect of exchange rate changes on cash		10,000			(66,000	)

Net (decrease) increase in cash and cash equivalents		(7,118,000	)		2,183,000
Cash and cash equivalents at beginning of period		11,111,000			3,940,000

Cash and cash equivalents at end of period	$	3,993,000		$	6,123,000

SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the period for interest	$	32,000		$	40,000

Cash paid during the period for taxes	$	59,000		$	2,000

Noncash financing activities:
Business acquisition, net assets acquired	$	—		$	5,846,000


	THREE MONTHS ENDED MARCH 31,
	2005			2004
Cash flows from operating activities:
Net (loss) income	$	(4,274,000	)	$	616,000
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		244,000			146,000
Loss on sale of assets		16,000			—
Gain on disposal of assets		(16,000	)		(16,000	)
Provision for bad debts		251,000			17,000
Provision for inventory excess and obsolescence		417,000			29,000
Income tax provision		72,000			407,000
Changes in assets and liabilities:
Accounts receivable		(3,167,000	)		(451,000	)
Inventory		(1,073,000	)		(259,000	)
Prepaid expenses and other assets		285,000			1,134,000
Accounts payable and accrued expenses		213,000			(2,140,000	)
Accrued legal settlement		(3,000,000	)		—
Deferred revenue		67,000			36,000

Net cash used in operating activities		(9,965,000	)		(481,000	)

Cash flows from investing activities:
Sale of marketable securities		25,339,000			—
Purchase of marketable securities		(20,122,000	)		—
Additions to property, plant and equipment		(239,000	)		(134,000	)
Business acquisition		—			(70,000	)

Net cash provided by (used in) investing activities		4,978,000			(204,000	)

Cash flows from financing activities:
Borrowings on line of credit		3,700,000			—
Payment on line of credit		(1,850,000	)		(1,792,000	)
Payments on insurance notes		—			(888,000	)
Proceeds from issuance of common stock, net		—			41,877,000
Proceeds from exercise of stock options and warrants		172,000			448,000
Payment of cash dividend		(229,000	)		—

Net cash provided by financing activities		1,793,000			39,645,000

Effect of exchange rate changes on cash		—			24,000

(Decrease) increase in cash and cash equivalents		(3,194,000	)		38,984,000
Cash and cash equivalents at beginning of period		6,140,000			11,111,000

Cash and cash equivalents at end of period	$	2,946,000		$	50,095,000

Supplemental cash flow disclosure:
Cash paid during the period for interest	$	18,000		$	20,000

Cash paid during the period for taxes	$	—		$	45,000

Non-cash financing activities:
Common stock issued for legal settlement	$	3,446,000		$	—

Common stock issued for Diodem patents	$	530,000		$	—


	September 30, 2004			December 31, 2003
Total cost	$	3,044,000		$	2,576,000
Accumulated depreciation		(875,000	)		(603,000	)

Net property, plant and equipment	$	2,169,000		$	1,973,000


	March 31, 2005			December 31, 2004
Land	$	309,000		$	321,000
Building		848,000			883,000
Leasehold improvements		212,000			209,000
Equipment and computers		2,037,000			1,897,000
Furniture and fixtures		818,000			761,000

		4,224,000			4,071,000
Accumulated depreciation		(1,189,000	)		(1,046,000	)

Property, plant and equipment, net	$	3,035,000		$	3,025,000


	As of September 30, 2004							As of December 31, 2003
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Patents (10 years)	$	1,284,000	$	(248,000	)	$	1,036,000	$	1,284,000	$	(150,000	)	$	1,134,000
Trademarks (6 years)		69,000		(68,000	)		1,000		69,000		(60,000	)		9,000
Trade names (Indefinite life)		979,000		—			979,000		979,000		—			979,000
Other (4 to 6 years)		593,000		(140,000	)		453,000		523,000		(58,000	)		465,000

Total	$	2,925,000	$	(456,000	)	$	2,469,000	$	2,855,000	$	(268,000	)	$	2,587,000

Goodwill (Indefinite life)	$	2,926,000	$	—		$	2,926,000	$	2,926,000	$	—		$	2,926,000


Cash	$	1,825,000
Stock consideration (307,500 shares at $12.38 per share)		3,806,000
Acquisition costs		215,000

Total	$	5,846,000


Tangible assets acquired	$	246,000
Identifiable intangible assets acquired		2,674,000
Goodwill		2,926,000

Total	$	5,846,000


	Nine Months Ended September 30, 2003
Pro forma:
Revenue	$	33,592,000
Net income	$	4,489,000
Net income per share:
Basic	$	0.22
Diluted	$	0.20


	Three Months Ended					Nine Months Ended
	September 30, 2004			September 30, 2003		September 30, 2004			September 30, 2003
Net income (loss)	$	(1,233,000	)	$	2,567,000	$	155,000		$	4,760,000
Other comprehensive income (loss) items:
Unrealized gain (loss) on marketable securities		(6,000	)		—		(6,000	)		—
Foreign currency translation adjustments		(119,000	)		4,000		(24,000	)		(73,000	)

Comprehensive income (loss)	$	(1,358,000	)	$	2,571,000	$	125,000		$	4,687,000


Term		5 years
Volatility		67	%
Annual dividend per share	$	0.00
Risk-free interest rate		3.73	%


	Three Months Ended March 31,
	2005		2004
United States	$	12,882,000	$	10,477,000
Europe, Middle East, Africa		1,443,000		1,802,000
Canada, Asia, Latin America and Pacific Rim		2,509,000		2,251,000

	$	16,834,000	$	14,530,000


	Three Months Ended September 30, 2004			Three Months Ended September 30, 2003		Increase (Decrease)			Percent Increase (Decrease)		Percent of Sales
	Three Months Ended September 30, 2004			Three Months Ended September 30, 2003		Increase (Decrease)			Percent Increase (Decrease)		Three Months Ended September 30 2004		Three Months Ended September 30, 2003
Revenue	$	12,038		$	13,453	$	(1,415	)	(10.5	)%	100.0	%	100.0	%
Cost of sales		4,979			5,024		(45	)	(0.9	)	41.4		37.3

Gross profit		7,059			8,429		(1,370	)	(16.3	)	58.6		62.7

Operating expenses:
Sales and marketing		5,931			3,729		2,202		59.1		49.3		27.7
General and administrative		2,387			1,527		860		56.3		19.8		11.4
Engineering and development		1,045			629		416		66.1		8.7		4.7

Total operating expenses		9,363			5,885		3,478		59.1		77.8		43.8

Income (loss) from operations		(2,304	)		2,544		(4,848	)	(190.6	)	(19.2	)	18.9
Non-operating income		272			23		249		1,082.6		2.3		0.2

Income (loss) before tax		(2,032	)		2,567		(4,599	)	(179.2	)	(16.9	)	19.1
Benefit for income tax		799			—		799		100.0		6.6		—

Net income (loss)	$	(1,233	)	$	2,567	$	(3,800	)	(148.0	)	(10.3	)	19.1

	Nine Months Ended September 30, 2004			Nine Months Ended September 30, 2003		Increase (Decrease)			Percent Increase (Decrease)		Percent of Sales
	Nine Months Ended September 30, 2004			Nine Months Ended September 30, 2003		Increase (Decrease)			Percent Increase (Decrease)		Nine Months Ended September 30, 2004		Nine Months Ended September 30, 2003
Revenues	$	41,426		$	33,042	$	8,384		25.4	%	100.0	%	100.0	%
Cost of sales		15,700			12,386		3,314		26.8		37.9		37.5

Gross profit		25,726			20,656		5,070		24.5		62.1		62.5

Operating expenses:
Sales and marketing		17,534			10,962		6,572		60.0		42.3		33.2
General and administrative		5,838			3,407		2,431		71.4		14.1		10.3
Engineering and development		2,523			1,662		861		51.8		6.1		5.0

Total operating expenses		25,895			16,031		9,864		61.5		62.5		48.5

Income (loss) from operations		(169	)		4,625		(4,794	)	(103.7	)	(0.4	)	14.0
Non-operating income		423			135		288		213.3		1.0		0.4

Income before tax		254			4,760		(4,506	)	(94.7	)	0.6		14.4
Provision for income tax		(99	)		—		(99	)	100.0		(0.2	)	—

Net income	$	155		$	4,760	$	(4,605	)	(96.7	)	0.4		14.4


										Percent of Revenue
	Three Months Ended March 31,						Increase (Decrease)			Three Months Ended March 31,
	2005			2004			Increase (Decrease)			2005		2004
Net revenue	$	16,834		$	14,530		$	2,304		100.0	%	100.0	%
Cost of revenue		7,465			5,686			1,779		44.3		39.1

Gross profit		9,369			8,844			525		55.7		60.9

Other income, net		16			16			—		0.1		0.1
Operating expenses:
Sales and marketing		6,126			5,336			790		36.4		36.7
General and administrative		4,486			1,667			2,819		26. 6		11.5
Engineering and development		3,038			772			2,266		18.1		5.3

Total operating expenses		13,650			7,775			5,875		81.1		53.5

(Loss) income from operations		(4,265	)		1,085			(5,350	)	(25.3	)	7.5
Non-operating income (loss), net		63			(61	)		124		0.3		(0.4	)

(Loss) income before tax		(4,202	)		1,024			(5,226	)	(25.0	)	7.1
Provision for income taxes		(72	)		(408	)		336		(0.4	)	(2.8	)

Net (loss) income	$	(4,274	)	$	616		$	(4,890	)	(25.4	)	4.3


	September 30, 2004		Three Months Ending December 31, 2004		Years Ending December 31,
	September 30, 2004		Three Months Ending December 31, 2004		2005		2006
Operating leases	$	617,000	$	106,000	$	421,000	$	90,000


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 – 31, 2004	860,900	$	9.08	860,900	1,139,100
August 1 – 31, 2004	616,100	$	8.41	616,100	523,000
September 1 – 30, 2004	48,000	$	9.03	48,000	475,000


	Outstanding at March 31, 2005		Nine Months Ending December 31, 2005		Years Ending December 31,
	Outstanding at March 31, 2005		Nine Months Ending December 31, 2005		2006		2007		2008		2009		2010
Operating leases and commitments	$	840,000	$	457,000	$	240,000	$	62,000	$	31,000	$	25,000	$	25,000


Exhibit No.	Description
4.1	Warrant to Purchase 81,037 shares of Common Stock of Biolase Technology, Inc. issued to Diodem, LLC dated January 24, 2005.

~~(a)~~4.2	~~Exhibits:~~Registration Rights Agreement between Biolase Technology, Inc. and Diodem, LLC dated January 24, 2005.

10.1†	Definitive Asset Purchase Agreement dated January 24, 2005 by and among Diodem, LLC, BL Acquisition II, Inc. and Biolase Technology, Inc. (filed January 28, 2005 with registrant’s Current Report on Form 8-K and incorporated herein by reference).

10.2†	License Agreement between SurgiLight, Inc. and Biolase Technology, Inc. dated February 3, 2005 (filed March 18, 2005 with registrant’s Current Report on Form 8-K and incorporated herein by reference).

31.1	Certification of Robert E. Grant ~~Pursuant~~pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

31.2	Certification of John W. Hohener pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

32.1		~~32.1~~ Certification of Robert E. Grant ~~Pursuant~~pursuant to 18 U.S.C. Section 1350 as ~~Adopted Pursuant~~adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~(b)~~32.2	~~Reports on Form 8-K:~~	~~(1) On July 21, 2004, the registrant furnished a current report on Form 8-K~~Certification of John W. Hohener pursuant to ~~report matters under Item 7 and Item 12~~18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the ~~report in relation~~Sarbanes-Oxley Act of 2002.

†	Confidential treatment was granted for certain confidential portions of this exhibit pursuant to ~~a press release issued by~~Rule 24b-2 under the ~~registrant on July 16, 2004.~~

		~~(2) On July 21, 2004,~~Securities Exchange Act of 1934. In accordance with Rule 24b-2, these confidential portions were omitted from this exhibit and filed separately with the ~~registrant furnished a current report on Form 8-K to report matters under Item 5~~Securities and ~~Item 7 of the report in relation to a press release issued by the registrant on July 19, 2004.~~

		(3) On July 30, 2004, the registrant furnished a current report on Form 8-K to report matters under Item 5 and Item 7 of the report in relation to two press releases issued by the registrant on July 27, 2004.

		(4) On July 30, 2004, the registrant furnished a current report on Form 8-K to report matters under Item 7 and Item 12 of the report in relation to a press release issued by the registrant on July 27, 2004.

		(5) On August 11, 2004, the registrant furnished a current report on Form 8-K to report matters under Item 5 of the report in relation to the resignation of a member of the Board of Directors of the registrant effective July 31, 2004.

		(6) On August 11, 2004, the registrant furnished a current report on Form 8-K to report matters under Item 5 and Item 7 of the report in relation to two press releases issued by the registrant on August 9, 2004.

		(7) On October 7, 2004, the registrant furnished a current report on Form 8-K to report matters under Item 2.02 and Item 9.01 of the report in relation to a press release issued by the registrant on October 7, 2004.

		(8) On October 27, 2004, the registrant furnished a current report on Form 8-K to report matters under Item 2.02 and Item 9.01 of the report in relation to a press release issued by the registrant on October 27, 2004.

		(9) On October 28, 2004, the registrant filed a current report on Form 8-K to report matters under Item 1.01, Item 5.02 and Item 9.01 of the report in relation to a press release issued by the registrant on October 27, 2004.Exchange Commission.