10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period of _________ to _________

Commission file number 1-11388

PLC Systems Inc.

(Exact name of registrant as specified in its charter)

Yukon Territory, Canada	04-3153858
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
10 Forge Park, Franklin, Massachusetts	02038
(Address of principal executive offices)	(Zip Code)

(508) 541-8800
(Registrant’s telephone number, including area code)

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

		Name of Each Exchange
	Title of Each Class		on which Registered
Common stock, no par value		American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  oNo  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  oNo  x

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  xNo  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

Large accelerated filer  oAccelerated filer  oNon-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  oNo  x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sale price for such stock on June 30, 2005, was $11,319,173. As of March 16, 2006, 30,079,730 shares of common stock, no par value per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement, which will be issued in connection with the 2006 Annual Meeting of Shareholders, are incorporated by reference in Part III of this annual report on Form 10-K.

Forward-Looking Statements

This annual report on Form 10-K (including certain information incorporated herein by reference) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements containing terms such as “believes”, “plans”, “expects”, “anticipates”, “intends”, “estimates” and similar expressions contain uncertainty and are forward-looking statements. Forward-looking statements are based on current plans and expectations and involve known and unknown important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Such important factors and uncertainties include, but are not limited to the risk factors set forth in Item 1A.

PART I

Item 1. Business

Overview

We are a medical device company specializing in innovative technologies for the cardiac and vascular markets. We currently manufacture two lasers that are used in the treatment of cardiovascular disease. We pioneered the CO2 Heart Laser System (The Heart Laser System) that cardiac surgeons use to perform carbon dioxide (CO2) transmyocardial revascularization, or TMR, to alleviate symptoms of severe angina. In addition, we manufacture the Optiwave 980 laser (Optiwave 980) under a supply agreement with Edwards Lifesciences LLC (Edwards). Following commercial release, the Optiwave 980 is expected to be utilized by surgeons to ablate cardiac tissue as a means to treat certain heart arrhythmias.

Edwards is our exclusive distributor for TMR products in the United States and our largest customer, accounting for approximately 89% and 88% of our total sales in 2005 and 2004, respectively. We expect this sales trend to continue for the near future.

Edwards is also our largest shareholder, owning approximately 18% of our outstanding common stock as of December 31, 2005, and has a representative on our Board of Directors.

Recent Developments

In February 2004, we signed an agreement with Edwards to assume development and manufacturing of the Optiwave 980 and its related system disposables (together the laser and related system disposables are hereinafter referred to together as the Optiwave 980 System).

In March 2006 we and Edwards terminated this agreement and entered into a new modified supply agreement such that we now will only manufacture the Optiwave 980 for Edwards and Edwards will assume all development and manufacturing responsibilities for the Optiwave 980 system disposables. We received a cash payment of $1,500,000 in consideration for selling our Optiwave 980 system related disposable manufacturing and development rights to Edwards. The Company will continue to be the exclusive manufacturer of the current generation of Optiwave 980 for Edwards and will have certain rights of first refusal related to the development and manufacture of the next generation laser.

Separately, Edwards will pay us a royalty on all future Optiwave 980 system related disposable sales, until such time that cumulative royalty payments from Edwards reach $1,700,000.

The CO2 Heart Laser System

TMR is performed by a cardiovascular surgeon, who uses a laser to create channels through the myocardium of the heart in an attempt to restore perfusion to areas of the heart not being reached by diseased or clogged arteries. This technique is used for relief of symptoms of severe angina in patients with ischemic heart disease not amenable to direct coronary revascularization interventions, such as angioplasty, stenting or coronary artery bypass grafting (bypass surgery). In addition to providing new direct pathways for blood to reach the ischemic myocardium, the creation of TMR channels is also believed to promote angiogenesis, the development of new blood vessels.

In August 1998 we received approval from the Food and Drug Administration, or FDA, to market our first generation CO2 Heart Laser, the HL1, throughout the United States. We were the first company to receive FDA approval to commercialize a product to perform TMR. In January 2001 we received approval from the FDA to market our smaller and lighter second generation Heart Laser, the HL2.

Each TMR procedure requires a sterile, single use TMR kit containing assorted TMR handpieces, drapes and other disposable items. The HL1 and HL2 lasers each require a TMR kit as part of the system.

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The same TMR kit may be used with either the HL1 or HL2 laser. The combination of either an HL1 or an HL2 with a TMR kit is referred to throughout this annual report as the Heart Laser System.

We manufacture the Heart Laser Systems at our facility in Franklin, Massachusetts.

Growth Strategy

Throughout 2005 we focused on broadening and diversifying our product portfolio beyond our TMR product line by (1) continuing to improve, manufacture and sell the Optiwave 980 to Edwards and (2) advancing our program progress on another innovative medical device that is still currently under development. Our goal is to continue to seek out creative solutions for unmet clinical needs within the cardiac and vascular related markets that possess substantial revenue growth prospects.

Cardiovascular Disease and Current Therapies

According to the 2006 Heart and Stroke Statistical Update, or 2006 HSSU, which was published by the American Heart Association, an estimated 71.3 million Americans suffered from one or more types of cardiovascular disease in 2003, with an estimated 13.2 million suffering from coronary heart disease, 6.5 million suffering from angina pectoris (chest pain) and 2.2 million suffering from atrial fibrillation.

Cardiovascular disease is the leading cause of death in the U.S., resulting in approximately 37% of all 2,440,000 deaths in 2003 or 1 of every 2.7 deaths in the U.S. The American Heart Association estimates that the direct and indirect costs of cardiovascular disease in the year 2006 will be approximately $403.1 billion.

Angina—Current Treatments

Angina is the medical term used to describe the chest pain or discomfort that an individual can experience when the heart does not receive an adequate supply of oxygen rich blood. This can occur when the arteries supplying blood flow to the heart muscle become partially blocked or narrowed by the accumulation of fatty deposits known as plaque. This condition where plaque progressively builds up in the interior walls of the arteries, resulting in reduced blood flow to the myocardium, ischemia and angina, is known as coronary atherosclerosis. Atherosclerosis is the principal form of cardiovascular disease and the primary cause of heart attacks.  Traditional treatment of atherosclerosis as a means to improve blood flow to the heart includes drug therapy, angioplasty, stenting and bypass surgery.

Drug therapy alleviates some of the symptoms of atherosclerosis but is often ineffective in serious cases. Angioplasty is a less invasive treatment for arteriosclerosis than bypass surgery. The most common form of angioplasty involves inserting a catheter with a balloon at the tip into a diseased artery. By inflating the balloon at the site of blockage, the arterial plaque can be pressed against the arterial walls and reshaped, resulting in increased blood flow and decreased angina symptoms. According to the 2006 HSSU, an estimated 1,244,000 inpatient angioplasty procedures were performed in the U.S. in 2003.

Metallic stents were developed to help prevent abrupt closures that sometimes occur after angioplasty. These stents are inserted into the artery after balloon angioplasty to hold the expanded plaque in place. Because it is less traumatic and less costly, stenting procedures are preferred over bypass surgery when the blockages are not complicated and involve few coronary arteries. While offering certain benefits compared to bypass surgery, some studies suggest restenosis, or the reclosure of the stented portion of the artery over time, is a serious problem. A new generation of stents that are coated with drugs targeted at preventing restenosis have recently shown some success. Early studies have shown significant reduction in restenosis when these drug eluting stents are used.

Conventional bypass surgery involves cutting open the patient’s chest, cutting through the sternum, usually connecting the patient to a heart-lung machine, stopping the heart, attaching a vein or artery

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removed from another part of the patient’s body to create a bypass around the diseased blood vessel and restarting the heart. According to the 2006 HSSU, an estimated 467,000 inpatient coronary artery bypass procedures were performed in the U.S. in 2003. Certain patients however are not suited for bypass procedures, including some who have previously undergone bypass surgery, patients with extremely diffuse diseases, patients with vessels that are too small to graft, patients with chronic obstructive pulmonary disease, some patients with diabetes, and others who are considered too ill to survive surgery.

We believe that TMR using the Heart Laser Systems is useful as a treatment for patients who have severe, stable angina and who are no longer candidates for either angioplasty or bypass surgery because of either extensive disease or small coronary arteries. The FDA has approved the Heart Laser Systems for such patients.

TMR as a sole therapy is designed to be less invasive and less expensive than traditional bypass surgery, and may avoid the restenosis problem common with bypass surgery and balloon angioplasty by not targeting the coronary arteries for treatment.

TMR Using the Heart Laser Systems

The main challenge in treating atherosclerosis is to allow adequate blood to flow to the heart muscle without significantly damaging the heart. The conventional and newer techniques described above are used to bypass, reopen or widen blocked or narrowed arteries and can eventually fail due to restenosis or natural disease progression. TMR using the Heart Laser Systems involves a different technique whereby channels are created in the myocardium as a means of supplying oxygen-rich blood from the left ventricular chamber into the ischemic myocardium. TMR does not target the coronary arteries for treatment.

Heart muscle must be constantly supplied with oxygen in order to function effectively. Oxygen is delivered to the myocardium by blood, which is distributed to the myocardium through the right and left coronary arteries. If these arteries are narrowed or blocked as a result of atherosclerosis, sufficient oxygen-rich blood may be unable to reach the heart to satisfy the metabolic demands of the myocardium. Cardiovascular disease eventually may cause myocardial ischemia, often evidenced by severe and debilitating angina caused by lack of oxygen to the heart muscle, which can progress to myocardial infarction (the death of an area of the heart muscle). Advanced multi-vessel ischemic heart disease is typically treated with bypass surgery.

During a sole therapy TMR procedure, the patient is given general anesthesia and an incision is made in the patient’s side between the ribs, exposing the heart. The Heart Laser Systems are synchronized with the patient’s heartbeat, firing only when the left ventricle is filled with blood and is electrically insensitive. We believe that synchronization may reduce the risk of arrhythmias (irregular heartbeats) and their associated morbidity and mortality. Research studies conducted by the Texas Heart Institute in animal models indicated that performing TMR without synchronization may be associated with an increase in life threatening arrhythmias. The synchronization technology is covered under a patent that we own. The Heart Laser Systems are capable of creating a transmural channel in less than 0.1 second with a single laser pulse in a patient whose heart has not been stopped and who has not been placed on a heart-lung bypass machine. The surgeon can vary the pulse width of the laser using a touch key control panel to accommodate for the thickness of the patient’s heart wall. Transesophageal echocardiography is used to confirm that complete channels are made by the laser. Generally, 20 to 40 new channels are created during the procedure.

We believe that, in addition to providing new direct pathways for blood to reach the ischemic myocardium, the creation of transmural channels using the Heart Laser Systems also promotes angiogenesis, the formation of new blood vessels.

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Potential Benefits of TMR

In September 2001 long term follow-up data was published in Circulation, the official journal of the American Heart Association, on eligible patients from our FDA clinical studies. The long-term TMR analysis included 78 patients at nine hospitals. Each patient had been suffering from chronic angina and from severe coronary artery disease, or CAD, before receiving treatment with the HL1. The average age of the patients at enrollment was 61. The average preoperative angina class for the group was 3.7 out of a maximum of 4 (angina is measured in classes from one to four, one being the least painful and four being the most painful). After an average of 55 months following the TMR procedure, the group’s average angina class improved from 3.7 to 1.6. This was virtually unchanged from the 1.5 average angina class reported at 12 months following the TMR procedure. In fact, five years after having the TMR procedure with the HL1, 17% of the patients reported having no angina and 64% were in angina class 1 or 2.

Based on clinical results to date, we believe that TMR using the Heart Laser Systems provides a number of benefits, although no assurance can be given that any of the mentioned benefits will be received by patients and no assurance can be given that the FDA will approve additional indications for use of the Heart Laser Systems or that the FDA will not withdraw or alter its current approval. These potential benefits include:

Therapy for Patients Not Suitable for Coronary Bypass.The FDA has approved the use of the Heart Laser Systems for patients who have stable angina (Canadian Cardiovascular Society Class III or IV) refractory to medical treatment and secondary to objectively demonstrated coronary artery atherosclerosis and with a region of the myocardium not amenable to direct coronary revascularization.

Potentially Reduced Hospital Readmission Costs.We believe that TMR is a cost effective treatment based on studies indicating that patients who receive TMR have fewer readmissions to the hospital for chest pain than those who receive only drug therapy.

Potential Delivery Mechanism for Angiogenic Agents.The TMR therapy utilizing the Heart Laser Systems may have the potential, with future development, to deliver angiogenic agents, which may assist in the treatment of CAD. This potentially could be accomplished through the use of stand-alone devices or by a device integrated into the current Heart Laser System handpieces that would, concomitantly with the TMR therapy, inject these agents into the myocardium.

Potential Angiogenic Response Stimulator.With additional clinical research, TMR therapy potentially could be found to be synergistic with delivered growth factors, which may prove useful in treating patients with CAD.

Cardiac Arrhythmias—Current Treatments

The heart is an electromechanical pump that contracts in a specific manner to efficiently pump blood throughout the body. The heart pumping is controlled by electrical signals that are generated in the right atrium of the heart and travel throughout the heart by way of an electrical conduction network. This system carries the electrical signals in a systematic way that results in a normal heartbeat. A failure in this conduction system usually results in an arrhythmia. An arrhythmia is an abnormal heart rhythm that can adversely affect the heart’s performance.

Several different types of arrhythmias can occur in the human heart. They can occur both in the ventricles and the atria and can be either fast heart rate (tachycardia) or slow heart rate (bradycardia). The most common sustained cardiac arrhythmia is an atrial tachycardia called atrial fibrillation, or AF, that is characterized by the irregular contractions and/or very rapid beating of the atria. During AF, instead of a single smooth wave of contraction, the electrical conduction does not operate normally and a storm of electrical energy spreads in random loops across both atria causing rapid, uncoordinated contractions.

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Today we believe AF affects an estimated 5 million people worldwide including an estimated 2.2 million Americans, and we estimate that there are 200,000 to 400,000 new cases diagnosed annually in the U.S. The condition can cause fatigue, dizziness, stroke and in extreme cases death if untreated. It is now understood that AF contributes to 15% to 20% of all strokes, and the need for life-long drug therapy can significantly impair the quality of life for patients.

Drug therapy is currently the standard of care for AF, and it is usually life-long. Patients are usually placed on rhythm control or rate control plus anticoagulation drugs, the former of which to manage arrhythmia and the latter to reduce the patient’s stroke risk. This type of therapy does not cure AF, but does help to reduce its effects. Anti-arrhythmic drugs have not proven highly successful to date.

The surgical Cox-Maze procedure is currently the most effective cure for AF with a reported success rate of over 95%. This is an extremely invasive, open-heart procedure that involves dissecting the atrium with a scalpel and sewing it back together to block the errant electrical signals allowing the heart to return to its normal rhythm. Because of its invasiveness and technical difficulty, we believe only several hundred Cox-Maze procedures are performed annually in the U.S.

The success of the Cox-Maze procedure has led surgeons and companies to develop and refine less invasive techniques that can deliver similar outcomes without the risks and the costs. These new approaches include the substitution of alternative energy sources for the surgical incision in the Cox-Maze procedure, such as radio-frequency, microwave, laser, cryo-therapy and ultrasound. Recent clinical results indicate that these alternative energy sources can reproduce much of the success of the surgical Cox-Maze procedure with significantly less trauma, including operating through minimally invasive incisions and on a beating heart.

AF surgery with these alternative energy sources can be performed from the inside of the arrested heart (endocardially) in conjunction with other cardiac procedures or, in some cases, from the outside of the heart (epicardially) while it is beating in a minimally invasive procedure. Since AF typically occurs in 30% to 45% of patients with mitral valve disease and the atrium is usually opened to repair or replace a mitral valve, we believe the initial surgical market for these new procedures will be in combination with mitral valve surgery.

Cardiac Tissue Ablation Using the Optiwave 980 System

The Optiwave 980 uses a 60-watt, 980nm diode laser as its power source. The laser power is delivered to various handpieces through a flexible optical fiber. The diode wavelength corresponds to a water absorption peak and causes tissue ablation by dielectric heating.

The key proprietary technology for this system is in the diffusing tip, which allows the surgeon to lay a linear lesion on the atria so that lesions as long as 5 cm are possible. The tip has a gold foil reflector that directs the laser power towards the heart. The tip is also malleable to allow different shaped lesions to be made.

The goal of laser ablation on cardiac tissue is to transmurally render specific cells incapable of conducting electrical cardiac signals without damaging adjacent tissues and other structures. When infrared laser energy is directed at the target tissue, water molecules in the tissue absorb the energy, generate heat and cause surrounding tissue to photocoagulate. The coagulated tissue forms lesions that block the conduction of errant electrical impulses, similar to the scalpel cuts in the Cox-Maze procedure.

We believe some of the beneficial features of the Optiwave 980 System are:

·It lends itself to minimally invasive procedures;

·It can perform ablation either endocardially or epicardially;

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·Laser technology creates uniform lesions at a precise depth;

·It produces lesions up to 5 cm in length;

·It targets tissue with a high degree of accuracy thereby avoiding damage to surrounding structures; and

·It can create lesions in fatty hearts.

Potential Benefits of Cardiac Tissue Ablation

The most time-consuming aspect of the Cox-Maze procedure is the need to create numerous incisions in the atria, essentially taking apart the tissue like a jigsaw puzzle and then meticulously sewing it back together. In addition, the procedure must be done on a stopped heart that is on cardiopulmonary bypass. As the new cardiac ablation devices are perfected, the goal will be to obtain clinically acceptable AF cure rates with a minimally invasive, easy to perform, low-cost procedure.

We believe that the Optiwave 980 System is positioned to solve problems with the Cox-Maze procedure. When using this system, the atria do not have to be cut apart and sewn back together. Electrical path blocking lesions can be made from the inside of the atria if the procedure is being done in conjunction with a valve procedure or potentially from the outside of the heart, while it is beating, without making any incisions in the atria.

Assuming that it has high cure rates, we believe that the fact that this procedure has the potential to be performed minimally invasively on a beating heart would make it an attractive alternative for many patients with AF.

Sales and Marketing Strategy

TMR Products—Sales Channel

We sell our TMR products principally through key distributors throughout the world. In the U.S., we have appointed Edwards as our exclusive distributor for the HL2 and all TMR disposable procedure kits. Edwards uses a direct sales force comprised of individuals with a high degree of professionalism and experience in the cardiovascular device business to market our TMR products in the U.S.

Outside the U.S., we have established an independent distributor network to market our TMR products, although in some areas, principally Europe, we continue to sell our TMR products directly to hospitals.

International sales (by origin) accounted for 6% of our total revenue in each of 2005, 2004 and 2003. We had no sales by origin in Canada, our jurisdiction of incorporation.

We sell our TMR products to both Edwards and our international distributors at a discount off list price.

Cardiac Tissue Ablation Products—Sales Channel

In January 2006, Edwards announced it would be launching the Optiwave 980 System in the U.S. Edwards has informed us that it expects to market the Optiwave 980 System to cardiothoracic surgeons. We are the exclusive manufacturer for the current generation of the Optiwave 980 and we have the right of first refusal to develop and manufacture the next generation of Optiwave 980 under certain conditions.

The Optiwave 980 System currently is only approved for marketing in the U.S. We believe that Edwards intends to use its direct sales force to market the Optiwave 980 System in the U.S.

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Edwards Marketing Programs

Edwards determines the programs, including sale, lease, rental and usage based offerings, that it believes will be most effective in the U.S. in selling our products to hospitals.

Edwards’ marketing efforts are directed at cardiothoracic surgeons, whose influence is believed to be critical in a hospital’s decision to purchase our products. In addition, Edwards emphasizes educating hospital administration and referring physicians, with a focus on promoting the economics and viability of the medical treatments using our products.

Edwards also currently conducts Center of Excellence TMR training programs across the country (i) to facilitate increased surgeon training for potential sales closure, (ii) to facilitate new site initiation, and (iii) to increase the number of surgeons trained in the use of our products. These TMR training programs are focused on educating prospective surgeons, as well as surgeons from new and existing customer sites. These comprehensive programs facilitate interaction among experienced users, enabling them to discuss best practices and focus on ensuring the best possible patient outcomes, including intensive discussions on patient selection and management. Course participants often view live, narrated procedures via closed circuit television. Actual hands on training is also provided in the use of our products.

Edwards’ direct sales force is supported by a promotional program that consists of electronic and print media advertising, public relations, direct mail, trade shows and educational symposia, all focused on disseminating critical information to decision makers and key purchase influencers. No assurance can be given that such programs will continue or be implemented successfully by Edwards.

Products and Customers

We sell and service one principal product line, the Heart Laser Systems, which accounted for approximately 89%, 90% and 95% of our revenues for the years ended December 31, 2005, 2004 and 2003, respectively. We also sell and service a second product line, the Optiwave 980, which accounted for approximately 5% and 3% of our revenues for the years ended December 31, 2005 and 2004, respectively.

During 2005, 2004 and 2003, sales to Edwards accounted for 89%, 88% and 89%, respectively, of our total revenues.

Manufacturing

We manufacture and test our TMR products and the Optiwave 980 at our facility in Franklin, Massachusetts, approximately 40 miles west of Boston. We believe that our manufacturing capacity will be sufficient to meet market demands anticipated in the coming year for all our products.

Some of the components for our Heart Laser Systems, most notably the power supply and certain optics and fabricated parts for the HL2, and certain components for the Optiwave 980, are only available from one supplier, and we have no assurance that we will be able to source any of our sole-sourced components from additional suppliers. Should the supply of certain critical components be interrupted or become unavailable, we may not be able to meet demand for our products, which could have a material adverse effect on our business and results of operations.

Our manufacturing facilities are subject to periodic inspection by regulatory authorities to ensure compliance with FDA and European Union quality system regulations.

Government Regulation

The Heart Laser Systems and the Optiwave 980 System, as well as other medical devices that we may develop, are subject to extensive regulation by the FDA and other regulatory authorities in the U.S. and abroad. The Federal Food, Drug, and Cosmetic Act (the “FDC Act”) and other federal and state statutes

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and regulations govern the research, design, development, manufacturing, preclinical and clinical testing, installation, storage, packaging, recordkeeping, servicing, labeling, distribution and promotion of medical devices in the U.S. Our laser products are subject to additional FDA regulation under the radiation health and safety provisions of the FDC Act, which imposes labeling and other safety requirements related to radiation hazards.

As a device manufacturer, we are also required to register with the FDA. As such, we are subject to inspection on a routine basis for compliance with the FDA’s Quality Systems regulations. These regulations require that we manufacture our products and maintain our documents in a prescribed manner with respect to manufacturing, testing and control activities. Further, we are required to comply with various FDA requirements for reporting. The FDC Act and medical device reporting regulations require that we provide information to the FDA on deaths or serious injuries alleged to have been caused or contributed to by the use of our products, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. The FDA also prohibits an approved device from being marketed for unapproved uses. Our product promotion and advertising is subject to continuing FDA regulation. Our laser products are subject to periodic inspection under the radiation health and safety provisions of the FDC Act for compliance with labeling and other safety regulations. The failure to comply with the applicable regulatory requirements may subject us to a variety of administrative or judicially imposed sanctions, including the FDA’s refusal to approve pending or supplemental applications, withdrawal of an approval or clearance, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, and civil and criminal penalties against that company or its officers, directors or employees. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.

We intend to continuously improve our products after market introduction and may therefore submit future Investigational Device Exemption, Pre-Market Notification (“510(k)”), Pre-Market Approval (“PMA”), or PMA supplement applications to the FDA. No assurance can be given that clearance or approval of such new applications will be granted by the FDA on a timely basis, or at all. Furthermore, we may be required to submit extensive preclinical and clinical data depending on the nature of the changes.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug products and medical devices. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance, or interpretations changed, and what the impact of such changes, if any, may be.

Various foreign countries in which our products are or may be sold impose additional or different regulatory and testing requirements. The international regulatory approval process varies from country to country and is subject to change in a given country as regulatory requirements change. Thus, the time required for an approval may differ and there can be substantial delays in obtaining approval after the relevant applications are filed. There is no assurance that foreign regulatory authorities will approve the use or sale of our products in a particular country on a timely basis, or at all.

The FDA has approved the use of the Heart Laser Systems for patients who have stable angina (Canadian Cardiovascular Society Class III or IV) refractory to medical treatment and secondary to objectively demonstrated coronary artery atherosclerosis and with a region of the myocardium not amenable to direct coronary revascularization.

The FDA has given clearance to the Optiwave 980 System under a 510(k) with indications for use as a surgical instrument for the coagulation of soft tissue, including cardiac tissue, in conjunction with or without endoscopic equipment in the contact or non-contact mode in open or closed surgical procedures.

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As part of our March 2006 supply agreement with Edwards, we have agreed to transfer ownership of the FDA approval to Edwards.

Third-Party Reimbursement

Healthcare providers, including hospitals and physicians that purchase medical devices, such as the Heart Laser Systems and Optiwave 980 System, for use on their patients, generally rely on third-party payers, principally Medicare, Medicaid and private health insurance plans, to reimburse all or part of the costs associated with the procedures performed with these devices.

Currently Medicare coverage is provided for TMR when it is performed as a sole therapy treatment. In addition, when two or more medical procedures are performed in combination with each other, Medicare rules generally allow hospitals to bill for whichever of the two procedures carries the higher reimbursement amount. Therefore, in situations where sole therapy TMR reimbursement rates exceed that provided for bypass surgery alone, if hospitals perform a combination procedure where both bypass surgery and adjunctive TMR are performed on a patient, the hospital is able to bill for the higher TMR procedure reimbursement payment. In these instances, the doctor also can bill an additional amount for performing multiple procedures.

Certain private insurance companies and health maintenance organizations also currently provide reimbursement for TMR procedures performed with our products and physician reimbursement codes have been established for both surgical procedures; however, we have limited data as to the breadth of this coverage for the TMR procedure by private insurance companies and health maintenance organizations.

Cardiac tissue ablation procedures, such as those that are expected to be performed using the Optiwave 980 System, are also currently reimbursed by Medicare when performed as a sole therapy. In instances where a surgeon might perform a cardiac tissue ablation procedure in combination with another heart related procedure, such as a valve replacement or repair, we believe the other procedure will normally carry a higher reimbursement and, therefore, will be the procedure that the hospital bills to Medicare.

No assurance can be given, however, that these payers will continue to reimburse healthcare providers who perform TMR or cardiac tissue ablation procedures using our products now or in the future. Further, no assurance can be given that additional payers will reimburse healthcare providers who perform TMR or cardiac tissue ablation procedures using our products or that reimbursement, if provided, will be timely or adequate. In addition, the market for our products could be adversely affected by future legislation to reform the nation’s healthcare system or by changes in industry practices regarding reimbursement policies and procedures.

Proprietary Processes, Patents, Licenses and Other Rights

It is our practice to file patent applications to protect our technology, inventions and product improvements. We also rely on trade secret protection for certain confidential and proprietary information.

Since April 1992, we have received 31 U.S. patents. These patents have terms which expire from 2009 through 2020 and cover, among other things, laser technology to create a pulsed, fast-flow laser system, the use of a laser on a beating heart to revascularize the heart using TMR related disposable components, and the system used to time the heart’s contractions to synchronize the laser firing at the correct time. We also have U.S. patent applications pending relating to technology used in the Heart Laser Systems and technologies associated with percutaneous myocardial revascularization. Edwards is the owner of the intellectual property rights in the Optiwave 980 System.

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In addition, we currently have seven patent applications pending at the U.S. patent office and have submitted one provisional patent application in connection with other intellectual property outside of the fields of TMR and AF.

In January 1999, CardioGenesis Corporation, our only direct competitor in the TMR market, agreed to the validity and enforceability of certain of our patents in connection with a settlement of certain litigation between the companies. The patents, U.S. Patent No. 5,125,926 and related international patents, cover our proprietary synchronization technology, which we believe is a critical factor in increasing the safety of TMR procedures. We granted CardioGenesis a non-exclusive worldwide license to the patents in exchange for payment of a license fee and ongoing royalties over the life of the patents.

Although we believe our patents and the patents that we license from Edwards to be strong, litigation by a competitor seeking to invalidate these patents could have a material adverse effect on our business, financial condition and results of operations. No assurance can be given that the existing patents will be held valid if challenged, that any additional patents will be issued or that the scope of any patent protection will exclude competitors. The breadth of claims in medical technology patents involves complex legal and factual issues and therefore can be highly uncertain.

We also rely upon unpatented proprietary technology and trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties. No assurance can be given that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop or otherwise acquire substantially equivalent proprietary technology and trade secrets or disclose such technology or that we can meaningfully protect our rights in such unpatented technology. In addition, others may hold or receive patents that contain claims covering products developed by us or by Edwards.

We believe our patents, as well as those that we license from Edwards, to be valid and enforceable. However, there has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. Litigation, which could result in substantial cost and diversion of our efforts, may be necessary to enforce our patents, to protect our trade secrets, to defend ourselves against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. Adverse determinations in litigation could subject us to significant liabilities to third parties, require us to seek licenses from third parties and prevent us from manufacturing, selling or using our products, any of which could have a material adverse effect on our business, financial condition and results of operations.

Competition

TMR Products

Our only direct competitor in the TMR market at this time is CardioGenesis. Although we do not believe it likely, because of the length of time and significant cost involved to conduct the necessary human clinical trials that would be required to secure approval from the FDA to market new TMR products, other companies may enter the TMR market in the future.

CardioGenesis has received FDA approval to market its holmium laser in the U.S. to perform TMR. CardioGenesis has also received CE Mark approval for their TMR system, which allows them to sell their product commercially in the European Union. CardioGenesis recently introduced a new model of their TMR laser and is promoting the advantages they believe their TMR system provides surgeons who wish to perform minimally invasive or robotically assisted TMR procedures. It is unclear at this time how successful, if at all, CardioGenesis will be with this new marketing program or what impact their new line of TMR products will have in terms of competing with our present Heart Laser System design.

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In addition to their TMR system, CardioGenesis has pursued a “percutaneous” method of performing myocardial revascularization, previously known as PMR, and recently rebranded as PMC (percutaneous myocardial channeling). PMC procedures are performed via a catheter inserted through an incision in a patient’s leg and is a less invasive method than TMR of creating channels in a human heart. CardioGenesis’ PMC system was reviewed by the FDA Circulatory System Devices Panel in July 2001. That panel, in a 7-2 vote, found the PMA application for their PMC system to be not approvable. CardioGenesis has recently announced that they have approval from the FDA under an Investigation Device Exemption to conduct a new clinical trial related to PMC. Presently there are no FDA approved PMC devices in the marketplace and we have no way to assess whether there ever will be an approved PMC device in the marketplace.

We believe that the primary competitive factors in the medical treatment of CAD are clinical safety and efficacy, product safety and reliability, regulatory approval, availability of reimbursement from insurance companies and other payers, product quality, price, reputation for quality, customer service and ease of use. We believe that our competitive success will be based on our ability to create and maintain scientifically effective and safe technology, obtain and maintain required regulatory approvals, obtain and maintain third party reimbursement for use of our products, attract and retain key personnel, obtain and maintain patent or other protection for our products and successfully differentiate, price, manufacture and market our products either directly or indirectly through outside parties.

The medical care products industry is characterized by extensive research efforts and rapid technological progress. New technologies and developments are expected to continue at a rapid pace in both industry and academia. Competition in the market for surgical lasers and for the treatment of cardiovascular disease is intense and is expected to increase. We believe that the Heart Laser Systems must compete not only with other TMR systems and potentially PMC systems, but also with medical management (drugs) and other coronary procedures (e.g., coronary bypass surgery, balloon angioplasty, atherectomy, laser angioplasty and stents, including new drug eluting stents that may significantly reduce restenosis). Many of the companies manufacturing these products have substantially greater resources and experience than we do. Such companies may succeed in developing products that are more effective, less invasive or less costly in treating coronary disease than the Heart Laser Systems and may be more successful than us in manufacturing and marketing their products. No assurance can be given that our competitors or others will not succeed in developing technologies, products or procedures that are more effective than any being developed by us or that would render our technology and products obsolete or noncompetitive. Although we will continue to work to develop new and improved products, the advent of either new devices or new pharmaceutical agents could hinder our ability to compete effectively and have a material adverse effect on our business, financial condition and results of operations.

Cardiac Tissue Ablation Products

Drug therapy currently accounts for nearly half of the current treatment for AF. The therapy is individualized to the patient and usually focuses on number, duration and/or severity of symptoms instead of achieving a cure, which remains elusive. In addition, many patients do not respond to drug treatment. These and other factors have created an environment in which new therapies that cure the condition in a safe and cost effective manner are likely to be adopted. Because of this, a number of companies have developed or are in the process of developing new devices for the treatment of AF.

Aside from drugs, there are a number of methods for treating AF, including surgical management, cardioversion, implantable devices and catheter-based ablation.

Surgical management includes the Cox-Maze procedure performed with either a scalpel or surgical ablation devices such as the Optiwave 980 System. We believe that the Optiwave 980 System is the only laser based surgical ablation system in the marketplace. Other surgical ablation systems exist using other

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sources of energy such as radio-frequency (RF), microwave, cryo-ablation and ultrasound. Each of these systems has advantages and disadvantages. A number of companies supply such devices, which will compete directly with the Optiwave 980 System.

Cardioversion is another technique that is used to treat AF. In this procedure the patient’s heart is given a shock, either externally using a defibrillator device or internally using a catheter. This shock usually causes the heart to return to normal rhythm. It has been successfully used for secondary AF which has not persisted for a long time and is caused by a specific event such as surgery.

Implantable devices consist of pacemakers and internal cardioverter defibrillators (ICD’s). Pacemakers can be used in atrial overdrive pacing to try to overpower errant electrical signals or where the atrium electrical system is ablated and replaced with a pacemaker. ICDs are implanted in the patient to provide automatic internal cardioversion during episodes of AF. While this appears to work, patient intolerance for shock therapy for a non-life threatening condition has emerged as a serious limitation.

Catheter-based ablation technologies are similar to the surgical ablation technologies, except the ablation energy is delivered percutaneously through a catheter. A number of companies are developing devices for this procedure.

Research and Development

Research and development expenses were $2,750,000, $2,130,000 and $980,000 for the years ended December 31, 2005, 2004 and 2003, respectively. We expect to continue to incur significant new research and development expenditures in 2006 and future years in pursuit of our business strategy to broaden and diversify our product portfolio beyond our current TMR offerings.

We continue to monitor technologies that may be applicable to TMR or cardiac ablation systems. No assurance can be given that our research and development goals will be implemented successfully.

Employees

As of March 16, 2006, we had 28 full-time employees worldwide, including our executive officers. Of these, 8 are in general and administrative positions, 2 are involved in sales, 7 are involved in research and development, 5 are involved in manufacturing, 5 are involved in service and 1 is involved in quality and regulatory affairs. We also employ 3 part-time employees, 1 in administration and 2 in quality and regulatory affairs. None of our employees are represented by a union. We consider our relationship with our employees to be good.

Company Information

We were incorporated pursuant to the COMPANY ACT of British Columbia, Canada on March 3, 1987. We transferred our jurisdiction of incorporation to the Yukon Territory of Canada in March 1999. Our principal offices and manufacturing facilities are located at 10 Forge Park, Franklin, Massachusetts 02038. Our telephone number is (508) 541-8800. Our Internet address is www.plcmed.com. As used herein, the references to PLC, we, our and the Company mean, unless the context requires otherwise, PLC and its subsidiaries, PLC Medical Systems, Inc. and PLC Sistemas Medicos Internacionais (Deutschland) GmbH.

Item 1A. Risk Factors

The risks and uncertainties described below are not the only risks we face. Additional risks and uncertainties not presently known to us or currently deemed immaterial may also impair our business operations. If any of the following risks actually occur, our financial condition and operating results could be materially adversely affected.

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We expect to incur significant operating losses in the near future

We incurred a net loss of $1,268,000 for the year ended December 31, 2005. We expect to continue to incur net losses for at least the next 12-24 months as we increase our spending primarily in the area of research and development. Moreover, as we continue to pursue our business strategy of acquiring or developing new medical devices to address cardiac and vascular related markets, we may continue to incur expenses that exceed the revenues we generate. We cannot provide any assurance that we will be successful with our business strategy, that any new products under development will be successful or that we will ever return to profitability.

Our company is currently dependent on one principal product line to generate revenues

We currently sell one principal product line, which consists of two patented high-powered carbon dioxide lasers and related TMR disposable kits known as the Heart Laser Systems, which account for the majority of our total revenue. Approximately 89% and 90%, of our revenues in the years ended December 31, 2005 and December 31, 2004, respectively, were derived from the sales and service of our Heart Laser Systems. This absence of a diversified product line means that we are directly and materially impacted by changes in the market for Heart Laser Systems.

Our company is dependent on one principal customer

Pursuant to the terms of our TMR distribution agreement with Edwards, Edwards is our exclusive distributor for our HL2 TMR laser and TMR kits in the United States. In addition, we are the exclusive manufacturer of the current version of the Optiwave 980 laser console for Edwards. As a result of these exclusive arrangements, Edwards accounted for 89% and 88% of our total revenues in the years ended December 31, 2005 and December 31, 2004, respectively, and we expect Edwards to account for the significant majority of our revenue in the near future. If our relationship with Edwards does not progress as anticipated, or if Edwards’ sales and marketing strategies fail to generate sales of our products in the future, our revenue will decrease significantly and our business, financial condition and results of operations will be seriously harmed.

Our ability to realize future revenues from the Optiwave 980 is dependent upon Edwards successfully launching this new product into an existing market with a new sales team

Edwards has only recently completed its marketing evaluations of the Optiwave 980 System and, as a result, has a limited amount of experience selling this new product into the U.S. market. Edwards must effectively train a new sales team to market the Optiwave 980 System and faces significant competition from several other companies that have been selling competitive non-laser based technologies for several years. We cannot assure you that Edwards will successfully commercialize the Optiwave 980 System or that we will ever receive any or all of the royalty revenue we negotiated to receive from the sale of disposable products under our royalty agreement with Edwards.

Our company is dependent on certain suppliers

Some of the components for our Heart Laser Systems, most notably the power supply and certain optics and fabricated parts for the HL2, and certain components for the Optiwave 980 System, are only available from one supplier, and we have no assurance that we will be able to source any of our sole-sourced components from additional suppliers. We are dependent upon our sole suppliers to perform their obligations in a timely manner. In the past, we have experienced delays in product delivery from our sole suppliers and, because we do not have an alternative supplier to produce these products for us, we have little leverage to enforce timely delivery. Any delay in product delivery or other interruption in supply from these suppliers could prevent us from meeting our commercial demands for our products, which could

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have a material adverse effect on our business, financial condition and results of operations. Furthermore, we do not require significant quantities of any components because we produce a limited number of our products each year. Our low-quantity needs may not generate substantial revenue for our suppliers. Therefore, it may be difficult for us to continue our relationships with our current suppliers or establish relationships with additional suppliers on commercially reasonable terms, if at all, and such difficulties may seriously harm our business, financial condition and results of operations.

We are dependent upon our key personnel and will need to hire additional key personnel in the near future

Our ability to operate our business successfully depends in significant part upon the retention and motivation of certain key technical, regulatory, production and managerial personnel and consultants and our ongoing ability to hire and retain additional qualified personnel in these areas. Competition for such personnel is intense, particularly in the Greater Boston area. We cannot be certain that we will be able to attract such personnel and the loss of any of our current key employees or consultants could have a significant adverse impact on our business.

Our company may be unable to raise needed funds

As of December 31, 2005, we had cash, cash equivalents and short-term investments totaling $9,460,000. Based on our current operating plan, we anticipate that our existing capital resources should be sufficient to meet our working capital requirements for at least the next 12 months. However, if our business does not progress in accordance with our current business plan, we may need to raise additional funds in the future. We may not be able to raise additional capital upon satisfactory terms, or at all, and our business, financial condition and results of operations could be materially and adversely affected. To the extent that we raise additional capital by issuing equity or convertible securities, ownership dilution to our shareholders will result. To the extent that we raise additional capital through the incurrence of debt, our activities may be restricted by the repayment obligations and other restrictive covenants related to the debt.

In order to compete effectively, our current and future products need to gain commercial acceptance

TMR and surgical ablation for cardiac arrhythmias are still both novel technologies. Our current and planned future products may never achieve widespread commercial acceptance. To be successful, we and Edwards need to:

·demonstrate to the medical community in general, and to heart surgeons and cardiologists in particular, that TMR and surgical tissue ablation for cardiac arrhythmias are procedures that are effective, relatively safe and cost effective;

·support third-party efforts to document the medical processes by which TMR procedures relieve angina and surgical tissue ablation cures cardiac arrhythmias;

·have more heart surgeons trained to perform TMR procedures using the Heart Laser Systems and surgical tissue ablation procedures using the Optiwave 980 System; and

·maintain and expand third-party reimbursement for the TMR procedure.

To date, only a limited number of heart surgeons have been trained in the use of TMR using the Heart Laser Systems and cardiac tissue ablation procedures using the Optiwave 980 System. We are dependent on Edwards to expand related marketing and training efforts in the U.S. for the use of our products.

The Heart Laser Systems have not yet received widespread commercial acceptance. We believe that concerns over the lack of a consensus view on the reason or reasons why a TMR procedure relieves angina

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in patients who undergo the procedure has limited demand for and use of the Heart Laser Systems. Until there is consensus, if ever, of the medical processes by which TMR procedures relieve angina, we believe some hospitals may delay the implementation of a TMR program.

If we are unable to achieve widespread commercial acceptance of the Heart Laser Systems or the Optiwave 980 System, our business, financial condition and results of operations will be materially and adversely affected.

Our primary competitor in TMR may obtain FDA approval to market a new device, the impact of which is uncertain on the future adoption rate of TMR

Our primary TMR competitor, CardioGenesis, is attempting to obtain FDA approval to market their “percutaneous” method of performing myocardial revascularization, previously known as PMR, and recently rebranded as PMC (percutaneous myocardial channeling), which would provide a less invasive method of creating channels in the heart. If PMC can be shown to be safe and effective and is approved by the FDA, it would eliminate the need in certain patients to make an incision in the chest, reducing costs and speeding recovery. It is unclear what impact, if any, an approval of a PMC device would have on the future adoption rate for TMR procedures. If PMC is approved, it could erode the potential TMR market which would have a material adverse effect on our business, financial condition and results of operations.

Rapid technological changes in our industry could make our products obsolete

Our industry is characterized by rapid technological change and intense competition. New technologies and products and new industry standards will develop at a rapid pace, which could make our current and future planned products obsolete. The advent of new devices and procedures and advances in new drugs and genetic engineering are especially concerning competitive threats. Our future success will depend upon our ability to develop and introduce product enhancements to address the needs of our customers. Material delays in introducing product enhancements may cause customers to forego purchases of our products and purchase those of our competitors.

Many potential competitors have substantially greater financial resources and are in a better financial position to exploit marketing and research and development opportunities. In addition, we are aware that other companies are developing or already have developed proprietary systems for the treatment of cardiac arrhythmias, and specifically AF, that may be safer, clinically more effective, easier and more cost effective to use and, in the case of percutaneous devices, less invasive than the system we are developing.

We must receive and maintain government clearances or approvals in order to market our products

Our products and our manufacturing activities are subject to extensive, rigorous and changing federal and state regulation in the U.S. and to similar regulatory requirements in other major international markets, including the European Union and Japan. These regulations and regulatory requirements are broad in scope and govern, among other things:

·product design and development;

·product testing;

·product labeling;

·product storage;

·premarket clearance and approval;

·advertising and promotion; and

·product sales and distribution.

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Furthermore, regulatory authorities subject a marketed product, its manufacturer and the manufacturing facilities to continual review and periodic inspections. We are subject to ongoing FDA requirements, including required submissions of safety and other post-market information and reports, registration requirements, Quality Systems regulations, and recordkeeping requirements. The FDA’s Quality Systems regulations include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. Edwards, our distributor, depending on its activities, is also subject to certain requirements under the Federal Food, Drug, and Cosmetic Act and the regulations promulgated thereunder, and state laws and registration requirements covering the distribution of our products. Regulatory agencies may change existing requirements or adopt new requirements or policies that could affect our regulatory responsibilities or the regulatory responsibilities of a distributor like Edwards. We may be slow to adapt or may not be able to adapt to these changes or new requirements.

Later discovery of previously unknown problems with our products, manufacturing processes, or our failure to comply with applicable regulatory requirements may result in enforcement actions by the FDA and other international regulatory authorities, including, but not limited to:

·warning letters;

·patient or physician notification;

·restrictions on our products or manufacturing processes;

·voluntary or mandatory recalls;

·product seizures;

·refusal to approve pending applications or supplements to approved applications that we submit;

·refusal to permit the import or export of our products;

·fines;

·injunctions;

·suspension or withdrawal of marketing approvals or clearances; and

·civil and criminal penalties.

Should any of these enforcement actions occur, our business, financial condition and results of operations could be materially and adversely affected.

To date, we have received the following regulatory approvals for our products:

Heart Laser Systems

United States—We received FDA approval to market the HL1 Heart Laser System in August 1998 and the HL2 Heart Laser System in January 2001. However, although we have received FDA approval, the FDA:

·has restricted the use of the Heart Laser Systems by not allowing us to market these products to treat patients whose condition is amenable to conventional treatments, such as heart bypass surgery, stenting and angioplasty; and

·could impose additional restrictions or reverse its ruling and prohibit use of the Heart Laser Systems at any time.

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Europe—We received the CE Mark from the European Union for the HL1 and HL2 in March 1995 and February 2001, respectively. However:

·our current ISO certification (13485-1996) that enables us to apply the CE mark and ship our products into the EU will expire on July 31, 2006. We must conform our quality system to a new ISO standard (13485-2003), undergo an audit and be certified by our registrar prior to July 31, 2006, in order to be able to continue to ship our products into the EU. We are currently in the process of implementing the necessary changes to our quality system in order to conform to the new ISO standard, however, we cannot provide any assurance that we will timely meet or maintain conformance to the requirements of the new standard before July 31, 2006 or in the future;

·the European Union could impose additional restrictions or reverse its ruling and prohibit use of the Heart Laser Systems at any time; and

·France has prohibited, and other European Union countries could prohibit or restrict, use of the Heart Laser Systems.

Japan—We cannot market our product in Japan until we receive government approval.

Prior to marketing the Heart Laser Systems in Japan, we must receive approval from the Japanese government. This approval requires a clinical study in Japan with at least 60 patients. A study was completed in 1998 with the HL1. Although the results of this study have been submitted to the Japanese government, we do not know whether the clinical study will be sufficient or when, if ever, we will receive approval to sell the HL1 in Japan. In addition, it is unclear what impact the introduction of the HL2 into the U.S. and other international markets will have on our ability to market the HL1 in Japan.

Optiwave 980 System

United States—The FDA has given clearance to the Optiwave 980 System through the 510(k) premarket notification process with indications for use as a surgical instrument for coagulation of soft tissue, including cardiac tissue, in conjunction with or without endoscopic equipment in the contact or non-contact mode in open or closed surgical procedures.

Although the Optiwave 980 System has received clearance from the FDA only for the indications of use stated above, physicians, under the practice of medicine exception, may use the device in any manner they choose in treating an individual patient, including using the device to treat patients with AF. However, neither we nor Edwards have conducted any clinical trials designed to obtain data to submit to the FDA for the purpose of obtaining a specific indication for use of the Optiwave 980 System that would allow us or Edwards to make claims or otherwise market this device for the treatment of AF. We are aware of several other companies that have announced their plans to conduct clinical trials in support of a labeling claim that would allow them to market their devices for the treatment of AF if clearance is obtained from the FDA.

In the event these other competitors are successful in obtaining specific indications of use for their devices in the treatment of AF, the Optiwave 980 System may be at a competitive marketing disadvantage until such time, if ever, that Edwards conducts a clinical trial, submits sufficient data to the FDA by means of a new 510(k) and obtains clearance to market the Optiwave 980 System for the treatment of AF. We cannot provide any assurance that Edwards will ever conduct such a clinical trial or, if they do, that the data they obtain and submit to the FDA will be sufficient for the FDA to expand the current indications of use and provide clearance for the Optiwave 980 System to be marketed for the treatment of AF. Also, we cannot assure you that even if such clearance is obtained, that it will be obtained in a timely enough fashion for our products to remain competitive in the marketplace.

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Europe—The Optiwave 980 System cannot be marketed in the EU until such time as it receives CE Mark approval. Edwards needs to complete and submit the relevant technical documentation to the appropriate certifying body in order to be able to apply the CE Mark to the product. If approval to apply the CE Mark is granted, the Optiwave 980 System will then be able to be distributed in the EU.

Changes in third party reimbursement for either TMR or cardiac tissue ablation procedures could materially affect future demand for our products

Demand for medical devices is often affected by whether third party reimbursement is available for the devices and related procedures. Currently Medicare coverage is provided for TMR when it is performed as a sole therapy treatment. In addition, when two or more medical procedures are performed in combination with each other, Medicare rules generally allow hospitals to bill for whichever of the two procedures carries the higher reimbursement amount. Therefore, in situations where sole therapy TMR reimbursement rates exceed that provided for bypass surgery alone, if hospitals perform a combination procedure where both bypass surgery and adjunctive TMR are performed on a patient, the hospital is able to bill for the higher TMR procedure reimbursement payment. In these instances, the doctor also can bill an additional amount for performing multiple procedures.

Certain private insurance companies and health maintenance organizations also currently provide reimbursement for TMR procedures performed with our products and physician reimbursement codes have been established for both surgical procedures; however, we have limited data as to the breadth of this coverage for the TMR procedure by private insurance companies and health maintenance organizations.

Cardiac tissue ablation procedures, such as those that are expected to be performed using the Optiwave 980 System, are also currently reimbursed by Medicare when performed as a sole therapy. In instances where a surgeon might perform a cardiac tissue ablation procedure in combination with another heart related procedure, such as a valve replacement or repair, we believe the other procedure will normally carry a higher reimbursement and, therefore, will be the procedure that the hospital bills to Medicare.

No assurance can be given, however, that these payers will continue to reimburse healthcare providers who perform TMR or cardiac tissue ablation procedures using our products now or in the future. Further, no assurance can be given that additional payers will reimburse healthcare providers who perform TMR or cardiac tissue ablation procedures using our products or that reimbursement, if provided, will be timely or adequate. In addition, the market for our products could be adversely affected by future legislation to reform the nation’s healthcare system or by changes in industry practices regarding reimbursement policies and procedures.

Should third party insurance reimbursement for either TMR or cardiac tissue ablation procedures be reduced or eliminated in the future, our business, financial condition and results of operations would be materially and adversely affected.

Asserting and defending intellectual property rights may impact our results of operations

In our industry, competitors often assert intellectual property infringement claims against one another. The success of our business depends on our ability to successfully defend our intellectual property. Future litigation may have a material impact on our financial condition even if we are successful in marketing our products. We may not be successful in defending or asserting our intellectual property rights.

An adverse outcome in any litigation or interference proceeding could subject us to significant liabilities to third parties and require us to cease using the technology that is at issue or to license the technology from third parties. In addition, a finding that any of our intellectual property is invalid could allow our competitors to more easily and cost-effectively compete with us. Thus, an unfavorable outcome

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in any patent litigation or interference proceeding could have a material adverse effect on our business, financial condition or results of operations.

The cost to us of any patent litigation or interference proceeding could be substantial. Uncertainties resulting from the initiation and continuation of patent litigation or interference proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and interference proceedings may also absorb significant management time.

We may be subject to product liability lawsuits; our insurance may not be sufficient to cover damages

We may be subject to product liability claims. Such claims may absorb significant management time and could degrade our reputation and the marketability of our products. If product liability claims are made with respect to our products, we may need to recall the implicated product which could have a material adverse effect on our business, financial condition and results of operations. In addition, although we maintain product liability insurance, we cannot be sure that our insurance will be adequate to cover potential product liability lawsuits. Our insurance is expensive and in the future may not be available on acceptable terms, if at all. If a successful product liability claim or series of claims exceeds our insurance coverage, it could have a material adverse effect on our business, financial condition and results of operations.

We are subject to risks associated with international operations

A portion of our product sales are generated from operations outside of the U.S. Establishing, maintaining and expanding international sales can be expensive. Managing and overseeing foreign operations are difficult and products may not receive market acceptance. Risks of doing business outside the U.S. include, but are not limited to, the following: agreements may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system; foreign customers may have longer payment cycles; foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade; U.S. export licenses may be difficult to obtain; and the protection of intellectual property rights in foreign countries may be more difficult to enforce. There can be no assurance that our international business will grow or that any of the foregoing risks will not result in a material adverse effect on our business or results of operations. Our international sales have declined since 2003.

We will soon have to comply with internal controls evaluations and attestation requirements

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required, beginning with our year ending December 31, 2007, to perform an evaluation of our internal controls over financial reporting and have our independent registered public accounting firm attest to such evaluation. We are developing a program to perform this evaluation in order to comply with these requirements. Compliance with these requirements is expected to be expensive and time-consuming. If we fail to timely complete this evaluation, or if our independent registered public accounting firm cannot timely attest to our evaluation, we could be subject to regulatory action and public confidence in us could be adversely affected and our stock price could decline. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.

Because we are incorporated in Canada, you may not be able to enforce judgments against us and our Canadian directors

Under Canadian law, you may not be able to enforce a judgment issued by courts in the U.S. against us or our Canadian directors. The status of the law in Canada is unclear as to whether a U.S. citizen can

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enforce a judgment from a U.S. court in Canada for violations of U.S. securities laws. A separate suit may need to be brought directly in Canada.

Our stock price has historically fluctuated and may continue to fluctuate significantly in the future which may result in losses for our investors

Our stock price has been and may continue to be volatile. Some of the factors that can affect our stock price are:

·the announcement of new products, services or technological innovations by us or our competitors;

·actual or anticipated quarterly increases or decreases in revenue, gross margin or earnings, and changes in our business, operations or prospects;

·speculation or actual news announcements in the media or industry trade journals about our company, our products, the TMR or cardiac ablation procedures or changes in reimbursement policies by Medicare and/or private insurance companies;

·announcements relating to strategic relationships or mergers;

·conditions or trends in the medical device industry;

·changes in the economic performance or market valuations of other medical device companies; and

·general market conditions or domestic or international macroeconomic and geopolitical factors unrelated to our performance.

The market price of our stock may fall if shareholders sell their stock

Certain current shareholders hold large amounts of our stock, which they could sell in the public market from time to time. Sales of a substantial number of shares of our common stock within a short period of time could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock.

We have no intention to pay dividends

We have never paid any cash dividends on our common stock. We currently intend to retain all future earnings, if any, for use in our business and do not expect to pay any dividends in the foreseeable future.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We maintain our principal executive offices and manufacturing and development operations in 24,000 square feet of leased space in Franklin, Massachusetts. The lease on this space expires on August 31, 2009. The total base rental payments for the fiscal years ending December 31, 2006, 2007, 2008 and for the eight months ending August 31, 2009 are approximately $261,000, $255,000, $261,000 and $176,000, respectively. We are also responsible for certain operating and maintenance costs and real estate taxes.

Item 3. Legal Proceedings

We are not presently involved in any material litigation proceedings.

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

Not applicable.

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PART II

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

Since September 17, 1992, our common stock has traded on the American Stock Exchange (“AMEX”) under the symbol “PLC”. On March 16, 2006, the closing sale price of our common stock was $0.68 per share.

For the periods indicated, the following table sets forth the range of high and low sales prices for our common stock from January 1, 2004.

2004	High		Low
First Quarter	$	2.00	$	1.10
Second Quarter	$	1.50	$	0.73
Third Quarter	$	0.96	$	0.60
Fourth Quarter	$	0.94	$	0.71
2005	High		Low
First Quarter	$0.80		$0.50
Second Quarter	$	0.70	$	0.45
Third Quarter	$	0.62	$	0.47
Fourth Quarter	$	0.62	$	0.45

As of March 14, 2006, there were 750 record holders of our common stock. We believe that there are approximately 8,534 beneficial owners of our common stock.

Dividends

We have never paid cash dividends. We currently intend to retain all future earnings, if any, for use in our business and we do not anticipate paying any cash dividends in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information about the securities authorized for issuance under our equity compensation plans as of December 31, 2005:

Plan Category	(a) Number of securities to be issued upon exercise of outstanding options warrants and rights		(b) Weighted-average exercise price of outstanding options, warrants and rights			(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders(1)		3,253,263		$	1.02		1,788,662	(2)
Equity compensation plans not approved by security holders(3)		2,534,559		$	2.30		—
Total		5,787,822		$	1.58		1,788,662

(1)Consists of the following equity compensation plans: (i) 1993 Formula Stock Option Plan, (ii) 1993 Stock Option Plan, (iii) 1995 Stock Option Plan, (iv) 2000 Employee Stock Purchase Plan, as amended (the “2000 ESPP”), (v) 2000 Equity Incentive Plan and (vi) 2005 Stock Incentive Plan.

(2)Includes 322,487 shares issuable under the 2000 ESPP, including shares issuable in connection with the current offering period, which ends on May 31, 2006.

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(3)Consists of the following equity compensation plans and arrangements: (i) 1997 Executive Stock Option Plan, (ii) 2000 Non-Statutory Stock Option Plan, (iii) 2000 Non-Qualified Performance and Retention Equity Plan, (iv) Warrant to Purchase Common Stock issued to Edwards Lifesciences Corporation for the right to receive 1,000,000 shares of common stock at an exercise price of $3.50 per share, which expired in January 2006 unexercised, and (v) Warrant to Purchase Common Stock issued to Prudential Vector Healthcare Group, a unit of Prudential Securities Incorporated, for the right to receive 100,000 shares of common stock at an exercise price of $1.00 per share, which expired in January 2006 unexercised.

Canadian Tax Matters

This summary is applicable to a holder or prospective purchaser of our common stock who is not (and is not deemed to be) a resident in Canada, does not (and is not deemed to) use or hold the common stock in, or in the course of, carrying on a business in Canada, and is not an insurer that carries on an insurance business in Canada and elsewhere.

This summary is based on the current provisions of the Income Tax Act (Canada) and the regulations thereunder. This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any holder of the common stock and no representation with respect to Canadian federal income tax consequences to any holder of common stock is made herein. Accordingly, prospective purchasers and holders of the common stock should consult their own tax advisers with respect to their individual circumstances.

Sales or Other Dispositions of Shares

A capital gain realized on the disposition of common stock by a person resident in the United States (a “non-resident”) will not be subject to tax under the Income Tax Act (Canada) unless the shares held by the non-resident are “taxable Canadian property”. In general, common stock will be taxable Canadian property if the particular non-resident used (or in the case of a non-resident insurer, used or held) the common stock in carrying on business in Canada or where at any time during the five-year period immediately preceding the realization of the gain, not less than 25% of the issued and outstanding shares of any class or series of shares of the company, which were listed on a prescribed stock exchanged, were owned by the particular non-resident, by persons with whom the particular non-resident did not deal at arms’ length, or by any combination thereof. If common stock constitutes taxable Canadian property, relief nevertheless may be available under the reciprocal tax treaty between Canada and the United States. Under the treaty, gains from the alienation of common stock owned by a non-resident who has never been resident in Canada generally will be exempt from Canadian capital gains tax if the shares do not relate to a permanent establishment or fixed base which the non-resident has or had in Canada, and if not more than 50% of the value of the shares was derived from real property situated in Canada.

Passive Foreign Investment Company Implications

Because we are incorporated outside the United States, and our cash and investments are significant to our total assets, we must monitor rules regarding possible classification as a passive foreign investment company under U.S. Federal tax rules.  While currently not classified as such, future classification as a passive foreign investment company could result in certain adverse tax consequences including, but not limited to, the allocation of a portion of the Company’s taxable income to our shareholders.

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Item 6. Selected Financial Data

The following selected financial data for the five years ended December 31, 2005 are derived from our audited consolidated financial statements. This data should be read in conjunction with the consolidated financial statements, related notes and other financial information included elsewhere herein.

	For the years ended December 31,
	2005			2004			2003			2002		2001
	(All amounts are in thousands except per share data)
Statement of Operations Data:
Revenues:
Product sales	$	6,097		$	5,982		$	6,899		$	7,425	$	7,975
Service fees	1,539			1,591			1,435			1,413		1,805
Total revenues:	7,636			7,573			8,334			8,838		9,780
Cost of revenues	3,066			3,069			3,343			4,092		5,591
Gross profit	4,570			4,504			4,991			4,746		4,189
Operating expenses:
Selling, general and administrative	3,336			3,329			3,297			3,626		7,438
Research and development	2,750			2,130			980			889		904
Total operating expenses	6,086			5,459			4,277			4,515		8,342
Income (loss) from operations	(1,516		)	(955		)	714			231		(4,153		)
Other income, net	248			175			60			74		251
Liquidation of subsidiary:
Foreign currency loss	—			—			(257		)	—		—
Income (loss) before income taxes	(1,268		)	(780		)	517			305		(3,902		)
Provision for income taxes	—			53			—			—		—
Net income (loss)	$	(1,268	)	$	(833	)	$	517		$	305	$	(3,902	)
Basic and diluted earnings (loss) per share	$	(0.04	)	$	(0.03	)	$	0.02		$	0.01	$	(0.13	)
Average shares outstanding:
Basic	30,074			30,025			29,826			29,696		29,248
Diluted	30,074			30,025			30,414			29,784		29,248

	As of December 31,
	2005		2004		2003		2002		2001
	(All amounts are in thousands )
Balance Sheet Data:
Working capital	$	8,964	$	10,658	$	7,405	$	6,470	$	5,785
Total assets	12,467		13,327		9,849		10,328		12,298
Secured borrowings, long-term	—		—		—		408		1,446
Stockholders’ equity	5,543		6,829		7,556		6,725		6,310

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

Overview

We are a medical device company specializing in innovative technologies for the cardiac and vascular markets. We currently manufacture two lasers that are used in the treatment of cardiovascular disease. Our Heart Laser Systems are used to treat patients with severe angina and the Optiwave 980 is used to ablate cardiac tissue as a means to treat certain heart arrhythmias.

Edwards is our exclusive distributor for TMR products in the United States and our largest customer, accounting for approximately 89% and 88% of our total sales in 2005 and 2004, respectively. We expect this sales trend to continue for the near future.

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Approximately 89% of our revenues in 2005 came from the sale and service of TMR lasers and related disposable kits. Although not a direct measure, we believe a leading indicator of the adoption rate of TMR as a treatment for severe angina is TMR kit shipments to U.S. hospitals. TMR kit shipments to U.S. hospitals through Edwards increased approximately 9% from 2004 to 2005. We remain largely dependent on the success of Edwards’ sales and marketing efforts to increase our installed base of TMR lasers and increase TMR procedure volumes and revenues.

Our management reviews a number of key performance indicators to assist them in determining how to allocate resources and run our day to day operations. These indicators include (1) actual prior quarterly sales trends, (2) projected TMR laser and kit sales for the next four quarters, as provided by Edwards in a rolling twelve month sales forecast, (3) research and development progress as measured against internal project plan objectives, (4) budget to actual financial expenditure results, (5) inventory levels (both our own and Edwards’) and (6) short term and long term projected cash flows of the business.

Critical Accounting Policies and Estimates

Our financial statements are based on the application of significant accounting policies, many of which require us to make significant estimates and assumptions (see Note 2 to the Consolidated Financial Statements). We believe that the following are some of the more material judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.

Inventories

Inventories are stated at the lower of cost (computed on a first-in, first-out method) or market value and include allocations of labor and overhead. A specific obsolescence allowance is provided for slow moving, excess and obsolete inventory based on our best estimate of the net realizable value of inventory on hand taking into consideration factors such as (1) actual trailing twelve month sales, (2) expected future product line demand, based in part on sales forecast input received from Edwards, and (3) service part stocking levels which, in management’s best judgment, are advisable to maintain in order to meet warranty, service contract and time and material spare part demands. Historically, we have found our reserves to be adequate.

Allowance for Doubtful Accounts

For our accounts receivable, we continuously monitor collections from customers, our principal customer being Edwards, and we maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that we have identified. Historically, we have not experienced significant losses related to our accounts receivable. Collateral is not generally required. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Warranty and Preventative Maintenance Costs

We warranty our products against manufacturing defects under normal use and service during the warranty period. We obtain similar warranties from a majority of our suppliers, including those who supply critical Heart Laser System components. In addition, under the terms of our TMR distribution agreement with Edwards, we are able to bill Edwards for actual warranty costs, including preventative maintenance services, up to a specified amount during the warranty period.

We evaluate the estimated future unrecoverable costs of warranty and preventative maintenance services for our installed base of lasers on a quarterly basis and adjust our warranty reserve accordingly.

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We consider all available evidence, including historical experience and information obtained from supplier audits.

Revenue Recognition

We record revenue from the sale of TMR kits and the Optiwave 980 at the time of shipment to Edwards. TMR kit revenues include the amount invoiced to Edwards for kits shipped pursuant to purchase orders received, as well as an amortized portion of deferred revenue related to Edwards’ payment to us of $4,533,333 in February 2004. This payment was made by Edwards in exchange for a reduction in the prospective purchase price we receive from Edwards upon a sale of the kits. We are amortizing this payment from Edwards into our Consolidated Statement of Operations as revenue over a seven year period (culminating in 2010) under the units-of-revenue method as prescribed by Emerging Issues Task Force (EITF) 88-18, Sales of Future Revenue. We determined that a seven year timeframe was the most appropriate amortization period based on a valuation model we used to assess the economic fairness of the payment. Factors we considered in developing this valuation model included the estimated foregone revenues over a seven year period resulting from the reduction in the prospective purchase price payable to us by Edwards, a discount rate deemed appropriate to this transaction and an estimate of the remaining economic useful life of the current TMR kit design, without any benefit being given to potential future product improvements we may make. Management reviews annually, and adjusts if necessary, the prospective revenue amortization rate for kits based on its best estimate of the total number of kits likely remaining to be shipped to hospital customers by Edwards through 2010.  Based on this, and for the years ended December 31, 2005 and 2004, we recorded amortization of $356,000 and $183,000, respectively, which is included in revenues in our Consolidated Statements of Operations.

TMR lasers are billed to Edwards in accordance with purchase orders that we receive. Invoiced TMR lasers are recorded as other current assets and deferred revenue on our Consolidated Balance Sheet until such time as the laser is shipped to a hospital, at which time we record revenue and cost of revenue.

Under the terms of the Edwards TMR distribution agreement, once Edwards has recovered a prescribed amount of revenue from a hospital for the use or purchase of a TMR laser, any additional revenues earned by Edwards are shared with us pursuant to a formula established in the distribution agreement. We only record our share of such additional revenue, if any, at the time the revenue is earned.

We record revenue from the sale of TMR kits and TMR lasers to international distributors or hospitals at the time of shipment.

Revenues from service and maintenance contracts are recognized ratably over the life of the contract.

Installation revenues related to a TMR laser transaction are recorded as a component of service fees when the laser is installed.

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Results of Operations

Results for the past three years and the related percent of revenues were as follows:

	2005					2004					2003
	$			%		$			%		$			%
	(dollars in thousands)
Total revenues	$	7,636		100.0	%	$	7,573		100.0	%	$	8,334		100.0	%
Total cost of sales	3,066			40.2		3,069			40.5		3,343			40.1
Gross profit	4,570			59.8		4,504			59.5		4,991			59.9
Selling, general & administrative	3,336			43.7		3,329			44.0		3,297			39.6
Research & development	2,750			36.0		2,130			28.1		980			11.8
Income (loss) from operations	(1,516		)	(19.9	)	(955		)	(12.6	)	714			8.6
Other income	248			3.2		175			2.3		60			0.7
Liquidation of subsidiary:
Foreign currency loss	—			—		—			—		(257		)	(3.1)
Income (loss) before income taxes	(1,268		)	(16.6	)	(780		)	(10.3	)	517			6.2
Provision for income taxes	—			—		53			0.7		—			—
Net income (loss)	$	(1,268	)	(16.6	)%	$	(833	)	(11.0	)%	$	517		6.2%

	2005			Increase (decrease) over 2004						2004				Increase (decrease) over 2003					2003
	$			$				%		$				$			%		$
	(dollars in thousands)
Product sales	$	6,097			$	115		2	%		$	5,982		$	(917	)	(13	)%	$	6,899
Service fees	1,539				(52		)	(3	)		1,591			156			11		1,435
Total revenues	7,636				63			1			7,573			(761		)	(9	)	8,334
Product cost of sales	2,316				(30		)	(1	)		2,346			(478		)	(17	)	2,824
Service fees cost of sales	750				27			4			723			204			39		519
Total cost of revenues	3,066				(3		)	—			3,069			(274		)	(8	)	3,343
Gross profit	4,570				66			1			4,504			(487		)	(10	)	4,991
Selling, general & administrative expenses	3,336				7			—			3,329			32			1		3,297
Research & development expenses	2,750				620			29			2,130			1,150			117		980
Total operating expenses	6,086				627			11			5,459			1,182			28		4,277
Liquidation of subsidiary:
Foreign currency loss	—				—			—			—			257			(100	)	(257		)
Other income	248				73			42			175			115			192		60
Income (loss) before income taxes	(1,268		)		(488		)	(63	)		(780		)	(1,297		)	(251	)	517
Provision for income taxes	—				(53		)	(100	)		53			53			100		—
Net income (loss)	$	(1,268	)		$	(435	)	(52	)%		$	(833	)	$	(1,350	)	(261	)%	$	517

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Product Sales

TMR laser revenues, the largest component of product sales in 2005, decreased by $457,000, or 13%, as compared to 2004. This decrease is primarily attributable to a $449,000, or 13%, decrease in domestic TMR laser revenues generated through our Edwards sales channel. The $449,000 decline in domestic TMR laser revenues is primarily a result of (1) a decrease in the number of new TMR lasers sold by Edwards in 2005 compared to 2004 and (2) decreased revenue sharing earned under the TMR distribution agreement with Edwards. These decreases were offset in part by a higher average selling price in 2005 on domestic TMR laser sales. International TMR laser revenues decreased $8,000, or 10%, in 2005 as compared to 2004.

Disposable TMR kit revenues, the second largest component of product sales, increased by $544,000, or 31%, in 2005 as compared to 2004. The increase is primarily related to a $534,000, or 32%, increase in domestic disposable revenue resulting from a higher volume of kit shipments to Edwards and a $173,000 increase in deferred revenue amortization related to the $4,533,333 payment by Edwards. International disposable TMR kit revenues increased $10,000, or 9%, in 2005 as compared to 2004.

Optiwave 980 revenues to Edwards increased $96,000, or 39%, as compared to 2004 due to a higher number of Optiwave 980 units sold to Edwards in 2005. Under our new supply agreement with Edwards that we entered into in March 2006, Edwards has agreed to purchase any additional units of the current generation of Optiwave 980 exclusively from us. We believe that our future revenues from sales of this first generation laser will not exceed $1,000,000 and may be less, depending in part on demand for that product and when, if ever, Edwards chooses to introduce its next generation laser to the market. We have a right of first refusal to develop and manufacture the next generation laser for Edwards; however, at this time we have not had discussions with Edwards regarding any such successor product.

Other product sales, relating to sales of new and refurbished surgical tubes, decreased $68,000, or 13%, as compared to 2004.

TMR laser revenues, the largest component of product sales in 2004, decreased by $1,020,000, or 23%, as compared to 2003. This decrease is primarily attributable to a $950,000, or 22%, decrease in domestic TMR laser revenues generated through our Edwards sales channel. The $950,000 decline in domestic TMR laser revenues is primarily a result of both a decrease in the number of new TMR laser units sold by Edwards in 2004 compared to 2003 and a lower average domestic selling price on TMR laser sales (down 8% in 2004).

International TMR laser revenues decreased by $70,000, or 46%, in 2004. Although we shipped a greater number of HL1 TMR lasers in 2004 compared to 2003, the lasers we did sell were at a lower average selling price. We believe the HL1 may continue to have some ability to be sold in price sensitive foreign countries; however, we expect the number to be in limited quantities, if any.

Disposable TMR kit revenues, the second largest component of product sales, decreased by $236,000, or 12%, in 2004 as compared to 2003. The decrease is primarily related to a $143,000, or 8%, decrease in domestic disposable revenue. This $143,000 decrease resulted from a lower volume of kit shipments to Edwards coupled with a reduced share of revenue on TMR kits. The reduced share of revenue on TMR kits is a result of a modification to the TMR distribution agreement in February 2004, whereby our share of the revenue on TMR kits sold to hospitals was reduced from 45% to 36.5% in exchange for a payment by Edwards of $4,533,333. The impact of this reduction to 36.5% compared to what disposable revenue would have been at 45% was a reduction in revenue of $327,000 in 2004. This impact was offset in part by the recognition of $183,000 of deferred revenue amortization in 2004 related to the $4,533,333 payment by Edwards.

International disposable revenue decreased by $93,000, or 46%, due to a decrease in the number of TMR kits shipped to international customers in 2004 compared to 2003 and a lower overall average selling

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price in 2004 on those kits that were sold. The decline in average sale price is the result of a greater number of kits being sold outside the European Union in 2004 compared to 2003. A greater number of the kits sold in 2004 were to countries located in Latin America and the Middle East, where we believe pricing pressures are greater and where we sell through distributors at a discount off of list price.

Optiwave 980 revenues to Edwards, a new component of product sales in 2004, increased $249,000 as compared to 2003 when we had no such sales.

Other product sales, relating to sales of new and refurbished surgical tubes, increased $90,000, or 20%, in 2004.

Service Fee Revenues

Service fees decreased $52,000, or 3%, in 2005 as compared to 2004. The decrease is primarily a result of decreased international service fee revenues due to decreased service billings to international customers.

Service fees increased $156,000, or 11%, in 2004 as compared to 2003. This increase is primarily a result of increased international revenues due to an increase in billings to international customers as compared to 2003.

Gross Profit

Total gross profit was $4,570,000, or 60%, of total revenues, for the year ended December 31, 2005 as compared with gross profit of $4,504,000, or 60%, of total revenues, for the year ended December 31, 2004. The increase in gross profit dollars in 2005 as compared to 2004 is due to (1) higher disposable TMR revenues and (2) a higher average domestic selling price on TMR laser sales.These increases were offset in part by (1) a decrease in additional revenue sharing earned under the TMR distribution agreement, (2) a decrease in service related revenues, (3)a decrease in the number of new TMR lasers sold and (4) higher unabsorbed period overhead expenses.

Total gross profit was $4,504,000, or 60%, of total revenues, for the year ended December 31, 2004 as compared with gross profit of $4,991,000, or 60%, of total revenues, for the year ended December 31, 2003. The decrease in gross profit dollars in 2004 as compared to 2003 is due to (1) a decrease in the number of new TMR lasers sold, (2) lower disposable TMR revenues, (3) lower revenues on HL1 transactions and (4) a $40,000 decrease in benefit derived from a reduction of our warranty accrual in 2003. These decreases were offset in part by new 2004 product sales of Optiwave 980 and an increase in service related revenues.

Selling, General and Administrative Expenses

The overall level of expenditures remained relatively unchanged in 2005 as compared to 2004. Salary and related fringe benefits, insurance, depreciation and software expenditures increased while legal and other related corporate expenditures decreased by similar offsetting amounts.

The overall increase in 2004 as compared to 2003 is primarily a result of increased expenditures related to legal fees of $167,000 offset in part by reduced international expenditures of $111,000 due to the closing of our Swiss subsidiary in late 2003 and other general corporate expenditures.

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Research and Development Expenses

Research and development expenditures increased 29% in 2005 as compared to 2004 primarily due to increased expenditures in connection with product development work on an additional internal research and development initiative. This increase was offset in part by a decrease in Optiwave 980 System expenditures in 2005. The transition of the Optiwave 980 from research and development to manufacturing in late 2004 contributed to a decrease of expenditures in this area in 2005.

The increased expenditures in 2004 as compared to 2003 were incurred in connection with the development of the Optiwave 980 System due to increased salaries and associated fringe benefits, project materials and depreciation related to this program and additional product development work on longer term research and development projects. These increases were offset in part by a $56,000 reduction in an accrued liability related to a past clinical trial that we no longer deemed necessary.

We expect to continue to incur significant new research and development expenditures in 2006 and future years in pursuit of our business strategy to broaden and diversify our product portfolio beyond our current TMR offerings.

Other Income

The largest component of other income is interest income earned on our cash, cash equivalents and short-term investments. Interest income increased $125,000 in 2005 as compared to 2004 primarily due to higher interest rates earned on our cash, cash equivalents and short-term investments. Other income was negatively impacted in comparison to the comparable period in 2004 as a result of a $52,000 insurance settlement received in 2004.

Interest income increased $63,000 in 2004 as compared to 2003 due to higher average cash balances. Other income increased $52,000 in 2004 as a result of an insurance settlement received in 2004.

Liquidation of Subsidiary—Foreign Currency Loss

In 2003, we decided to close our Swiss subsidiary. In closing that subsidiary, we realized a non-recurring foreign currency translation loss of $257,000 in the year ended December 31, 2003.

Provision for Income Taxes

In 2005, there was no provision for income taxes due to our net loss. In 2004, we recorded a provision for income taxes due to limitations on the utilization of U.S. net operating loss carryforwards being available to reduce taxable income. In 2003, there was no provision for income tax despite a recorded net profit of $517,000 due to the utilization of U.S. net operating loss carryforwards being available to reduce taxable income.

Net Income (Loss)

The net loss increased in 2005 as compared to 2004 primarily due to increased research and development expenses.

The change from net income in 2003 to a net loss in 2004 resulted primarily from lower gross margin dollars generated on lower overall sales coupled with higher research and development expenses.

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Kit Shipments

We view disposable kit shipments to end users as an important metric in evaluating our business. We believe that kit shipments (particularly kit shipments to U.S. hospitals), although not a direct measure, are a reasonable indicator for the adoption of TMR as a therapy in the marketplace. Disposable kit shipments to end users are as follows:

	2005	% Increase (Decrease) Over 2004			2004	% Increase (Decrease) Over 2003			2003
Domestic (by Edwards)	2,056		9	%	1,880		1	%	1,866
International	87		(30	)	125		(7	)	135
Total	2,143		7	%	2,005		0	%	2,001

We believe the 9% growth in domestic kit shipments in 2005 was primarily due to an increased base of installed TMR lasers available to perform TMR procedures and diminished concerns regarding the reimbursement around the TMR procedure that arose in 2004, as explained below.

We believe the limited growth in domestic kit shipments in 2004 was in part a result of some uncertainty surrounding reimbursement for the TMR procedure that was created when the Centers for Medicare and Medicaid Services (CMS) convened an advisory panel meeting in July 2004 to review and discuss the evidence and clinical data regarding TMR, even though no changes to Medicare coverage resulted from this panel meeting. We believe this uncertainty, which has since diminished, adversely impacted Edwards’ sales of TMR kits in 2004.

The overall limited growth in TMR kit shipments in recent years may also be partly attributable to what we believe may be an ongoing downward trend in the number of bypass surgeries being performed. We believe the proliferation in the number of interventional cardiac procedures being performed, particularly with the recent advent in the use of drug eluting stents, is causing a delay in the number of patients being referred to cardiac surgeons for treatment of their cardiovascular disease. Because a significant number of the total TMR procedures performed each year by cardiac surgeons are done in combination with bypass surgery, we believe the growth in the number of TMR procedures may be being adversely impacted by this reduction in the number of bypass surgeries being performed.

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments totaled $9,460,000 as of December 31, 2005, a decrease of $218,000 from $9,678,000 as of December 31, 2004. In March 2006, we received $1,500,000 related to the sale of our Optiwave 980 System related disposable manufacturing and development rights to Edwards (See Note 11). Our short-term investments consist of monies invested in bank certificates of deposit. We have no debt obligations. We believe that our existing cash resources will meet our working capital requirements through at least the next 12 months.

Cash used for operations in 2005 was $127,000 due to our net loss, which was partially offset by a reduction in our accounts receivable as a result of cash collections from our customers, as well as other favorable working capital changes and non-cash depreciation and amortization. Cash was also used to purchase $57,000 of capital equipment. Cash provided by financing activities consisted of $6,000 of net proceeds from the sales of common shares. The effect of foreign exchange rate changes during 2005 also negatively impacted cash by $40,000.

We are largely dependent on the success of Edwards’ sales and marketing efforts in the U.S. to continue to increase the installed base of HL2 and Optiwave 980 lasers and to substantially increase TMR

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procedural volumes and revenues. Should the installed base of HL2 lasers or TMR procedural volume not increase sufficiently, our liquidity and capital resources will be negatively impacted. Additionally, other unanticipated decreases in operating revenues or increases in expenses or changes or delays in third-party reimbursement to healthcare providers using our products may adversely impact our cash position and require further cost reductions or the need to obtain additional financing. It is not certain that we, working with Edwards and our international distributors, will be successful in achieving broad commercial acceptance of either the Heart Laser Systems or the Optiwave 980, or that we will be able to operate profitably in the future on a consistent basis, if at all.

Some hospital customers prefer to acquire the Heart Laser Systems on a usage basis rather than as a capital equipment purchase. We believe this is the result of limitations many hospitals currently have on acquiring expensive capital equipment as well as competitive pressures in the marketplace. A usage business model will result in a longer recovery period for Edwards to recoup its investment in lasers it purchases from us. This results in (1) a delay in our ability to receive additional shared revenue, if any, that we otherwise are entitled to receive under the terms of our distribution agreement with Edwards (see “Critical Accounting Policies and Estimates—Revenue Recognition”) and (2) a delay in the purchase of new lasers by Edwards if its installed base of lasers placed under usage contracts are under-performing and it chooses to re-deploy these lasers to other hospital sites in lieu of purchasing a new laser from us. Our cash position and our need for additional financing to fund operations will be dependent in part upon the number of hospitals that acquire Heart Laser Systems from Edwards on a usage basis and the number and frequency of TMR procedures performed by these hospitals.

Furthermore, we have undertaken a new business strategy that involves broadening and diversifying our product portfolio beyond our current TMR offerings, by developing or acquiring new and innovative medical devices to address cardiac and vascular related markets. We believe this strategy will result in our incurring losses for at least the next 12-24 months as we increase our spending in the area of research and development. We cannot be certain that we will be successful in implementing our business strategy or that future sales, if any, from these planned new products will recover the investments we plan to make. If we are unsuccessful in implementing our business strategy, or if the diversification of our product portfolio takes longer or costs more than anticipated, our liquidity and capital resources will be adversely affected and we may need to obtain additional financing.

There can be no assurance that, should we require additional financing, such financing will be available on terms and conditions acceptable to us. Should additional financing not be available on terms and conditions acceptable to us, additional actions may be required that could adversely impact our ability to continue to realize assets and satisfy liabilities in the normal course of business. The consolidated financial statements set forth in this report do not include any adjustments to reflect the possible future effects of these uncertainties.

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Contractual Obligations

Our long-term contractual commitments as of December 31, 2005 consisted of operating leases for our facility in Franklin, Massachusetts, which expires in August 2009, and our former facility in Billerica, Massachusetts, which expired in February 2006, and purchase commitments to make payments to suppliers. Future annual minimum payments for these contractual obligations are as follows:

	Payment due by period
Contractual Obligations	Total		Less than 1 year			1-3 years		3-5 years		More than 5 years
	(dollars in thousands)
Operating Lease Obligations	$	953		$	261	$	692		—		—
Purchase Obligations	551			551		—			—		—
Total	$	1,504		$	812	$	692		—		—

Off-Balance Sheet Arrangements

None.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

A portion of our operations consists of sales activities in foreign jurisdictions. We manufacture our products exclusively in the U.S. and sell our products in the U.S. and abroad. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute our products. Our operating results are exposed to changes in exchange rates between the U.S. dollar and foreign currencies, especially the Euro. When the U.S. dollar strengthens against the Euro, the value of foreign sales decreases. When the U.S. dollar weakens, the functional currency amount of sales increases. No assurance can be given that foreign currency fluctuations in the future will not adversely affect our business, financial condition and results of operations, although at present we do not believe that our exposure is significant as international sales represented only 6% of our consolidated sales in 2005. We do not hedge any balance sheet exposures and intercompany balances against future movements in foreign exchange rates.

Our interest income and expense are sensitive to changes in the general level of U.S. and foreign interest rates. In this regard, changes in U.S. and foreign interest rates affect the interest earned on our cash and cash equivalents. We do not believe that a 10% change to the applicable interest rates would have a material impact on our future results of operations or cash flows.

Item 8. Financial Statements and Supplementary Data

All financial statements and other information required to be filed hereunder are filed as Appendix A hereto, are listed under Item 15(a) and are incorporated herein by reference.

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

Not applicable.

32

Item 9A. Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2005. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2005, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 2006 Annual Meeting of Shareholders (referred to as our Definitive Proxy Statement) under the caption “Item No. 1—Election of Directors”.

We have adopted a code of ethics that applies to all employees, including our principal executive officer, principal financial officer and principal accounting officer. We undertake to provide a copy of our code of ethics to any person without charge, upon request to PLC Systems Inc., c/o Chief Financial Officer, 10 Forge Park, Franklin, Massachusetts 02038. We intend to disclose waivers and amendments of provisions of the code, if any, for our principal executive officer, principal financial officer and principal accounting officer and that relates to any element of the code of ethics definition enumerated in applicable SEC rules by posting such information, if any, on our Internet website, www.plcmed.com.

Item 11. Executive Compensation

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement under the caption “Item No. 1—Election of Directors”. The information specified in Item 402(k) and (1) of Regulation S-K and set forth in our Definitive Proxy Statement is not incorporated herein by reference.

33

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement under the captions “Securities Authorized for Issuance Under Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management”.

Item 13. Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement under the caption “Certain Relationships and Related Transactions”.

Item 14. Principal Accountant Fees and Services

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement under the caption “Principal Accountant Fees and Services”.

34

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)Financial Statements.The following documents are filed as Appendix A hereto and are included as part of this annual report on Form 10-K.

	Page
Report of Independent Registered Public Accounting Firm	F-2
Report of Predecessor Independent Registered Public Accounting Firm	F-3
Consolidated Balance Sheets as of December 31, 2005 and 2004	F-4
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003	F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2005, 2004 and 2003	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003	F-7
Notes to Consolidated Financial Statements	F-8
Schedule II—Valuation and Qualifying Accounts	S-1

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.

(b)Exhibits.

The exhibits filed as part of this annual report on Form 10-K are set forth on the Exhibit Index immediately preceding such exhibits, and are incorporated herein by reference.

(c)Financial Statement Schedules.

See Item 15(a) above.

35

SIGNATURES

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

	PLC SYSTEMS INC.
Date: March 28, 2006	By:	/s/ MARK R. TAUSCHER
		Mark R. Tauscher
		President and Chief Executive Officer

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

	Name		Capacity		Date
/s/ MARK R. TAUSCHER		President and Chief Executive		March 28, 2006
Mark R. Tauscher		Officer (Principal Executive Officer)
/S/ JAMES G. THOMASCH		Chief Financial Officer (Principal		March 28, 2006
James G. Thomasch		Financial and Principal  Accounting Officer)
/s/ EDWARD H. PENDERGAST		Director		March 28, 2006
Edward H. Pendergast
/s/ DONALD E. BOBO		Director		March 28, 2006
Donald E. Bobo
/s/ KEVIN J. DUNN		Director		March 28, 2006
Kevin J. Dunn
/s/ BENJAMIN HOLMES		Director		March 28, 2006
Benjamin Holmes
/s/ ALAN H. MAGAZINE		Director		March 28, 2006
Alan H. Magazine
/s/ BRENT NORTON, M.D.		Director		March 28, 2006
Brent Norton, M.D.
/s/ ROBERT I. RUDKO, PH.D.		Director		March 28, 2006
Robert I. Rudko, Ph.D.

36

APPENDIX A

PLC SYSTEMS INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2005, 2004 and 2003

PLC SYSTEMS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		F-2
Report of Predecessor Independent Registered Public Accounting Firm		F-3
Consolidated Balance Sheets as of December 31, 2005 and 2004		F-4
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003		F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2005, 2004 and 2003		F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003		F-7
Notes to Consolidated Financial Statements		F-8
Financial Statement Schedule:
Schedule II—Valuation and Qualifying Accounts		S-1

F-1

Report of Vitale, Caturano & Company Ltd., Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
PLC Systems Inc.

We have audited the accompanying consolidated balance sheet of PLC Systems Inc. as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America.) Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal controls over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PLC Systems Inc. as of December 31, 2005, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Our audit was performed for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The schedule listed in the Index at Item 15 is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. In our opinion, the schedule referred to above presents fairly, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole for the year ended December 31, 2005.

/s/ Vitale, Caturano & Company, Ltd.

Boston, Massachusetts

February 10, 2006, except with respect to
the matters discussed in Note 11,
as to which the date is March 9, 2006

F-2

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
PLC Systems Inc.

We have audited the accompanying consolidated balance sheets of PLC Systems Inc. as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PLC Systems Inc. at December 31, 2004, and the consolidated results of its operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Boston, Massachusetts
February 10, 2005

F-3

PLC SYSTEMS INC.

CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
(In thousands)

	2005		2004
ASSETS
Current assets:
Cash and cash equivalents	$   2,560		$   9,678
Short-term investments	6,900		—
Accounts receivable—Edwards	634		1,144
Accounts receivable—other, net of allowance of $96 and $104 in 2005 and 2004, respectively	153		261
Inventories, net	963		1,112
Prepaid expenses and other current assets	798		592
Total current assets	12,008		12,787
Equipment, furniture and leasehold improvements, net	235		293
Other assets	224		247
Total assets	$ 12,467		$ 13,327
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$      352		$      328
Accrued compensation	677		430
Accrued other	334		301
Deferred revenue—Edwards	1,621		999
Deferred revenue—other	60		71
Total current liabilities	3,044		2,129
Deferred revenue—Edwards	3,692		4,181
Deferred revenue—other	188		188
Total long-term liabilities	3,880		4,369
Commitments and contingencies (note 8)
Stockholders’ equity:
Preferred stock, no par value, unlimited shares authorized, none issued and outstanding
Common stock, no par value, unlimited shares authorized, 30,080 and 30,068 shares issued and outstanding at December 31, 2005 and 2004, respectively	93,737		93,731
Accumulated deficit	(87,850	)	(86,582	)
Accumulated other comprehensive loss	(344	)	(320	)
Total stockholders’ equity	5,543		6,829
Total liabilities and stockholders’ equity	$ 12,467		$ 13,327

The accompanying notes are an integral part of the consolidated financial statements.

F-4

PLC SYSTEMS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 2005, 2004 and 2003
(In thousands, except per share data)

	2005			2004			2003
Revenues:
Product sales—Edwards	$	5,476		$	5,328		$	6,123
Product sales—other	621			654			776
Service fees—Edwards	1,311			1,322			1,328
Service fees—other	228			269			107
Total revenues	7,636			7,573			8,334
Cost of revenues:
Product sales—Edwards	2,064			1,987			2,551
Product sales—other	252			359			273
Service fees—Edwards	577			556			513
Service fees—other	173			167			6
Total cost of revenues	3,066			3,069			3,343
Gross profit	4,570			4,504			4,991
Operating expenses:
Selling, general and administrative	3,336			3,329			3,297
Research and development	2,750			2,130			980
Total operating expenses	6,086			5,459			4,277
Income (loss) from operations	(1,516		)	(955		)	714
Other income (expense):
Other income, net	248			175			60
Liquidation of subsidiary: foreign currency loss	—			—			(257		)
Income (loss) before income taxes	(1,268		)	(780		)	517
Provision for income taxes	—			53			—
Net income (loss)	$	(1,268	)	$	(833	)	$	517
Basic and diluted earnings (loss) per share	$	(0.04	)	$	(0.03	)	$	0.02
Average shares outstanding:
Basic	30,074			30,025			29,826
Diluted	30,074			30,025			30,414

The accompanying notes are an integral part of the consolidated financial statements.

F-5

PLC SYSTEMS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For The Years Ended December 31, 2005, 2004 and 2003
(In thousands)

								Accumulated
								Other
	Common Stock			Accumulated				Comprehensive
	Shares	Amount		Deficit				Loss				Total
Balance, December 31, 2002	29,798	$	93,586		$	(86,266	)		$	(595	)	$	6,725
Exercise of stock options	19	10			—				—			10
Issuance of common stock	79	40			—				—			40
Comprehensive income:
Net income	—	—			517				—			517
Foreign currency translation, including $257 of realized foreign currency losses	—	—			—				264			264
Total comprehensive income												781
Balance, December 31, 2003	29,896	$	93,636		$	(85,749	)		$	(331	)	$	7,556
Exercise of stock options	159	86			—				—			86
Issuance of common stock	13	9			—				—			9
Comprehensive loss:
Net loss	—	—			(833		)		—			(833		)
Foreign currency translation	—	—			—				11			11
Total comprehensive loss												(822		)
Balance, December 31, 2004	30,068	$	93,731		$	(86,582	)		$	(320	)	$	6,829
Issuance of common stock	12	6			—				—			6
Comprehensive loss:
Net loss	—	—			(1,268		)		—			(1,268		)
Foreign currency translation	—	—			—				(24		)	(24		)
Total comprehensive loss												(1,292		)
Balance, December 31, 2005	30,080	93,737			(87,850		)		(344		)	5,543

The accompanying notes are an integral part of the consolidated financial statements.

F-6

PLC SYSTEMS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 2005, 2004 and 2003
(In thousands)

	2005			2004			2003
Operating activities:
Net income (loss)	$	(1,268	)	$	(833	)	$	517
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization	140			122			122
Foreign currency loss on liquidation of subsidiary	—			—			257
Change in assets and liabilities:
Accounts receivable—Edwards	510			(43		)	119
Accounts receivable—other	119			(134		)	(13		)
Inventory	148			(226		)	22
Prepaid expenses and other assets	(208		)	(102		)	(120		)
Accounts payable	24			30			(104		)
Deferred revenue—Edwards	134			4,514			258
Deferred revenue—other	(7		)	34			20
Accrued liabilities	281			(4		)	(471		)
Net cash provided by (used for) operating activities	(127		)	3,358			607
Investing activities:
Purchase of investments	(8,400		)	—			—
Maturity of investments	1,500			—			—
Purchase of equipment	(57		)	(180		)	(91		)
Net cash used for investing activities	(6,957		)	(180		)	(91		)
Financing activities:
Net proceeds from sales of common shares	6			95			50
Secured borrowings	—			—			(137		)
Net cash provided by (used for) financing activities	6			95			(87		)
Effect of exchange rate changes on cash and cash equivalents	(40		)	28			16
Net increase (decrease) in cash and cash equivalents	(7,118		)	3,301			445
Cash and cash equivalents at beginning of year	9,678			6,377			5,932
Cash and cash equivalents at end of year	$	2,560		$	9,678		$	6,377

The accompanying notes are an integral part of the consolidated financial statements.

F-7

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005

1.Business

PLC Systems Inc. (“PLC” or the “Company”) is a medical device company specializing in innovative technologies for the cardiac and vascular markets. The Company currently manufactures two lasers that are used in the treatment of cardiovascular disease. PLC pioneered the CO2 Heart Laser System (“The Heart Laser System”) that cardiac surgeons use to perform carbon dioxide (CO2) transmyocardial revascularization (“TMR”) to alleviate symptoms of severe angina. In addition, the Company manufactures the Optiwave 980 laser (“Optiwave 980”) under a supply agreement with Edwards Lifesciences LLC (“Edwards”). The Optiwave 980 is expected to be utilized by surgeons to ablate cardiac tissue as a means to treat certain heart arrhythmias.

Edwards is the Company’s exclusive distributor for TMR products in the United States. Edwards is also the Company’s largest shareholder, owning approximately 18% of its outstanding common stock as of December 31, 2005, and has a representative on the Board of Directors.

2.   Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of PLC and its two wholly owned subsidiaries, PLC Medical Systems, Inc. and PLC Sistemas Medicos Internacionais (Deutschland) GmbH. During 2003, PLC Medical Systems AG was substantially liquidated resulting in the recognition of $257,000 of foreign currency translation losses. All intercompany accounts and transactions have been eliminated.

Use of Estimates

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

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents at December 31, 2005 and 2004 consist of investments in money market funds. Short-term investments consist of monies invested in bank certificates of deposits with remaining maturities greater than three months and less than one year. These investments are carried at cost, which approximates fair value.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk include cash, cash equivalents and short-term investments and accounts receivable. The Company believes it minimizes its exposure to potential concentrations of credit risk by placing its cash equivalents and short-

F-8

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005

2.Significant Accounting Policies (Continued)

term investments in high-quality financial instruments with a high quality institution. At December 31, 2005 and 2004, the majority of the cash, cash equivalents and short-term investments balance was invested with a single financial institution.

The Company has a concentration of credit risk due to its exclusive supply arrangements with Edwards. Edwards accounted for 81% of the Company’s accounts receivable at both December 31, 2005 and 2004. Edwards also accounted for 89%, 88% and 89% of the Company’s revenues for the years ended December 31, 2005, 2004 and 2003, respectively. Collateral is not required on sales to Edwards.

Concentration of Revenues

Approximately 89%, 90% and 95% of the Company’s revenues for the years ended December 31, 2005, 2004 and 2003, respectively, were derived from the sales and service of the Heart Laser System.

Allowance for Doubtful Accounts

For the Company’s accounts receivable, the Company continuously monitors collections from customers, its principal customer being Edwards, and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that the Company has identified. Historically, the Company has not experienced significant losses related to its accounts receivable. Collateral is generally not required. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories

Inventories are stated at the lower of cost (computed on a first-in, first-out method) or market value and include allocations of labor and overhead. A specific obsolescence allowance is provided for slow moving, excess and obsolete inventory based on management’s best estimate of the net realizable value of inventory on hand taking into consideration factors such as actual trailing twelve month sales, expected future product line sales and estimated required service part stocking levels needed to meet warranty, service contract and time and material spare part demands.

Equipment, Furniture, Leasehold Improvements and Long-Lived Assets

Equipment, furniture and leasehold improvements are stated on the basis of cost. Depreciation is computed principally on the straight-line method for financial reporting purposes and on accelerated methods for income tax purposes.

Depreciation and amortization are based on the following useful lives:

Equipment	3-5 years
Office furniture and fixtures	5 years
Leasehold improvements	Shorter of life of lease or useful life

F-9

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005

2.Significant Accounting Policies (Continued)

The Company reviews and evaluates long-lived assets for impairment on a regular basis. In the Company’s opinion, long-lived assets are not impaired as of the balance sheet dates presented.

Warranty and Preventative Maintenance Costs

The Company warranties its products against manufacturing defects under normal use and service during the warranty period. The Company obtains similar warranties from a majority of its suppliers, including those who supply critical Heart Laser System components. In addition, under the terms of its TMR distribution agreement with Edwards, the Company is able to bill Edwards for actual warranty costs, including preventative maintenance services, up to a specified amount during the warranty period.

The Company evaluates the estimated future unrecoverable costs of warranty and preventative maintenance services for its installed base of lasers on a quarterly basis and adjusts its warranty reserve accordingly. The Company considers all available evidence, including historical experience and information obtained from supplier audits.

Changes in the warranty accrual were as follows (in thousands):

	Year Ended December 31,
	2005				2004
Balance, beginning of period		$	60			$	60
Change in liability for warranties issued during the period		(7		)		4
Change in liability for pre-existing warranties		7				(4		)
Balance, end of period		$	60			$	60

Revenue Recognition

The Company records revenue from the sale of TMR kits and the Optiwave 980 at the time of shipment to Edwards. TMR kit revenues include the amount invoiced to Edwards for kits shipped pursuant to purchase orders received, as well as an amortized portion of deferred revenue related to Edwards’ payment of $4,533,333 in February 2004. This payment was made by Edwards in exchange for a reduction in the prospective purchase price the Company receives from Edwards upon a sale of the kits (see Note 3). The Company is amortizing this payment from Edwards into its Consolidated Statement of Operations as revenue over a seven year period (culminating in 2010) under the units-of-revenue method as prescribed by Emerging Issues Task Force (EITF) 88-18, Sales of Future Revenue. Management determined that a seven year timeframe was the most appropriate amortization period based on a valuation model they used to assess the economic fairness of the payment. Factors management considered in developing this valuation model included the estimated foregone revenues over a seven year period resulting from the reduction in the prospective purchase price payable to the Company by Edwards, a discount rate deemed appropriate to this transaction and an estimate of the remaining economic useful life of the current TMR kit design, without any benefit being given to potential future product improvements the Company may make. Management reviews annually, and adjusts if necessary, the prospective revenue amortization rate for kits based on its best estimate of the total number of kits likely remaining to be shipped to hospital customers by Edwards through 2010.  Based on this, and for the years ended

F-10

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005

2.Significant Accounting Policies (Continued)

December 31, 2005 and 2004, the Company recorded amortization of $356,000 and $183,000, respectively, which is included in revenues in the Consolidated Statements of Operations.

TMR lasers are billed to Edwards in accordance with purchase orders that the Company receives. Invoiced TMR lasers are recorded as other current assets and deferred revenue on the Company’s Consolidated Balance Sheet until such time as the laser is shipped to a hospital, at which time the Company records revenue and cost of revenue.

Under the terms of the Edwards TMR distribution agreement, once Edwards has recovered a prescribed amount of revenue from a hospital for the use or purchase of a TMR laser, any additional revenues earned by Edwards are shared with the Company pursuant to a formula established in the distribution agreement. The Company only records its share of such additional revenue, if any, at the time the revenue is earned.

The Company records revenue from the sale of TMR kits and TMR lasers to international distributors or hospitals at the time of shipment.

Revenues from service and maintenance contracts are recognized ratably over the life of the contract.

Installation revenues related to a TMR laser transaction are recorded as a component of service fees when the laser is installed.

Foreign Currency Translation

Assets and liabilities are translated into U.S. dollars at end-of-period exchange rates, while income and expense items are translated at average rates of exchange prevailing during the year. Exchange gains and losses arising from translation are accumulated as a separate component of stockholders’ equity. During 2003, the liquidation of PLC Medical Systems AG was substantially complete, resulting in the recognition of $257,000 of foreign currency translation losses. Gains and losses from foreign currency transactions are recorded as other income, net, in the accompanying statements of operations and are not material.

Earnings (Loss) per Share

In 2005 and 2004, basic and diluted loss per share have been computed using only the weighted average number of common shares outstanding during the period without giving effect to any potential future issuances of common stock related to stock option programs and warrants, since their inclusion would be antidilutive.

In 2003, basic earnings per share have been computed using only the weighted average number of common shares outstanding during the period, while diluted earnings per share was computed using the weighted average number of common shares outstanding during the period plus the effect of outstanding stock options and warrants using the treasury stock method. In calculating diluted earnings per share, the dilutive effect of stock options and warrants is computed using the average market price for the respective period.

F-11

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005

2.Significant Accounting Policies (Continued)

For the years ended December 31, 2005, 2004 and 2003, 5,788,000, 6,170,000 and 3,866,000 shares attributable to outstanding stock options and warrants were excluded from the calculation of diluted earnings per share because the effect was antidilutive. The following table sets forth the computation of basic and diluted earnings per share:

	Years Ended December 31,
	2005			2004			2003
	(In thousands, except per share data)
Net income (loss) available for common shareholders	$	(1,268	)	$	(833	)	$	517
Weighted average outstanding shares of common stock	30,074			30,025			29,826
Dilutive effect of employee stock options and warrants	—			—			588
Common stock and common stock equivalents	30,074			30,025			30,414
Earnings (loss) per share:
Basic	$	(0.04	)	$	(0.03	)	$	0.02
Diluted	$	(0.04	)	$	(0.03	)	$	0.02

Stock Based Compensation

The Company has historically granted stock options for a fixed number of shares to employees and certain other individuals with exercise prices equal to the fair value of the shares at the dates of grant. Through December 31, 2005 the Company adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation (“SFAS 123”), and accounted for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (“APB Opinion No. 25”). Under APB Opinion No. 25, compensation expense with respect to such awards is not recognized if on the date the awards were granted the exercise price was equal to or greater than the fair market value of the underlying common shares.

The following table illustrates the effect on net income (loss) and basic earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:

	Years Ended December 31,
	2005			2004			2003
	(In thousands, except per share data)
Net income (loss) attributable to common stockholders—As reported	$	(1,268	)	$	(833	)	$	517
Deduct total stock-based compensation expense determined under fair value based method for all stock option awards	(186		)	(470		)	(147		)
Net income (loss) attributable to common stockholders—Pro forma	$	(1,454	)	$	(1,303	)	$	370
Earnings (loss) per basic and diluted share attributable to common stockholders—As reported	$	(0.04	)	$	(0.03	)	$	0.02
Earnings (loss) per basic and diluted share attributable to common stockholders—Pro forma	$	(0.05	)	$	(0.04	)	$	0.01

F-12

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005

2.Significant Accounting Policies (Continued)

The fair value of options issued at the date of grant were estimated using the Black-Scholes model with following weighted average assumptions:

	2005		2004		2003
Expected life (years)	3		3		3
Interest rate	3.68%		1.47%-2.53%		1.59%-2.98%
Volatility	40.7%		73.4%-80.3%		58.5%-78.8%
Expected dividend yield	None		None		None
Weighted average fair value of options granted during the year	$	0.17	$	0.41	$	0.25

Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payments (“SFAS 123R”), which is a revision of SFAS No. 123. SFAS 123R supersedes APB Opinion No. 25. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The disclosure-only approach permitted by SFAS 123 and elected by the Company through December 31, 2005 is no longer an alternative. The Company is required to adopt the provisions of SFAS 123R effective January 1, 2006. The impact of adoption of SFAS 123R will depend in part on levels of share-based payments granted in the future and the above pro-forma disclosures are not necessarily representative of the effects on reported net income (loss) for future years.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4 (“SFAS 151”). SFAS 151 amends the guidance in ARB No 43, Chapter 4, Inventory Pricing, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current-period charges. In addition, SFAS 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 151 will have a material impact on the Company’s financial condition, results of operations or liquidity.

In May 2005, the FASB issued FASB Statement No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). Previously, APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” required the inclusion of the cumulative effect of changes in accounting principle in net income of the period of the change. SFAS 154 requires companies to recognize a change in accounting principle, including a change required by a new accounting pronouncement when the pronouncement does not include specific transition provisions, retrospectively to prior periods’ financial statements. The Company will assess the impact of a retrospective application of a change in accounting principle in accordance with SFAS 154 when such a change arises after the effective date of January 1, 2006.

F-13

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005

3.Edwards Transaction

In February 2004, the Company signed an agreement with Edwards to assume development and manufacturing of the Optiwave 980 and related system disposables. Subsequent to December 31, 2005, the Company and Edwards terminated this agreement and entered into a new modified supply agreement whereby the Company will, commencing in March 2006, now only manufacture the Optiwave 980 for Edwards and Edwards will assume all development and manufacturing responsibilities for the Optiwave 980 system disposables (see Note 11, “Subsequent Event”).

In conjunction with signing the February 2004 agreement, the terms of the Company’s TMR distribution agreement with Edwards were modified to (1) extend the term of the agreement until at least October 17, 2017 and (2) reduce the Company’s share of revenue on TMR kits sold to hospitals. The Company received as consideration from Edwards, a lump-sum payment of $4,533,333, which initially was recorded as deferred revenue in the Company’s Consolidated Balance Sheet. See Note 2, “Revenue Recognition”.

4.Inventories

Inventories consist of the following at December 31 (in thousands):

	2005		2004
Raw materials	$	701	$	889
Work in process	67		130
Finished goods	195		93
	$	963	$	1,112

At December 31, 2005 and 2004, inventories are stated net of a reserve of $533,000 and $528,000, respectively, for potentially excess and obsolete inventory.

5.Equipment, Furniture and Leasehold Improvements

Equipment, furniture and leasehold improvements consist of the following at December 31 (in thousands):

	2005		2004
Equipment	$	3,220	$3,613
Office furniture and fixtures	582		582
Leasehold improvements	346		346
	4,148		4,541
Less accumulated depreciation and amortization	3,913		4,248
	$	235	$	293

Depreciation expense was $114,000, $94,000 and $89,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

F-14

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005

6.Stockholders’ Equity

In January 2001, the Company issued 5,333,333 shares of common stock to Edwards at $.75 per share resulting in net proceeds of approximately $3,898,000. Edwards has certain preemptive rights to maintain their ownership position relative to future stock offerings. The Company also issued 1,000,000 warrants to purchase shares of common stock at $1.50 per share, 1,000,000 warrants to purchase shares of common stock at $2.50 per share, and 1,000,000 warrants to purchase shares of common stock at $3.50 per share. These warrants all expired unexercised in January 2004, January 2005 and January 2006, respectively. In connection with this transaction, the Company issued to a financial advisor a warrant to purchase 100,000 shares at $1.00 per share. This warrant expired unexercised in January 2006.

At December 31, 2005, there were 7,576,000 shares of authorized but unissued common stock reserved for issuance under all stock option plans, the employee stock purchase plan and stock warrants.

The Company has unlimited authorized shares of preferred stock. The Board of Directors is authorized to fix designations, relative rights, preferences and limitations in the preferred stock at the time of issuance.

The Company has never declared nor paid dividends on any of its capital stock and does not expect to do so in the foreseeable future.

7.Stock Option and Stock Purchase Plans

In May 2005, the Company adopted the 2005 Stock Incentive Plan (the “2005 Plan”). The 2005 Plan has replaced the 1997 Executive Stock Option Plan, 2000 Equity Incentive Plan, 2000 Non-Statutory Stock Option Plan and 2000 Non-Qualified Performance and Retention Equity Plan (the “Previous Plans”), under which no further awards can be granted from the Previous Plans after the adoption of the 2005 Plan.

The number of Options that may be granted under the 2005 Plan is equal to 2,156,175 shares of common stock (subject to adjustment in the event of stock splits and other similar events), plus such number of shares as may become available under the Previous Plans after the date of the adoption of the 2005 Plan because any award previously granted under any such plan expires or is terminated, surrendered or cancelled without having been fully exercised or is forfeited in whole or in part or results in any common stock not being issued, provided that such number of additional shares may not exceed 2,535,492. Incentive stock options are issuable only to employees of the Company, while non-qualified options may be issued to non-employee directors, consultants, and others, as well as to employees. The options granted under the Previous Plans and the 2005 Plan become exercisable either immediately, ratably over one to four years from the date of grant, or based on the attainment of specific performance criteria, and expire ten years from the date of grant. In May 2005 and 2004, the Company granted new options to purchase 690,000 and 895,000 shares of the Company’s common stock, respectively, to employees and non-employee directors which vested immediately upon granting.

The Company grants stock options to its non-employee directors. Generally, new non-employee directors receive an initial grant of an option to purchase 30,000 shares of the Company’s common stock that vests in installments over three years. Once the initial grant has fully vested, non-employee directors other than the Chairman of the Board receive an annual grant of an option to purchase 15,000 shares of the Company’s common stock that generally vests either immediately or in four equal quarterly installments. The Chairman of the Board receives an annual grant of an option to purchase 30,000 shares

F-15

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005

7.Stock Option and Stock Purchase Plans (Continued)

of the Company’s common stock that vests either immediately or in four equal quarterly installments in the same manner as the options granted annually to the other non-employee directors. All such options have an exercise price equal to the fair market value of the common stock on the date of grant. The grants of options to non-employee directors discussed above are not awarded to the Edwards representative who holds a Company board position.

The per share exercise price of the common stock subject to an incentive stock option may not be less than the fair market value of the common stock on the date the option is granted. The Company must grant non-qualified options at an exercise price of at least 85% of the fair market value of the common stock.

In August 2002, the Company communicated to its domestic employees an offer to exchange certain employee stock options having an exercise price of $.75 or more per share previously granted to them in return for nonqualified stock options of the Company at an exchange ratio of one new option share for one eligible option share surrendered (the “Exchange Offer”). Each employee who accepted the Exchange Offer was required to exchange all option shares subject to each option grant that the employee surrendered for exchange and to forfeit certain stock options granted to him or her on or after February 26, 2002. Generally, the new options granted in this exchange vest on a cumulative basis with one-sixth of the new option vesting on the date the new option was granted and the remaining portion of the new option vesting in five equal installments at the end of each six-month period thereafter.

The Company issued on or about March 26, 2003 new options to purchase 999,345 shares of the Company’s Common Stock in exchange for the options surrendered in this option exchange program. Because the new options were granted six months and a day from the cancellation, no compensation expense resulted from the grant of the new options.

The following is a summary of option activity under all Plans (in thousands, except per option data):

	2005						2004						2003
	Number of Options			Weighted Average Exercise Price			Number of Options			Weighted Average Exercise Price			Number of Options			Weighted Average Exercise Price
Outstanding, beginning of year		4,070			$	1.38		3,346			$	1.51		2,149			$	2.25
Options granted		690			0.55			927			0.82			1,378			0.53
Options exercised		—			—			(158	)		0.54			(20	)		0.51
Options cancelled		(2	)		0.81			(23	)		1.15			(71	)		1.74
Options cancelled upon termination of expired stock option plans		(70	)		5.94			(22	)		4.63			(90	)		4.00
Outstanding, end of year		4,688			1.19			4,070			1.38			3,346			1.51
Exercisable, end of year		4,586			1.19			3,539			1.50			2,258			1.97

F-16

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005

7.Stock Option and Stock Purchase Plans (Continued)

The following table summarizes stock options at December 31, 2005 (number of options in thousands):

	Outstanding						Exercisable
Range of Exercise Prices	Number of Options		Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
$0.45-$0.90		3,860		7.44		0.61		3,780		0.60
$1.25-$3.00		336		4.56		2.16		314		2.21
$3.88-$8.88		492		2.30		5.08		492		5.08
		4,688		6.69		1.19		4,586		1.19

The Company has a 2000 Employee Stock Purchase Plan (the “Purchase Plan”) for all eligible employees.  Prior to December 1, 2005, shares of the Company’s common stock could be purchased at six-month intervals at 85% of the lower of the fair market value on the first or the last day of each six-month period.  On November 30, 2005, the Company adopted an amendment to the Purchase Plan which provides that the purchase price for each share of the Company’s common stock purchased under the Plan will be 95% of the closing price of the Company’s common stock on the last business day of the relevant plan period.  The change in the purchase price was effective beginning with the plan period commencing on December 1, 2005.  Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period, subject to certain additional limitations.  Under the Purchase Plan, employees of the Company purchased 12,044 shares of common stock in 2005, 13,390 shares of common stock in 2004 and 78,832 shares of common stock in 2003 at average prices of $0.50, $0.70 and $0.51 per share, respectively.  At December 31, 2005, 322,487 shares were reserved for future issuance under the Purchase Plan.

8.Lease Commitments

The Company leases its corporate office under an operating lease agreement which expires in August 2009. In addition to the minimum lease payments, the agreement requires payment of the Company’s pro-rata share of property taxes and building operating expenses. The Company also leased additional manufacturing space under an operating lease which expired in February 2006.

As of December 31, 2005, future minimum lease payments are estimated to be as follows (in thousands):

Year	Future Minimum Lease Payments
2006		$	261
2007		255
2008		261
2009		176
		$953

Total rent expense was $316,000 in 2005, $294,000 in 2004 and $296,000 in 2003.

F-17

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005

9.Income Taxes

The provision for income taxes in the year ended December 31, 2004 shown in the Consolidated Statement of Operations represents current federal income taxes payable.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets as of December 31 are as follows (in thousands):

	2005			2004
Net U.S. operating loss carryforwards	$	20,827		$	20,138
Net foreign operating loss carryforwards	341			377
Accrued expenses and reserves	640			585
Tax credits	1,027			1,039
Other	2,440			2,403
Total deferred tax assets	25,275			24,542
Valuation allowance	(25,275		)	(24,542		)
Net deferred tax assets	$	—		$	—

The valuation allowance increased by approximately $733,000 in 2005 primarily due to a net loss and an increase in temporary differences associated with deferred revenue and accrued expenses in 2005. The Company recorded the valuation allowance due to the uncertainty of the realizability of the related net deferred tax asset of $25,275,000.

Income (loss) before taxes consisted of the following (in thousands):

	2005			2004			2003
Domestic	$	(1,167	)	$	(4,496	)	$	1,098
Foreign	(101		)	3,663			(581		)
	$	(1,268	)	$	(833	)	$	517

The amounts reported above for the 2004 domestic and foreign income (loss) before taxes include the effects of the write-off of all unsettled intercompany receivables and payables carried on the books of the Company’s U.S. and Swiss operating subsidiaries at the time the Swiss operating subsidiary was formally liquidated in 2004. As such, the U.S. operating subsidiary recorded an expense of approximately $3,800,000 and the Swiss operating subsidiary recorded income of the same amount in 2004.

F-18

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005

9.Income Taxes (Continued)

Income taxes (benefit) computed at the federal statutory rate differ from amounts provided as follows (in thousands):

	2005			2004			2003
Statutory income tax expense (benefit)	$	(431	)	$	(283	)	$	471
Utilization of loss carryforwards	(30		)	(1,398		)	(471		)
Unbenefited U.S. losses	396			1,529			—
Unbenefited foreign losses	65			152			—
Benefit for income taxes	$	—		$	—		$	—

At December 31, 2005, the Company had U.S. net operating loss carryforwards available to reduce future taxable income of approximately $52 million, which expire at various dates through 2025. In addition, the Company had foreign net operating loss carryforwards of approximately $900,000.

10.   Segment Information

The Company operates in one industry segment - the development, manufacture and sale of medical lasers and related products. Net sales to unaffiliated customers (by origin) are summarized below (in thousands):

	North America			Europe			Total
2005
Net sales		$	7,213		$	423	$	7,636
2004
Net sales		$	7,111		$	462	$	7,573
2003
Net sales		$	7,864		$	470	$	8,334

All of the Company’s long-lived assets are located in North America.

11.Subsequent Event

In March 2006, the Company entered into an agreement with Edwards whereby the Company received a cash payment of $1,500,000 in consideration for selling its Optiwave 980 system related disposable manufacturing and development rights to Edwards. The Company will continue to be the exclusive manufacturer of the current generation of Optiwave 980 for Edwards and will have certain rights of first refusal related to the development and manufacture of the next generation laser. Separately, Edwards will pay the Company a royalty on all future Optiwave 980 system related disposable sales until such time that cumulative royalty payments from Edwards reach $1,700,000.

F-19

PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005

12.Selected Quarterly Data (unaudited)

	March 31				June 30			September 30				December 31				Total
	(In thousands, except per share data)
2005
Total revenue		$	1,943		$	1,982			$	1,900			$	1,811		$	7,636
Gross profit		1,215			1,192				1,085				1,078			4,570
Loss from operations		(236		)	(354		)		(464		)		(462		)	(1,516		)
Net loss		(184		)	(290		)		(397		)		(397		)	(1,268		)
Loss per share, basic and diluted		(0.01		)	(0.01		)		(0.01		)		(0.01		)	(0.04		)
2004
Total revenue		$	1,909		$	1,796			$	1,606			$	2,262		$	7,573
Gross profit		1,143			1,049				1,056				1,256			4,504
Income (loss) from operations		(376		)	(333		)		(446		)		200			(955		)
Net income (loss)		(350		)	(251		)		(436		)		204			(833		)
Earnings (loss) per share, basic and diluted		(0.01		)	(0.01		)		(0.01		)		0.01			(0.03		)

F-20

Schedule II

PLC SYSTEMS INC.

Valuation and Qualifying Accounts

			Additions
	Balance at		Charged to							Balance at
	Beginning		Costs and							End of
Description	of Period		Expenses				Deductions			Period
For the Year Ended December 31, 2005
Allowance for Doubtful Accounts	$	104,000		$	(8,000	)		—		$	96,000
For the Year Ended December 31, 2004
Allowance for Doubtful Accounts	$	115,000		$	(2,000	)		$	9,000	$	104,000
For the Year Ended December 31, 2003
Allowance for Doubtful Accounts	$	192,000		$	(14,000	)		$	63,000	$	115,000

S-1

EXHIBIT INDEX

Exhibit
Number	Description of Document
3.1	Articles of Continuance, pursuant to the Yukon Business Corporations Act, as amended, incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 2004, as previously filed with the Securities and Exchange Commission.
3.2	By-Law No. 1, a By-Law relating generally to the transaction of the business and affairs of PLC Systems Inc., incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 1999, as previously filed with the Securities and Exchange Commission.
4.1	Form of Common Stock Certificate, incorporated by reference to the Registrant’s registration statement on Form S-1 (SEC File No. 33-48340) and amendments thereto, as previously filed with the Securities and Exchange Commission.
10.1#	1993 Stock Option Plan, incorporated by reference to the Registrant’s registration statement on Form S-1 (SEC File No. 33-58258) and amendments thereto, as previously filed with the Securities and Exchange Commission.
10.2#	1993 Formula Stock Option Plan, incorporated by reference to the Registrant’s registration statement on Form S-1 (SEC File No. 33-58258) and amendments thereto, as previously filed with the Securities and Exchange Commission.
10.3#	1995 Stock Option Plan, incorporated by reference to the Registrant’s registration statement on Form S-8 (SEC File No. 33-95168), as previously filed with the Securities and Exchange Commission.
10.4#	1997 Executive Stock Option Plan, incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 1997, as previously filed with the Securities and Exchange Commission.
10.5#	2000 Non-qualified Performance and Retention Equity Plan, incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 2000, as previously filed with the Securities and Exchange Commission.
10.6#	2000 Non-Statutory Stock Option Plan, incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 2001, as previously filed with the Securities and Exchange Commission.
10.7#	2000 Equity Incentive Plan, incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 2001, as previously filed with the Securities and Exchange Commission.
10.8#	Form of Stock Option Grant Letter to Employees of the Registrant under the Registrant’s 1995 Stock Option Plan, 1997 Executive Stock Option Plan, 2000 Equity Incentive Plan and 2000 Non-Qualified Performance and Retention Plan, incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2004, as previously filed with the Securities and Exchange Commission.
10.9#	Form of Stock Option Grant Letter to Non-Employee Directors of the Registrant under the Registrant’s 1995 Stock Option Plan, 1997 Executive Stock Option Plan and 2000 Equity Incentive Plan., incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2004, as previously filed with the Securities and Exchange Commission.
10.10#	2005 Stock Incentive Plan, incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on May 24, 2005.

10.11#	Form of Stock Option Grant Letter for Employees of the Registrant under the Registrant’s 2005 Stock Incentive Plan, incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on May 24, 2005.
10.12#	Form of Stock Option Grant Letter for Non-Employee Directors of the Registrant under the Registrant’s 2005 Stock Incentive Plan, incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on May 24, 2005.
10.13#	Employment Agreement of James G. Thomasch, dated November 4, 1999, incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 2000, as previously filed with the Securities and Exchange Commission.
10.14#	Employment Agreement of Mark R. Tauscher, dated December 22, 1999, incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 2000, as previously filed with the Securities and Exchange Commission.
10.15#	Terms of Employment dated October 28, 2003 between the Registrant and Dr. Robert I. Rudko, incorporated by reference to the Registrant’s annual report on Form 10-K for the year ended December 31, 2003, as previously filed with the Securities and Exchange Commission.
10.16#	Amendment dated March 15, 2005 to Terms of Employment between PLC Medical Systems, Inc. and Dr. Robert I. Rudko, incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on March 17, 2005.
10.17+*	Distribution Agreement, dated January 9, 2001, by and among the Registrant, PLC Medical Systems, Inc. and Edwards Lifesciences LLC.
10.18	Shareholders Agreement, dated January 9, 2001, by and between the Registrant and Edwards Lifesciences Corporation, incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2001, as previously filed with the Securities and Exchange Commission.
10.19+	Distribution Agreement by and among the Registrant, PLC Medical Systems, Inc. and Edwards Lifesciences LLC dated February 24, 2004, incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2004, as previously filed with the Securities and Exchange Commission.
10.20+	Contribution, Development and Manufacturing Agreement by and among the Registrant, PLC Medical Systems, Inc. and Edwards Lifesciences LLC dated as of February 24, 2004, incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2004, as previously filed with the Securities and Exchange Commission.
10.21	First Amendment to Distribution Agreement entered into as of February 24, 2004 by and among Edwards Lifesciences LLC, the Registrant and PLC Medical Systems, Inc., incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2004, as previously filed with the Securities and Exchange Commission.
10.22	First Amendment to Shareholders Agreement entered into as of February 24, 2004 by and between Edwards Lifesciences Corporation and the Registrant, incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2004, as previously filed with the Securities and Exchange Commission.
10.23*#	Compensatory Arrangements with Executive Officers.
10.24*#	Compensatory Arrangements with Non-Employee Directors.
10.25*#	Severance Agreements with Certain Executive Officers.
21.1*	Subsidiaries of the Registrant.

23.1*	Consent of Vitale, Caturano & Company Ltd.
23.2*	Consent of Ernst & Young LLP
31.1*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed with this annual report on Form 10-K for the year ended December 31, 2005.

+Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission.

#Management contract or compensatory plan or arrangement.

EX-10.17

Exhibit 10.17

Confidential Materials omitted and filed separately with the

Securities and Exchange Commission. Asterisks denote omissions.

DISTRIBUTION AGREEMENT

by and among

PLC SYSTEMS INC.,

PLC MEDICAL SYSTEMS, INC.

and

EDWARDS LIFESCIENCES LLC

dated

January 9, 2001

TABLE OF CONTENTS

ARTICLE I - Definitions		1
ARTICLE II - Appointment		3
Section 2.1	Appointment	3
Section 2.2	Competition	3
ARTICLE III - Obligations of Distributor		3
Section 3.1	General Obligations of Edwards	3
Section 3.2	Costs and Expenses	4
Section 3.3	Sales and Marketing Option	4
ARTICLE IV - Obligations of PLC		4
Section 4.1	Transition Services	4
Section 4.2	Approvals	4
Section 4.3	Labeling of Products	4
Section 4.4	Clinical or Marketing Studies	5
Section 4.5	Installation Services and Services Provided Under Extended Service Agreements	5
Section 4.6	Warranty and Preventive Maintenance Services	5
Section 4.7	Recall of Products	5
Section 4.8	Product Liability Insurance	6
Section 4.9	Costs and Expenses	6
ARTICLE V - Sales and Marketing		6
Section 5.1	Marketing Plan	6
Section 5.2	Sales Plan	6
Section 5.3	Sales Material and Literature	6
Section 5.4	Training and Retention of Sales Personnel	6
Section 5.5	Performance Record of Sales Personnel	7
ARTICLE VI - Purchase Arrangements		7
Section 6.1	Purchase Forecasts for Products	7
Section 6.2	Purchaser Orders; No Minimum Product Quantities	7
Section 6.3	Placement of Orders	7
ARTICLE VII - Pricing, Payment, Shipping		8
Section 7.1	TMR Disposable Kit.	8
Section 7.2	HL-1 Laser Systems	8
Section 7.3	HL-2 Laser Systems	8
Section 7.4	Product Accessories	9
Section 7.5	Shipping	9
Section 7.6	Payment	9
ARTICLE VIII - Term and Termination; Annual Meeting		9
Section 8.1	Term and Renewal	9

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Section 8.2	Immediate Termination	10
Section 8.3	Annual Meeting	10
ARTICLE IX - Warranties and Indemnification		10
Section 9.1	Warranties	10
Section 9.2	Indemnification by PLC	10
Section 9.3	Indemnification by Edwards	11
Section 9.4	Indemnification Procedures	11
ARTICLE X - Intellectual Property Rights and Confidentiality		12
Section 10.1	Trademarks	12
Section 10.2	Confidential Information	12
ARTICLE XI - MISCELLANEOUS		13
Section 11.1	Relationship	13
Section 11.2	No Conflict	13
Section 11.3	Governing Law	13
Section 11.4	Escalation	13
Section 11.5	Jurisdiction and Consent to Service	14
Section 11.6	Notices	14
Section 11.7	Interpretation	15
Section 11.8	Severability	15
Section 11.9	Counterparts	15
Section 11.10	Entire Agreement; No Third Party Beneficiaries	15
Section 11.11	Amendments and Modifications; Waivers and Extensions.	16
Section 11.12	Assignment	16
Section 11.13	Exhibits	16
Section 11.14	Expenses	16
Section 11.15	No Consequential or Punitive Damages	16

Exhibits and Schedules
Exhibit A	Description of Products
Schedule 2.1	Distributors
Schedule 3.3	Sales Personnel
Schedule 4.1	Transition Services
Schedule 4.5	Installation Services and Services Relating to Extended Service Agreements
Schedule 4.6	Warranty and Preventive Maintenance Services
Schedule 4.8	Product Liability Insurance
Schedule 5.1	Marketing Plan
Schedule 5.2	Sales Plan
Schedule 7.3	HL-2 Laser System Customers
Schedule 7.4	Product Accessories

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DISTRIBUTION AGREEMENT

DISTRIBUTION AGREEMENT, dated as of January 9, 2001 this “Agreement”), by and among Edwards Lifesciences LLC, a Delaware corporation (“Edwards”), PLC Systems Inc., a Yukon Territory corporation (“PLC Parent”), and PLC Medical Systems, Inc., a Delaware corporation (“PLC”), which is a wholly owned subsidiary of PLC Parent.

WHEREAS, PLC has developed a carbon dioxide laser system and related accessories described in Exhibit A hereto (as set forth in Exhibit A, the “Products”), and desires that the sale and use of the Products be actively promoted in the fifty states of the United States of America and the District of Columbia (the “Territory”);

WHEREAS, Edwards is a company in the medical devices field with experience and expertise in the commercialization and distribution of medical devices;

WHEREAS, PLC desires to engage Edwards to purchase, resell and distribute the Products in the Territory; and

WHEREAS, Edwards desires to obtain rights to purchase, resell and distribute the Products in the Territory;

NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows:

ARTICLE I

Definitions

As used in this Agreement, the following terms shall have the following meanings:

“Agreement” shall have the meaning set forth in the Recitals.

“Automatic Renewal Threshold” shall have the meaning set forth in Section 8.1.

“Average End User Price” shall have the meaning set forth in Section 7.1.

“Damages” shall have the meaning set forth in Section 9.2.

“DBMR” shall have the meaning set forth in Section 2.2.

“Dispute” shall have the meaning set forth in Section 11.4.

“Edwards” shall have the meaning set forth in the Recitals.

“Edwards Facility” shall have the meaning set forth in Section 7.5.

“Effective Date” shall have the meaning set forth in Section 8.1.

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“Escalation Notice” shall have the meaning set forth in Section 11.4.

“Estimated End User Price “ shall have the meaning set forth in Section 7.1.

“ETL” shall have the meaning set forth in Section 4.2.

“FDA” shall have the meaning set forth in Section 4.2.

“HL-1 Laser System” shall have the meaning set forth in Exhibit A.

“HL-2 Laser System” shall have the meaning set forth in Exhibit A.

“HL-2 Purchase Price” shall have the meaning set forth in Section 7.3.

“Indemnified Party” shall have the meaning set forth in Section 9.3.

“Indemnifying Party” shall have the meaning set forth in Section 9.3.

“Initial Term” shall have the meaning set forth in Section 8.1.

“PLC” shall have the meaning set forth in the Recitals.

“PLC Parent” shall have the meaning set forth in the Recitals.

“Products” shall have the meaning set forth in the Recitals.

“Sales and Marketing Option” shall have the meaning set forth in Section 3.3.

“Scheduled Employees” shall have the meaning set forth in Section 3.3

“Services” shall have the meaning set forth in Section 4.5.

“Territory” shall have the meaning set forth in the Recitals.

“TMR Disposable Kit” shall have the meaning set forth in Exhibit A.

“Transaction Agreements” shall have the meaning set forth in Section 11.10.

“Usage Premium” shall mean, with respect to each contract pursuant to which an HL-1 Laser System or HL-2 Laser System is sold, the dollar amount by which the per-usage charge set forth in such contract exceeds the TMR Disposable Kit price set forth in such contract or if the TMR Disposable Kit price is not explicitly stated in such contract, the list price of a TMR Disposable Kit at the time the contract was entered into. In addition, Usage Premium shall also include the amount of any additional payments related exclusively to the use of the applicable Laser System, including, but not limited to, rental or lease payments.

“Warehouse Retesting” shall mean retesting an HL-2 Laser System to its original factory specifications due to the fact that it has been warehoused by Edwards for longer than the Warehouse Life.

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“Warehouse Life” shall mean [**], unless PLC reasonably determines, at any time during the term of this Agreement, that such period may be extended, but in no event shall such period be extended to more than [**]; provided, however that PLC shall provide Edwards with the data upon which it makes the determination to extend or maintain the Warehouse Life.

“Warranty Period” shall mean in the event (a) an HL-2 Laser System is shipped before the expiration of the Warehouse Life, the period from the date of installation until the [**] anniversary of such installation, but not to exceed [**] from the date of shipment to the end user; (b) an HL-2 Laser System is shipped after the expiration of the Warehouse Life and PLC has requested that such HL-2 Laser System be Warehouse Retested and Edwards ships without such Warehouse Retesting, the period from the date of sale to Edwards until the date which is [**] plus the Warehouse Life; (c) a proposed shipment of an HL-2 Laser System would occur after the expiration of the Warehouse Life, and Edwards and PLC agree to the Warehouse Retesting of such HL-2 Laser System, the period from the date of installation until the [**] anniversary of such installation, but not to exceed [**] from the date of shipment to the end user; and (d) a proposed shipment of an HL-2 Laser System would occur after the expiration of the Warehouse Life, and Edwards and PLC agree that Warehouse Retesting of such HL-2 Laser System is not necessary, the period from the date of installation until the [**] anniversary of such installation, but not to exceed [**] from the date of shipment to the end user.

ARTICLE II

Appointment

SECTION 2.1  Appointment. Subject to the terms and conditions contained in this Agreement, PLC hereby appoints Edwards as PLC’s exclusive independent distributor of the Products in the Territory. Edwards may not appoint a secondary or sub-distributor to sell the Products without PLC’s prior written consent, other than those set forth on Schedule 2.1. PLC shall not appoint any other agents, representatives, or distributors for the purpose of selling the Products in the Territory.

SECTION 2.2  Competition. Edwards shall not sell any devices in the Territory which directly compete with the Products in the field of myocardial revascularization either intraoperative or percutaneous that uses a device-based channeling means (“DBMR”) during the term of this Agreement. Edwards may market and sell medical devices, including, without limitation, products that may be used in connection with revascularization of the heart, as long as such medical devices are not within the field of DBMR and all other medical devices which it is selling as of the date hereof. Edwards does not currently sell any devices in the field of DBMR.

ARTICLE III

Obligations of Distributor

SECTION 3.1  General Obligations of Edwards. Edwards shall use commercially reasonable efforts to distribute and sell the Products in the Territory including, without limitation, the following:

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(a)Promote the sale and use of Products in the Territory;

(b)Provide customer service, including responding to customer inquiries and requests for quotes on Product pricing; and

(c)Provide invoices to customers and manage accounts receivable and collection responsibilities for sales by Edwards of the Products.

SECTION 3.2  Costs and Expenses. Edwards shall bear all the costs and expenses associated with its obligations set forth in this Agreement.

SECTION 3.3  Sales and Marketing Option. Edwards shall have the option (the “Sales and Marketing Option”) which must be exercised, if at all, upon 30 days prior written notice to PLC given during or before the three-month period following the first anniversary of the date hereof, to assume full sales and marketing responsibility for the Products in the Territory and to offer employment, subject to Edwards’ standard employment qualifications, with base compensation, commission and benefits substantially competitive to those provided by PLC immediately prior to such offer to each PLC employee set forth on Schedule 3.3 (the “Scheduled Employees”), provided they meet the performance criteria set forth on Schedule 3.3. Upon exercise of the Sales and Marketing Option, PLC shall release performance reviews of the Scheduled Employees to Edwards, subject to the waiver of each such employee. If such Scheduled Employee refuses to waive access to his or her performance reviews, such refusal shall constitute a rejection of an offer of employment from Edwards and Edwards shall have no further obligations with respect to such employee and PLC shall be responsible for any severance pay pursuant to the last sentence of this section. If Edwards chooses not to offer employment to any Scheduled Employee that meets the performance criteria set forth on Schedule 3.3 and Edwards’ standard employment qualifications, Edwards shall pay to PLC the amount on Schedule 3.3 per such employee. In the event a Scheduled Employee rejects the employment offer by Edwards, PLC shall be responsible for severance pay to such employee, if any, pursuant to PLC’s then existing severance policy, if any.

ARTICLE IV

Obligations of PLC

SECTION 4.1  Transition Services. PLC shall and PLC Parent shall cause PLC to provide to Edwards at no cost the transition services set forth on Schedule 4.1 for a period of up to two months from the Effective Date which services Edwards may terminate in whole or in part at any time prior to the expiration of such two-month period.

SECTION 4.2  Approvals. PLC shall and PLC Parent shall cause PLC to use commercially reasonable efforts to obtain and maintain all approvals and clearances required with respect to the sale of the Products in the Territory, including, without limitation, approvals from the Food and Drug Administration (the “FDA”) and the Electrical Testing Laboratory (“ETL”).

SECTION 4.3  Labeling of Products. PLC shall and PLC Parent shall cause PLC to provide and to assume regulatory responsibility for all finished Product and Product-related

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labeling, including all sales and marketing literature, such that it complies with all applicable laws and regulations in the Territory during the term of this Agreement. All labeling for the Products shall include the statement “Distributed by Edwards Lifesciences LLC, Manufactured by PLC Medical Systems, Inc.”

SECTION 4.4  Clinical or Marketing Studies. PLC shall and PLC Parent shall cause PLC to use commercially reasonable efforts to conduct any clinical study with respect to the Products required by the FDA or other governmental agencies to sell or market the Products in the Territory. All other clinical or marketing studies with respect to the Products that are conducted within the Territory will be approved, funded, and conducted on terms and conditions mutually agreed to by PLC and Edwards.

SECTION 4.5  Installation Services and Services Provided Under Extended Service Agreements. PLC shall and PLC Parent shall cause PLC to provide the services and technical support relating to the Products as set forth on Schedule 4.5 (the “Schedule 4.5 Services”). PLC shall retain all service fees and revenues that it receives from end users for providing the Schedule 4.5 Services, provided that PLC shall pay to Edwards a commission of [**]% of all such fees and revenues. If and to the extent that PLC fails to perform its obligation in the first sentence of this Section 4.5, Edwards may provide those Schedule 4.5 Services or contract with a third party to provide those Schedule 4.5 Services. In such event, Edwards shall keep all service fees and revenues resulting therefrom and PLC shall train the personnel (at a rate of $[**] per day) performing such Schedule 4.5 Services (whether employed by Edwards or a third party) and provide factory support, including, without limitation, spare parts, technical troubleshooting, and processing product returns. PLC shall also provide Edwards with monthly reports with respect to Product returns and complaints. Edwards shall log in any Products returned by customers to Edwards and return such Products to PLC. If an HL-2 Laser System is installed and the price to be paid by the end user for such installation is less than $[**] per day, PLC shall install such HL-2 Laser System and Edwards shall pay PLC the difference between $[**] and the amount to be paid by the end user per day for such installation, but in no event shall Edwards’ payment exceed $[**] per installation.

SECTION 4.6  Warranty and Preventive Maintenance Services. PLC shall and PLC Parent shall cause PLC to provide all warranty and two scheduled preventive maintenance services on all HL-2 Laser Systems as set forth on Schedule 4.6 during the Warranty Period. Edwards shall reimburse PLC for the costs set forth on Schedule 4.6 incurred by PLC in the performance of its obligation in the prior sentence during the Warranty Period, but in no event shall such reimbursement exceed $[**] per HL-2 Laser System. In the event PLC is required to conduct Warehouse Retesting on an HL-2 Laser System, Edwards shall reimburse PLC $[**] per such HL-2 Laser System, upon completion of Warehouse Retesting.

SECTION 4.7  Recall of Products. In the event of a recall of any of the Products, PLC shall and PLC Parent shall cause PLC to bear all costs and expenses of such recall, including, without limitation, expenses or obligations to third parties, the cost of notifying customers and end users, and costs associated with the shipment of recalled Products from customers to PLC. Edwards shall cooperate with PLC in effecting any recall of the Products sold by Edwards by producing customer lists and assisting with the notification of customers and end users of the recalled Products.

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SECTION 4.8  Product Liability Insurance. Set forth on Schedule 4.8 is a copy of PLC’s product liability insurance policy which is in full force and effect. PLC shall and PLC Parent shall cause PLC to obtain and keep in force during the term of this Agreement a product liability insurance policy in an amount not less than $10,000,000 in a form reasonably acceptable to Edwards. During the term of this Agreement and for a period of [**] following the expiration or termination of this Agreement, such insurance policy shall evidence Edwards and all of its affiliates as additional insured entities and shall provide for written notification to Edwards by the insurer not less than 30 days prior to cancellation, expiration or modification. PLC shall and PLC Parent shall cause PLC to provide a certificate of insurance evidencing compliance with this Section 4.8 to Edwards within 30 days of the date hereof.

SECTION 4.9  Costs and Expenses. PLC shall and PLC Parent shall cause PLC to bear all the costs and expenses associated with PLC’s obligations set forth in this Agreement.

ARTICLE V

Sales and Marketing

SECTION 5.1  Marketing Plan. PLC and Edwards shall jointly execute the marketing plan for the Products set forth in Schedule 5.1 and fund such plan based on the percentages set forth on such schedule during the first six months of the term of this Agreement. During such period, PLC and Edwards shall jointly develop a marketing plan for the Products for the next six months and PLC shall provide [**]% of the funding for such plan and Edwards shall provide the remaining [**]% of the funding. PLC and Edwards shall continue to jointly develop a marketing plan for the Products and provide funding for such plan according to mutually agreeable allocations until such time as Edwards exercises the Sales and Marketing Option.

SECTION 5.2  Sales Plan. Edwards and PLC agree to the sales plan set forth on Schedule 5.2. Edwards shall reimburse any out-of-pocket costs for travel incurred by PLC in connection with training Edwards’ sales personnel beyond the scope of the training requirements anticipated in Schedule 5.2.

SECTION 5.3  Sales Material and Literature. PLC shall initially provide all sales material and literature for the Products. PLC and Edwards shall jointly develop any new literature. The costs and expenses associated with developing and producing any new literature shall be paid jointly by PLC and Edwards according to the funding percentages set forth in Section 5.1 until such time as Edwards exercises the Sales and Marketing Option. If Edwards exercises such option, Edwards thereafter shall be solely responsible for paying the cost of such literature. Nothing in this Section 5.3 shall have any effects on PLC’s obligations set forth in Section 4.3.

SECTION 5.4  Training and Retention of Sales Personnel. PLC shall provide products and sales training to all PLC and Edwards sales personnel that are engaged in marketing and selling the Products in the Territory. PLC shall use commercially reasonable efforts to retain the sales personnel set forth on Schedule 3.3. During the term of this Agreement and for a period of [**] after the termination or expiration of this Agreement, neither PLC Parent nor PLC shall hire or solicit for employment any of Edwards’ personnel without the prior written consent of

6

Edwards. During the term of this Agreement and for a period of one year after the termination or expiration of this Agreement, Edwards shall not hire or solicit for employment any personnel of PLC Parent or PLC without the prior written consent of PLC; provided, however, that if Edwards exercises the Sales and Marketing Option, the foregoing limitations shall be inapplicable to personnel listed or otherwise referenced on Schedule 3.3.

SECTION 5.5  Performance Record of Sales Personnel. PLC shall keep an accurate and complete record of the performance of all Scheduled Employees, including the sales figures for each Scheduled Employee, and will provide quarterly updates to Edwards of the sales figures for each territory.

ARTICLE VI

Purchase Arrangements

SECTION 6.1  Purchase Forecasts for Products. PLC and Edwards shall confer monthly and jointly produce a rolling twelve-month forecast of the expected demand for the Products until such time as Edwards exercises the Sales and Marketing Option. After Edwards exercises such option, for the remaining term of the Agreement, Edwards shall provide quarterly to PLC a rolling four quarter forecast of the expected demand for the Products.

SECTION 6.2  Purchaser Orders; No Minimum Product Quantities. Edwards shall submit a non-cancelable purchase order to PLC for TMR Disposal Kits for the upcoming calendar quarter on the first day of the month preceding such quarter except that until June 30, 2001, Edwards shall submit non-cancelable purchase orders on a monthly basis for TMR Disposal Kits. Until such time as Edwards exercises the Sales and Marketing Option, Edwards shall submit non-cancelable purchase orders to PLC for HL-2 Laser Systems on an as needed basis. If Edwards exercises such option, thereafter, Edwards shall submit a non-cancelable purchase order to PLC for HL-2 Laser Systems for the upcoming calendar quarter on the first day of the month preceding such quarter. Notwithstanding its provision of demand forecasts for the Products and anything else set forth herein, Edwards shall determine in its sole discretion the quantity of Products it shall purchase and there shall be no minimum purchase requirements for any Products. To the extent that the terms of any purchase order and the terms of this Agreement conflict, the terms of this Agreement shall control.

SECTION 6.3  Placement of Orders. All orders for Products submitted by Edwards shall be initiated by written purchase orders sent to PLC which shall specify the desired delivery date, location and method of transportation for the Products included in such order. With respect to any Product for which Edwards may submit purchase orders to PLC on an as needed basis, Edwards agrees to promptly submit purchase orders to PLC after its receipt of orders from its customers, but, in any event, shall submit purchase orders to PLC within ten business days of its receipt of a customer order. Quarterly purchase orders submitted to PLC by Edwards will indicate the quantity of Products to be delivered for each month of the quarter, provided, however, the quantity for any individual month shall in no case be less than [**]% of the total to be delivered for the entire quarter. The quantity for the quarter shall not exceed [**]% of the most recent forecasted quantity for the quarter. PLC shall use commercially reasonable efforts to deliver the Products on the agreed upon delivery dates set forth in accepted

7

purchase orders, but, in any event, shall make all deliveries within [**] days of the agreed upon delivery dates set forth in accepted purchase orders.

ARTICLE VII

Pricing, Payment, Shipping

SECTION 7.1  TMR Disposable Kit. (a) Edwards shall purchase the TMR Disposable Kits from PLC at 55% of the Average End User Price. If Edwards exercises the Sales and Marketing Option, thereafter Edwards shall purchase the TMR Disposable Kits from PLC at 45% of the Average End User Price. The “Average End User Price” shall mean the average of the actual sales price for each TMR Disposable Kit sold during a calendar quarter. Edwards shall calculate the Average End User Price and deliver such calculation to PLC within 15 days after the end of each quarter.

(b)PLC shall bill TMR Disposable Kits to Edwards on a preliminary basis at 55% of the Estimated End User Price before Edwards exercises the Sales and Marketing Option and 45% of the Estimated End User Price after Edwards exercises such option. Through June 30, 2001, the “Estimated End User Price” shall be $2,000. During subsequent quarters of the Agreement, the “Estimated End User Price” shall be equal to the Average End User Price for the most recent quarter that such data is available and calculable.

(c)The difference between the preliminary amount billed during a quarter using the Estimated End User Price and the actual amount owed using the Average End User Price shall be credited to Edwards by PLC or paid by Edwards to PLC, as the case may be, within [**] days of the date such Average End User Price is determined. With respect to TMR Disposable Kits that PLC has sold prior to the date of this Agreement to PLC customers using the HL-1 Laser System, but as to which delivery has not yet been requested by the applicable customer, upon such request for delivery PLC shall provide the requested TMR Disposable Kits to Edwards [**], and Edwards shall provide such TMR Disposable Kits to the applicable customer [**].

(d)Within [**] days of the end of each calendar month, Edwards shall provide to PLC a written report showing, for the month immediately preceding the report, Edwards’ sales of the Products, including the name of the customer, the date of the shipment, the price of the Product and the allocation of the price between Edwards and PLC. Edwards shall maintain for at least two years its records, contracts and accounts relating to sales of the Products, and shall permit examination thereof by authorized representatives of PLC at all reasonable times.

SECTION 7.2  HL-1 Laser Systems. Edwards shall deliver to PLC 100% of all Usage Premiums received in connection with the sale of TMR Disposable Kits for use with, and service revenue related to, HL-1 Laser Systems. Edwards shall deliver any and all monies received in connection with the purchase of an HL-1 Laser System to PLC.

SECTION 7.3  HL-2 Laser Systems. Subject to any adjustment provided herein, Edwards shall purchase the HL-2 Laser Systems from PLC for $[**] per unit, which amount

8

includes warehousing fees at PLC’s facility (the “HL-2 Purchase Price”). In addition, Edwards shall pay PLC [**]% of the amount the HL-2 Laser System end user price exceeds the HL-2 Purchase Price for each such HL-2 Laser System sold. Edwards shall retain the Usage Premiums it receives from each HL-2 Laser System that is placed until the aggregate Usage Premiums received with respect to such HL-2 Laser System equals the [**]. Thereafter, Edwards shall pay PLC [**]% of such Usage Premiums. PLC and Edwards agree to periodically review in good faith the HL-2 Laser Purchase Price and to make adjustments, subject to their mutual agreement, to the HL-2 Purchase Price due to inflation, change in product cost and/or other market or competitive conditions. Edwards shall pay PLC within [**] days of the sale the amount set forth in the column titled “Protection” specified in Schedule 7.3 for each such HL-2 Laser System that is sold to a customer listed on Schedule 7.3 within three months of Effective Date of this Agreement.

SECTION 7.4  Product Accessories. Edwards shall purchase from PLC F.O.B PLC’s manufacturing facility any Product accessory set forth on Schedule 7.4 for the transfer price listed for such accessory on Schedule 7.4.

SECTION 7.5  Shipping. At Edwards’ request, PLC shall warehouse all HL-2 Laser Systems purchased by Edwards at Edwards’ segregated warehouse within PLC’s facility (“Edwards Facility”). Until the date 60 days after the date of the termination of the transition services provided in Section 4.1, PLC shall deliver TMR Disposable Kits directly to the end user. Thereafter, PLC shall deliver TMR Disposable Kits directly to Edwards. All prices for the Products shall be F.O.B. PLC’s manufacturing facility. The prices will not include any federal, state or local sales, use, excise or value added tax that may be applicable. If PLC has the legal obligation to collect such taxes, the appropriate amount shall be added to Edwards’ invoice and paid by Edwards unless Edwards provides PLC with a valid tax exemption certificate authorized by the appropriate taxing authority. PLC shall ship the Products using the method of transportation specified by Edwards in the purchase order. In all cases, title, risk of loss and all responsibility for transportation, insurance and storage shall pass from PLC to Edwards upon transfer of finished HL-2 Laser Systems from PLC to the Edwards Facility and after such transfer PLC shall promptly issue an invoice related thereto to Edwards.

SECTION 7.6  Payment. Full payment shall be made by Edwards to PLC within [**] days from the invoice date which shall be shipping date for the Products to Edwards.

ARTICLE VIII

Term and Termination; Annual Meeting

SECTION 8.1  Term and Renewal. This Agreement shall commence on the dale hereof (the “Effective Date”) and be valid for an initial term of five (5) years (“Initial Term”). Edwards shall have the option to extend the Agreement on the same terms and conditions for an additional term of five (5) years, provided that the TMR Disposable Kits sold by Edwards, measured for the twelvemonth period ending six months prior to the expiration of the Initial Term, are used in at least 35% of all intraoperative laser-based transmyocardial revascularization procedures in the Territory for such period as measured by a third-party study reasonably acceptable to PLC and Edwards (the “Automatic Renewal Threshold”). If the parties cannot

9

agree on any such study, then they shall jointly commission a study by McKinsey & Company and will be bound by such study. PLC and Edwards shall split the cost of the McKinsey & Company study equally. If the sale of Products by Edwards does not meet the Automatic Renewal Threshold, the parties may agree to extend the Agreement on mutually acceptable terms and conditions.

SECTION 8.2  Immediate Termination. This Agreement may be terminated by either Edwards or PLC immediately in the event that (a) any breach by PLC of Section 4.8; (b) any material breach by the other party remains uncured 60 days after written notice containing details of the breach has been delivered to the other party; or (c) the other party shall file for protection from its creditors under any applicable bankruptcy or insolvency laws, shall make an assignment for the benefit of creditors, or shall have a receiver appointed for its property. This Agreement may be terminated by Edwards upon one-year notice, in the event Edwards decides in its sole reasonable discretion that unfavorable market conditions exist for the Products in the Territory.

SECTION 8.3  Annual Meeting. The chief executive officer of PLC and the executive in charge of the DBMR business for Edwards shall agree to meet annually in order to discuss sales opportunities, current market trends and to keep each other informed of pertinent events and competing products having an impact upon the Products’ marketability, including, but not limited to, forecasts as to future demand.

ARTICLE IX

Warranties and Indemnification

SECTION 9.1  Warranties. PLC warrants that (a) it possesses good and marketable title to all Products sold to Edwards under this Agreement; (b) each Product conforms to its specifications and is fit for the purposes and indications described in its labeling; (c) when available for sale in the Territory the Products are or will be manufactured in conformity with all FDA and ETL rules and regulations and applicable laws of the Territory; (d) the Products have or will have obtained FDA approval to market and sell the Products when the Products are available for sale in the Territory; (e) it is the owner or licensor of the entire right, title and interest in the intellectual property relating to the Products and, to the knowledge of PLC and PLC Parent, the use by Edwards of any such intellectual property will not violate any right of any third party; and (f) it complies and will continue to comply with all applicable laws and regulations of the Territory with respect to the Products.

SECTION 9.2  Indemnification by PLC. PLC and PLC Parent shall indemnify and hold harmless Edwards, its officers, directors, shareholders, employees, parents, successors, affiliates, assigns, customers and users of Products, in each case, from and against any and all costs or expenses (including, without limitation, reasonable attorneys’ fees, and the reasonable out-of-pocket expenses of testifying and preparing for testimony and responding to document and other information requests, whether or not a party to such litigation), judgments, fines, losses, claims (whether or not meritorious) and damages (collectively, “Damages”), as incurred, to the extent they relate to, arise out of or are the result of (i) the manufacture by PLC or use of any Products; (ii) the design of any Products or component of the Products not developed

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exclusively by Edwards; (iii) the failure of the Products to satisfy any warranty made by PLC; (iv) by reason of the sale or use of the Products any claim of infringement of patents, trademarks, trade names, or copyrights, any claim of misappropriation or misuse of trade secrets or information or any similar claim; (v) any claims with respect to any Scheduled Employee arising from actions taken by PLC prior to the date hereof, and (vi) any claims with respect to any Scheduled Employee arising from actions taken by PLC, unrelated to this Agreement, prior to the exercise of the Sales and Marketing Option, provided, however, that such indemnification shall in no event exceed $[**].

SECTION 9.3  Indemnification by Edwards. Edwards shall indemnify and hold harmless PLC, its successors, affiliates and assigns, in each case, from and against any and all Damages, as incurred, to the extent they relate to, arise out of or are the result of Edwards’ gross negligence or willful misconduct in the promotion and sale of the Products by Edwards.

SECTION 9.4  Indemnification Procedures. The party seeking indemnification (the “Indemnified Party”) pursuant to this Article EX shall promptly notify the indemnifying party (the “Indemnifying Party”), in writing, of such claim describing such claim in reasonable detail, provided that the failure to provide such notice shall not affect the obligations of the Indemnifying Party unless and only to the extent it is actually prejudiced thereby. In the event that such claim involves a claim by a third party against an Indemnified Party, the Indemnifying Party shall have 30 days after receipt of such notice to decide whether it will undertake, conduct and control, through counsel of its own choosing (but reasonably acceptable to the Indemnified Party) and at its own expense, the settlement or defense thereof unless (i) the Indemnifying Party is also a party to the proceeding and the Indemnified Party determines in good faith that joint representation would be inappropriate or (ii) the Indemnifying Party fails to provide reasonable assurance to the Indemnified Party of its financial capacity to defend such proceeding, and provide indemnification with respect thereto, and if it so decides, the Indemnified Party shall cooperate with it in connection therewith, provided that the Indemnified Party may participate in such settlement or defense through counsel chosen by it, and provided further that the fees and expenses of such counsel shall be borne by the Indemnified Party. The Indemnifying Party shall not, without the written consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned or delayed), settle or compromise any action, unless such settlement or compromise includes an unconditional release of the Indemnified Party. If the Indemnifying Party does not notify the Indemnified Party within 30 days after the receipt of notice of a claim of indemnity hereunder that it elects to undertake the defense thereof, the Indemnified Party shall have the right to contest, settle or compromise the claim but shall not pay or settle any such claim without the consent of the Indemnifying Party (which consent shall not be unreasonably withheld, conditioned or delayed). The Indemnifying Party and the Indemnified Party shall cooperate fully in all aspects of any investigation, defense, pre-trial activities, trial, compromise, settlement or discharge of any claim in respect of which indemnity is sought pursuant to Article IX, including, but not limited to, providing the other party with reasonable access to employees and officers (including as witnesses) and other information. The remedies provided in this Article IX will not be exclusive of or limit any other remedies that may be available to the Indemnified Parties.

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ARTICLE X

Intellectual Property Rights and Confidentiality

SECTION 10.1  Trademarks. Edwards shall have the right to indicate to the public that it is an authorized distributor of the Products and to market and sell the Products under the trademarks, service marks and trade names that PLC may adopt from time to time. Edwards shall not alter, obscure or remove any trademarks, service marks or trade names of PLC which are contained on or in or affixed to the Products at the time of shipment. Edwards shall not use any trademarks, service marks or trade names of PLC in connection with any business conducted by Edwards other than dealing with the Products in accordance with the terms of this Agreement. Edwards agrees that its use of the trademarks, service marks and trade names of PLC shall not create in its favor any right, title or interest therein and acknowledges PLC’s exclusive right, title and interest thereto. Edwards agrees that it will not use, without PLC’s prior written consent, any mark which is similar to or is likely to be confused with any trademarks, service marks or trade names of PLC. Edwards’ rights to use the trademarks, service marks and trade names of PLC as set forth in this Section 10.1 shall terminate upon termination or expiration of this Agreement.

SECTION 10.2  Confidential Information. In order to avoid disclosure of confidential and proprietary information to any other person, firm or corporation, the parties agree that during the term of this Agreement and for a period of three years from the termination of this Agreement each will treat any such information which is received from one another in writing and clearly marked as “Confidential” or if disclosed orally, which is confirmed in writing as “Confidential” within thirty (30) days of initial disclosure, with the same degree of care that each employs with respect to its own information which it does not desire to have published or disseminated. It is understood that each party shall be liable for any unauthorized disclosure should it fail to safeguard the disclosed information with such care. This obligation shall survive the termination or expiration of this Agreement. The parties shall not have any obligation with respect to such information which is:

(a)independently developed by the receiving party without the benefit of the disclosure or is already known to the receiving party at the time of the disclosure, as evidenced by written documentation;

(b)publicly known or becomes publicly known without the wrongful act or breach of this Agreement by the receiving party; or

(c)rightfully received by the receiving party from a third-party who is not under any obligation of confidentiality or trade secret obligation to the originating party.

12

ARTICLE XI

MISCELLANEOUS

SECTION 11.1  Relationship. The relationship of Edwards and PLC established by this Agreement is of independent contractors and not agents (except as set forth in Section 2.1), and nothing in this Agreement shall be construed:

(a)To give either party the power to direct or control the daily activities of the other party beyond the obligations imposed on Edwards and PLC, respectively, by this Agreement;

(b)To constitute the parties as partners, joint ventures, co-owners or otherwise as participants in joint undertaking; or

(c)To allow either party to create or assume any obligation on behalf of the other party for any purpose whatsoever. The purchase, promotion, and resale of, or any other legal transactions concerning the Products hereunder shall be carried out in the name of and for the account of Edwards as principal, and Edwards shall not enter into any agreement with third persons binding in any way on PLC.

SECTION 11.2  No Conflict. Each party represents and warrants to the other parties that it is not subject to any contractual obligation or restraint which will materially interfere with its right and ability to perform pursuant to the terms of this Agreement.

SECTION 11.3  Governing Law. This Agreement shall be governed by, interpreted under, and construed in accordance with the internal laws of the State of New York, including, without limitation, Sections 5-1401, 5-1402 of the New York General Obligations Law and New York Civil Practice Laws and Rules 327(b).

SECTION 11.4  Escalation. Edwards and PLC (and/or PLC Parent) will attempt in good faith to resolve expeditiously any dispute, claim or controversy arising out of or relating to this Agreement (the “Dispute”) promptly by negotiations between executives who have authority to settle the controversy and who are at a higher level of management than the persons with direct responsibility for the administration of this Agreement. Either party may give the other party written notice (the “Escalation Notice”) of any Dispute not resolved in the normal course of business. Within 15 days after delivery of the Escalation Notice, the receiving party shall submit to the other a written response. The Escalation Notice and the response thereto shall include (a) a statement of each party’s position and a summary of arguments supporting that position, and (b) the name and title of the executive who will represent that party and of any other person who will accompany the executive. Within 30 days after delivery of the Escalation Notice, the executives of both parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the Dispute. All reasonable requests for information made by one party to the other will be honored. All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. The parties shall attempt to resolve any Dispute pursuant to the procedure set forth in this Section 11.4 for a period up to 60 days from the date of delivery of the Escalation Notice before resorting to other available remedies; provided, however, nothing contained in this Section 11.4 shall prevent any party from resorting to judicial process if injunctive or other equitable relief from a court is necessary to prevent serious and irreparable injury to it or to others. The use of the procedure set forth in this

13

Section 11.4 will not be construed under the doctrine of laches, waiver or estoppel to affect adversely any party’s right to assert any claim or defense.

SECTION 11.5  Jurisdiction and Consent to Service. In accordance with the laws of the State of New York, and without limiting the jurisdiction or venue of any other court, the parties (a) agree that any suit, action or proceeding arising out of or relating to this Agreement shall be brought solely in the state or federal courts of New York; (b) consent to the exclusive jurisdiction of each such court in any suit, action or proceeding relating to or arising out of this Agreement; (c) waive any objection which any of them may have to the laying of venue in any such suit, action or proceeding in any such court; and (d) agree that service of any court paper in any such suit, action or proceeding may be made in any manner as may be provided under the applicable laws or court rules governing service of process in such court.

SECTION 11.6  Notices. All notices, demands, requests, consents, approvals or other communications required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and shall be delivered (charges prepaid, receipt confirmed or return receipt requested (if available)) by hand, by nationally recognized air courier service, by certified mail or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Notice shall be deemed given and effective (i) if delivered by hand or by nationally recognized courier service, when delivered at the address specified in this Section 11.6 (or in accordance with the latest unrevoked written direction from such party), (ii) if by certified mail, upon mailing or (iii) if given by facsimile when such facsimile is transmitted to the fax number specified in this Section 11.6 (or in accordance with the latest unrevoked written direction from such party), provided the appropriate confirmation is received.

To PLC:

PLC Systems Inc.
10 Forge Park
Franklin, MA 02038
Attention:  Chief Executive Officer
Fax:  (508) 541-7990

with a copy (which shall not constitute notice) to:

Wilmer Cutler Pickering Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention:  Steven D. Singer, Esq.
Fax:  (617) 526-5000

To Edwards:

Edwards Lifesciences LLC

One Edwards Way

Irvine, California 92614

Attention:  Associate General Counsel

Fax:  (949) 250-6850

14

with a copy (which shall not constitute notice) to:

Skadden, Arps, Slate, Meagher & Flom LLP

300 South Grand Avenue, Suite 3400

Los Angeles, California 90071-3144

Attention:  Joseph J. Giunta, Esq.

Fax:  (213) 687-5600

SECTION 11.7  Interpretation. When a reference is made in this Agreement to a Section, Schedule or Exhibit, such reference shall be to a Section, Schedule or Exhibit of this Agreement unless otherwise indicated. When a reference is made in this Agreement to a specific Schedule, such reference shall be deemed to include, to the extent applicable, all the other Schedules. The table of contents, table of definitions, titles and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When the words “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” All accounting terms not defined in this Agreement shall have the meanings determined by generally accepted accounting principles as of the date hereof. All capitalized terms defined herein are equally applicable to both the singular and plural forms of such terms.

SECTION 11.8  Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the parties shall negotiate in good faith with a view to the substitution therefore of a suitable and equitable solution in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid provision; provided, however, that the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law.

SECTION 11.9  Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall, taken together, be considered one and the same agreement, it being understood that the parties need not sign the same counterpart.

SECTION 11.10  Entire Agreement; No Third Party Beneficiaries. This Agreement and the other Transaction Agreements (as such term is defined in the Securities Purchase Agreement, dated as of January 7, 2001, by and among Edwards Lifesciences Corporation, PLC and PLC Parent), including all exhibits hereto and thereto, by and among the parties hereto,

(a)constitute the entire agreement of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous agreements, representations, understandings, negotiations and discussions between the parties, whether oral or written, with respect to the subject matter hereof; and

15

(b)and shall be binding upon and shall inure to the benefit of each of the parties hereto and thereto and their respective successors and permitted assigns and is not intended to confer any rights, remedies or benefits on any Persons other than as expressly set forth in this Section 11.10.

SECTION 11.11  Amendments and Modifications; Waivers and Extensions.

(a)No amendment, modification or termination of this Agreement shall be binding upon any other party unless executed in writing by the parties hereto intending to be bound thereby.

(b)Any party to this Agreement may waive any right, breach or default which such party has the right to waive; provided that such waiver will not be effective against the waiving party unless it is in writing, is signed by such party, and specifically refers to this Agreement. Waivers may be made in advance or after the right waived has arisen or the breach or default waived has occurred. Any waiver may be conditional. No waiver of any breach of any agreement or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof nor of any other agreement or provision herein contained. No failure or delay in exercising any right, power or privilege hereunder shall be deemed a waiver or extension of the time for performance of any other obligations or acts nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

SECTION 11.12  Assignment. Neither this Agreement nor any of the rights, duties or obligations hereunder may be assigned or delegated by any of the parties hereto without the prior written consent of PLC or Edwards, as the case may be, which may be withheld in its sole discretion except that Edwards may assign all its rights and obligations to any subsidiary of Edwards Lifesciences Corporation. Any attempted assignment or delegation of rights, duties or obligations hereunder in contravention hereof shall be void and of no effect.

SECTION 11.13  Exhibits. Each of the exhibits referred to herein and attached hereto is an integral part of this Agreement and is incorporated herein by reference.

SECTION 11.14  Expenses. Except as otherwise provided in this Agreement, each party to this Agreement shall bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the transactions contemplated hereby, including all fees and expenses of agents, representations, counsel and accountants.

SECTION 11.15  No Consequential or Punitive Damages. If any party claims any breach of this Agreement by the other party or otherwise becomes dissatisfied with any matter relating hereto or arising herefrom, it shall have no right to seek consequential or punitive damages and each party hereby waives any right it may have to seek such punitive or consequential damages.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

PLC SYSTEMS INC.
By:	/s/ James G. Thomasch
	Name:	James G. Thomasch
	Title:	Senior Vice President and Chief Financial
		Officer
PLC MEDICAL SYSTEMS, INC.
By:	/s/ James G. Thomasch
	Name:	James G. Thomasch
	Title:	Senior Vice President and Chief Financial
		Officer
EDWARDS LIFESCIENCES LLC
By:	/s/ John H. Kehl, Jr.
	Name:	John H. Kehl, Jr.
	Title:	Corporate Vice President

Exhibit A

Description of Products

1.HL-2 Laser System including:

[**]

2.TMR Disposable Kit including:

[**]

Products shall also include [**] and or [**] the products, [**] and [**] products [**] in the field [**].

Products do not include the HL-1 Laser System.

Schedule 2.1

Distributors

1.Criticor (West Coast)

2.Central Medical (Wisconsin, Minnesota)

Schedule 3.3

Sales Personnel

Capital Sales Representatives
[**]

Manager of Clinical Training

[**]

Clinical Specialists

[**]

(i)$[**]

(ii)A ranking of no less than “satisfactory” (or PLC’s equivalent) on the most recent performance review immediately prior to Edwards’ exercise of the Sales and Marketing Option.

Schedule 4.1

Transition Services

1.Customer service:  Provide seamless support to customers during transition to include order placement, returns, problem resolution, questions, etc. In addition, provide support and data to Edwards Customer Service relative to customers, products and the sales force.

2.Invoicing:  Provide accounts receivable support to customers during transition to include invoicing, collections, problem resolution, questions, etc. In addition, provide support and data to Edwards Accounts Receivable relative to customers, aging and other information.

Schedule 4.5

Installation Services and Services Relating to Extended Service Agreements

Installation Support Service includes:

(i)installation of HL-2 Laser System at hospital

(ii)laser operator in-service training at hospital

Extended Service Agreements can include:

all or part of the services defined in Schedule 4.6. The exact services are detailed in extended service contract agreements with the customer and are tailored to the customer requirements.

PLC is not responsible for the re-installation or transportation of the Product among multiple facilities.

Schedule 4.6

Warranty and Preventive Maintenance Services

Preventive Maintenance are planned services which include:

(i)Cleaning of optics

(ii)In-service for any new operating room personnel

(iii)Calibration of energy readings

(iv)Safety checks

(v)Replacement of air purge filter

(vi)any adjustments to make the product meet performance specifications

Warranty Service is unplanned services which include:

(i)any necessary travel, labor and material expense to repair or replace a defective product or product component that is not meeting published PLC performance specifications.

“costs” shall include all material costs at PLC’s fully absorbed standard manufacturing cost and labor and travel-related costs for PLC personnel calculated at the rate of $[**] per day, billed in whole day increments

Schedule 4.8

Product Liability Insurance

To be provided.

Schedule 5.1

Marketing Plan

To be provided.

Schedule 5.2

Sales Plan

PLC and Edwards have developed a joint sales strategy to drive utilization during the first year of the agreement. Edwards and PLC anticipate a transition of the sales and marketing functions from PLC to Edwards at the end of the first twelve months based on the success of the partnership in 2001. Specific objectives, actions and activities to accomplish the goals are highlighted below and the details are supported by the jointly developed master Sales Plan.

Objective:	Drive procedural growth in assigned territory.
Expectation:	Edwards sales organization will develop skill sets that allow them to successfully manage the process of increasing kit sales by gaining necessary knowledge & devoting time needed to drive procedural increases in assigned territory.
Action:	A training curriculum will be established for the Edwards Sales Representatives that develops core competencies in the key areas of clinical knowledge, concept selling and capital acquisition.
Activities:	The following activities have been schedules to ensure core competencies are attained:

Activity	Location	Date	Attendees
A. Implementation/Launch	Chicago	January 8-11	PLC/EW
B. Training-Patient Selection	STS	January 29	EW/PLC
C. Edwards National Meeting	Irvine, CA	Feb. 7	EW/PLC mgmt
D. Combine Training Event	not determined	April 2	EW/PLC
E. Combine Training Event	not determined	September 2	EW/PLC
F. PLC representative will spend approximately 20% of selling time supporting Edwards activity to assist in the attainment of sales objectives.

*Measurements will be established to monitor progress in key areas.

Schedule 7.3

HL-2 Laser System Customers

EST. COMMISSION ACCOUNT	CITY	REP	DEAL	CLOSE	PROTECTION
[**]	[**]	[**]	[**]	[**]	[**]
[**]	[**]	[**]	[**]	[**]	[**]
[**]	[**]	[**]	[**]	[**]	[**]
[**]	[**]	[**]	[**]	[**]	[**]
[**]	[**]	[**]	[**]	[**]	[**]
[**]	[**]	[**]	[**]	[**]	[**]

Schedule 7.4

Product Accessories

Part Number	Description	Model used on	Qty	Unit	Shelf life	PLC Sale Price	Edwards Transfer Price	Shipping Weight (lbs)	Shipping Dimensions (inches)	Notes:
P00100	Footswitch	both	1	ea	n/a	[**]	[**]	8	12x6.5x5.5
L00002	Safety Goggles	both	1	ea	n/a	[**]	[**]	1	7.5x6.5x5.5
B00056	Remote Enable Cable	both	1	ea	n/a	[**]	[**]	1	11x13x1.5	Fedex small box
B00076	Lens Cell	both	1	ea	n/a	[**]	[**]	1	11x13x1.5	Fedex small box
A00097	ECG Trunk Cable	HL-2	1	ea	n/a	[**]	[**]	1	11x13x1.5	Fedex small box
A00098	ECG 5 Lead Set	HL-2	1	ea	n/a	[**]	[**]	1	11x13x1.5	Fedex small box
L00004	Filter, Hepa, 0.3 micron	HL-2	1	ea	n/a	[**]	[**]	1	11x13x1.5	Fedex small box
A00181	HL-2 Operators Manual	HL-2	1	ea	n/a	[**]	[**]	3	13.5x11.5x2.5	Fedex medium box
A00202	Warning Sign HL-2	HL-2	1	ea	n/a	[**]	[**]	1	11x13x1.5	Fedex small box

EX-10.23

EXHIBIT 10.23

Compensatory Arrangements with Executive Officers

Base Salary

The current annual base salaries of each of the executive officers of PLC Systems Inc. (the “Company”) are as follows:

Mark R. Tauscher, President, Chief Executive Officer and Director	$	286,841
James G. Thomasch, Senior Vice President of Finance and Administration, Chief Financial Officer and Treasurer	$	180,081
Dr. Robert I. Rudko, Chief Scientist	$	198,275
Michael F. Adams, Vice President of New Ventures	$	169,744
Kenneth J. Luppi, Vice President of Operations	$	147,583

Cash Bonus Compensation

On February 1, 2006, the Compensation Committee of the Board of Directors (the “Compensation Committee”) of the Company adopted bonus arrangements for its executive officers for 2006. Messrs. Tauscher, Thomasch, Adams,  Luppi  and Rudko will receive a bonus based 25% on the financial performance of the Company’s business and 75% on the attainment of defined program milestones during the fiscal year ending December 31, 2006. The target bonus payment for Mr. Tauscher is 50% of his base salary, for Mr. Thomasch 40% of his base salary, and for Messrs. Adams, Luppi and Rudko is 30% of each of their respective base salaries. The target bonus payments may be adjusted downwards if the financial performance of the Company’s business does not meet the targets or the Company does not attain the defined program milestones.

Other Compensation

Mr. Tauscher and Mr. Thomasch each currently receive an annual car allowance of $12,000. Mr. Adams, Mr. Luppi and Dr. Rudko each currently receive an annual car allowance of $6,000.

The Compensation Committee may also, from time to time, award each of the executive officers compensation in the form of stock options granted under the Company’s 2005 Stock Incentive Plan.

EX-10.24

EXHIBIT 10.24

Compensatory Arrangements with Non-Employee Directors

Each non-employee director of PLC Systems Inc. (the “Company”) other than the Chairman of the Board receives $12,000 per year and the Chairman of the Board receives $24,000 per year, paid in quarterly installments. In addition, non-employee directors other than the Chairman of the Board who serve as chairman of a committee, or who serve on more than one committee, receive an additional $500 per quarter. The Company reimburses directors for reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors and committees of the Board of Directors.

The Company grants stock options to its non-employee directors. Generally, new non-employee directors receive an initial grant of an option to purchase 30,000 shares of the Company’s common stock that vests in installments over three years. Once the initial grant has fully vested, non-employee directors other than the Chairman of the Board receive an annual grant of an option to purchase 15,000 shares of the Company’s common stock that vests in four equal quarterly installments. The Chairman of the Board receives an annual grant of an option to purchase 30,000 shares of the Company’s common stock that vests in four equal quarterly installments. All such options have an exercise price equal to the fair market value of the common stock on the date of grant. The grants of options to non-employee directors discussed above do not apply to Donald E. Bobo, Jr. because he is a director as a result of the Company’s transaction with Edwards Lifesciences LLC.

EX-10.25

EXHIBIT 10.25

Severance Arrangements with Certain Executive Officers

Pursuant to resolutions adopted by the Board of Directors of PLC Systems Inc. (the “Company”) on December 19, 2001, Michael F. Adams, the Company’s Vice President of New Ventures, and Kenneth J. Luppi, the Company’s Vice President of Operations, are entitled to receive payments equal to 26 weeks of base salary in the event that they are terminated within one year of the date of a change in control of the Company.

Mark R. Tauscher, the Company’s President and Chief Executive Officer, James G. Thomasch, the Company’s Senior Vice President of Finance and Administration, Chief Financial Officer and Treasurer, and Dr. Robert I. Rudko, the Company’s Chief Scientist, are separately entitled to receive severance payments pursuant to the terms of their respective employment agreements with the Company.

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

1)             PLC Medical Systems, Inc., a Delaware corporation

2)             PLC Sistemas Medicos Internacionais (Deutschland) GmbH, a German corporation

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

As independent registered public accountants, we hereby consent to the incorporation of our report dated February 10, 2006, except with respect to the matters discussed in Note 11, as to which the date is March 9, 2006, relating to the consolidated financial statements and schedule of PLC Systems Inc.  for the year ended December 31, 2005 included in this Form 10-K, into the Company’s previously filed Registration Statements on Form S-3 (File Nos.  333-68923, 333-80045 and 333-43454) and Form S-8
(File Nos. 33-95168, 333-51547, 333-37814, 333-48706, 333-51136, 333-57752, 333-91430, 333-106100 and 333-127770).

	/s/ Vitale, Caturano & Company Ltd.
Boston, Massachusetts
March 28, 2006

EX-23.2

EXHIBIT 23.2

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 333-68923, 333-80045 and 333-43454 and Form S-8 Nos. 33-95168, 333-51547, 333-37814, 333-48706, 333-51136, 333-57752, 333-91430, 333-106100 and 333-127770) of PLC Systems Inc. of our report dated February 10, 2005 with respect to the consolidated financial statements and financial statement schedule of PLC Systems Inc. as of December 31, 2004 and for each of the two years in the period ended December 31, 2004, included in this Annual Report (Form 10-K) for the year ended December 31, 2005.

	/s/ Ernst & Young LLP
Boston, Massachusetts
March 27, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark R. Tauscher, certify that:

1. I have reviewed this annual report on Form 10-K of PLC Systems Inc.;

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

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

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

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

b) Not Applicable;

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

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

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

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

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

Date:March 28, 2006	/s/ Mark R. Tauscher
	Mark R. Tauscher
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James G. Thomasch, certify that:

1. I have reviewed this annual report on Form 10-K of PLC Systems Inc.;

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

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

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

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

b) Not Applicable;

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

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

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

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

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

Date:March 28, 2006	/s/ James G. Thomasch
	James G. Thomasch
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report on Form 10-K of PLC Systems Inc. (the “Company”) for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Mark R. Tauscher, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1)  the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	March 28, 2006	By:	/s/ Mark R. Tauscher
			Mark R. Tauscher
			Chief Executive Officer

In connection with the annual report on Form 10-K of PLC Systems Inc. (the “Company”) for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, James G. Thomasch, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

(1)  the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	March 28, 2006	By:	/s/ James G. Thomasch
			James G. Thomasch
			Chief Financial Officer