UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2007~~March 31, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-19627

BIOLASE TECHNOLOGY, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		87-0442441
(State or other jurisdiction		~~(I.R.S. Employer~~
of incorporation or organization)		(I.R.S. Employer Identification No.)

4 Cromwell
Irvine, California 92618
(Address of principal executive offices, including zip code)

(949) 361-1200
(Registrant’s telephone number, including area code)

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. Yesþ Noo

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


Large accelerated ~~filer~~o ~~Accelerated filer~~þ ~~Non-accelerated~~ filero	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

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

Number of shares outstanding of the registrant’s common stock, $0.001 par value, as of ~~November 6, 2007: 23,888,401~~May 7, 2008: 24,142,201

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL ~~STATEMENTS~~STATEMENTS.

BIOLASE TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except per share data)


							March 31, 2008			December 31, 2007
	September 30, 2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	11,890		$	14,676		$	13,881		$	14,566
Accounts receivable, less allowance of $971 and $1,357 in 2007 and 2006, respectively		7,497			15,193
Accounts receivable, less allowance of $1,034 and $1,033 in 2008 and 2007, respectively								10,192			11,266
Inventory, net		10,774			7,774			7,614			7,627
Prepaid expenses and other current assets		1,072			1,346			1,701			2,317

Total current assets		31,233			38,989			33,388			35,776

Property, plant and equipment, net		4,354			4,851			3,897			4,040
Intangible assets, net		1,200			1,469			1,116			1,208
Goodwill		2,926			2,926			2,926			2,926
Deferred tax asset		22			35			58			50
Other assets		308			308			307			308

Total assets	$	40,043		$	48,578		$	41,692		$	44,308


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit							$	1,972		$	3,552
Accounts payable	$	6,807		$	7,699			7,934			6,151
Accrued liabilities		5,920			8,560			6,771			9,431
Deferred revenue, current portion		5,522			5,431			4,861			5,649

Total current liabilities		18,249			21,690			21,538			24,783
Deferred tax liabilities		327			271			361			342
Deferred revenue, long-term		2,841			4,278			2,007			2,236
Other liabilities, long-term		483			373			442			456

Total liabilities		21,900			26,612			24,348			27,817

Stockholders’ equity:
Preferred stock, par value $0.001, 1,000 shares authorized, no shares issued and outstanding outstanding		—			—
Common stock, par value $0.001, 50,000 shares authorized; 25,852 and 25,741 shares issued and 23,888 and 23,777 shares outstanding in 2007 and 2006, respectively		26			26
Preferred stock, par value $0.001, 1,000 shares authorized, no shares issued and outstanding								—			—
Common stock, par value $0.001, 50,000 shares authorized; 26,106 and 25,967 shares issued and 24,142 and 24,003 shares outstanding in 2008 and 2007, respectively								27			26
Additional paid-in capital		112,842			111,415			114,200			113,430
Accumulated other comprehensive gain		1,146			108			111			54
Accumulated deficit		(79,472	)		(73,184	)		(80,595	)		(80,620	)

		34,542			38,365			33,743			32,890
Treasury stock (cost of 1,964 shares repurchased)		(16,399	)		(16,399	)		(16,399	)		(16,399	)

Total stockholders’ equity		18,143			21,966			17,344			16,491

Total liabilities and stockholders’ equity	$	40,043		$	48,578		$	41,692		$	44,308

BIOLASE TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2007			2006			2007			2006			2008			2007
Products and services revenue	$	11,910		$	16,869		$	43,158		$	49,469		$	18,037		$	14,100
License fees and royalty revenue		902			197			2,891			384			1,004			960

Net revenue		12,812			17,066			46,049			49,853			19,041			15,060
Cost of revenue		6,228			8,448			21,318			24,914			9,459			6,923

Gross profit		6,584			8,618			24,731			24,939			9,582			8,137

Other (loss) income, net		—			(1	)		—			10

Operating expenses:
Sales and marketing		6,292			5,510			19,619			17,493			5,605			6,393
General and administrative		2,602			2,967			7,781			9,123			3,077			2,377
Engineering and development		1,279			1,306			3,686			3,776			1,461			1,210
Patent infringement legal settlement		—			(32	)		—			348

Total operating expenses		10,173			9,751			31,086			30,740			10,143			9,980

Loss from operations		(3,589	)		(1,134	)		(6,355	)		(5,791	)		(561	)		(1,843	)

Gain on foreign currency transactions														616			53
Interest income														58			152
Interest expense														(24	)		(16	)

Non-operating income, net		119			94			442			134			650			189

Loss before income tax provision		(3,470	)		(1,040	)		(5,913	)		(5,657	)
Income tax provision (benefit)		38			(33	)		219			70
Income (loss) before income tax provision														89			(1,654	)
Income tax provision														63			69

Net loss	$	(3,508	)	$	(1,007	)	$	(6,132	)	$	(5,727	)
Net income (loss)													$	26		$	(1,723	)

Net loss per share:
Net income (loss) per share:
Basic	$	(0.15	)	$	(0.04	)	$	(0.26	)	$	(0.24	)	$	0.00		$	(0.07	)

Diluted	$	(0.15	)	$	(0.04	)	$	(0.26	)	$	(0.24	)	$	0.00		$	(0.07	)

Shares used in the calculation of net loss per share:
Shares used in the calculation of net income (loss) per share:
Basic		23,887			23,580			23,840			23,394			24,056			23,791

Diluted		23,887			23,580			23,840			23,394			24,295			23,791

BIOLASE TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)


	Nine Months Ended						Three Months Ended
	September 30,						March 31,
	2007			2006			2008			2007
Cash Flows From Operating Activities:
Net loss	$	(6,132	)	$	(5,727	)
Adjustments to reconcile net loss to net cash and cash equivalents (used in) provided by operating activities:
Net income (loss)							$	26		$	(1,723	)
Adjustments to reconcile net loss to net cash and cash equivalents provided by (used in) operating activities:
Depreciation and amortization		1,410			1,560			481			456
Residual cost of demo equipment sold		82			—
Gain on disposal of assets		—			(10	)
(Recovery) provision for bad debts		(352	)		732
Provision for excess and obsolete inventory		—			110
Provision for bad debts								27			(76	)
Stock-based compensation		952			893			452			361
Issuance of common stock for patent litigation settlement		—			348
CEO compensation								2			—
Deferred income taxes		73			33			13			19
Changes in operating assets and liabilities:
Accounts receivable		8,176			(2,477	)		1,124			3,006
Inventory		(3,000	)		2,446			12			(1,105	)
Prepaid expenses and other assets		229			925			(541	)		(134	)
Accounts payable and accrued liabilities		(3,637	)		(4,509	)		226			(2,160	)
Deferred revenue		(1,358	)		7,984			(1,023	)		(572	)

Net cash and cash equivalents (used in) provided by operating activities		(3,557	)		2,308
Net cash and cash equivalents provided by (used in) operating activities								799			(1,928	)

Cash Flows From Investing Activities:
Additions to property, plant and equipment		(631	)		(2,150	)		(158	)		(220	)

Net cash and cash equivalents used in investing activities		(631	)		(2,150	)		(158	)		(220	)

Cash Flows From Financing Activities:
Net repayments on line of credit		—			(5,000	)
Borrowings under line of credit								2,929			—
Payments under line of credit								(4,509	)		—
Proceeds from exercise of stock options and warrants		476			2,419			315			197

Net cash and cash equivalents provided by (used in) financing activities		476			(2,581	)
Net cash and cash equivalents (used in) provided by financing activities								(1,265	)		197

Effect of exchange rate changes		926			(103	)		(61	)		64

Decrease in cash and cash equivalents		(2,786	)		(2,526	)		(685	)		(1,887	)
Cash and cash equivalents, beginning of year		14,676			8,272			14,566			14,676

Cash and cash equivalents, end of period	$	11,890		$	5,746		$	13,881		$	12,789


Supplemental cash flow disclosure:
Cash paid during the period for:
Interest	$	26		$	362		$	24		$	16

Income taxes	$	203		$	131		$	49		$	23

Non-cash investing and financing activities:
Leasehold improvements capitalized and paid by landlord	$	—		$	569

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Unaudited)~~(UNAUDITED)

NOTE 1 — BASIS OF PRESENTATION

The Company

BIOLASE Technology Inc. ~~(the “Company”~~, or ~~“Biolase”),~~the Company or Biolase, incorporated in Delaware in 1987, is a medical technology company operating in one business segment that designs, manufactures and markets advanced dental, cosmetic and surgical lasers and related products.

Basis of Presentation

The unaudited consolidated financial statements include the accounts of BIOLASE Technology, Inc. and its consolidated subsidiaries ~~and~~ have been prepared on a basis consistent with the December 31, ~~2006~~2007 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments and the elimination of all material intercompany transactions and balances, necessary to fairly present the information set forth therein. These unaudited, interim, consolidated financial statements do not include all the footnotes, presentations and disclosures normally required by accounting principles generally accepted in the United States of America, ~~(“GAAP”)~~or GAAP, for complete consolidated financial statements. Certain amounts have been reclassified to conform to current period presentation.

Fair Value Measurements

Effective January 1, 2008, we adopted FAS 157,Fair Value Measurements,or FAS 157, which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. FAS 157 establishes a three-level fair value hierarchy that priortizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Our adoption of FAS 157 did not have an impact on our financial position or results of operations. On February 12, 2008, the FASB issued Staff Position No. FAS 157-2, or FSP 157-2. FSP 157-2 delays the effective date of FAS 157 for non-financial assets and liabilities, as defined, to fiscal years beginning after November 1, 2008. We do not believe that the adoption of the provisions of FSP 157-2 will materially impact our consolidated financial position and consolidated results of operations.

Effective January 1, 2008, we adopted FAS 159,The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement 115,or FAS 159, which provides entities the option to measure many financial instruments and certain other items at fair value. Entities that choose the fair value option will recognize unrealized gains and losses on items for which the fair value option was elected in earnings at each subsequent reporting date. We have currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with GAAP.

Use of Estimates

The preparation of these consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements and the accompanying notes. Significant estimates in these consolidated financial statements include allowances on accounts receivable, inventory and deferred taxes, as well as estimates for accrued warranty expenses, the realizability of goodwill and indefinite-lived intangible assets, effects

of stock-based compensation and the provision or benefit for income taxes. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ materially from those estimates.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

In ~~September 2006,~~December 2007, the FASB issued FAS ~~157,~~141 (revised 2007),~~Fair Value Measurements (“~~Business Combinations,or FAS ~~157”~~).~~FAS 157 establishes a framework for measuring fair value and~~141(R), which expands ~~disclosures about fair value measurements. The changes to current practice resulting from the application of this standard relate to~~ the definition of a business and a business combination, requires the fair value of the ~~methods used~~purchase price of an acquisition including the issuance of equity securities to ~~measure~~be determined on the acquisition date, requires that all assets, liabilities, contingent consideration, contingencies and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date, requires that acquisition costs generally be expensed as incurred, requires that restructuring costs generally be expensed in periods subsequent to the acquisition date, and requires changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the ~~expanded disclosures about fair value measurements.~~measurement period to impact income tax expense. FAS ~~157~~141(R) is effective for ~~fiscal years~~business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after ~~November~~December 15, ~~2007 and interim periods within those fiscal years.~~2008. We do not believe that the adoption of the provisions of FAS ~~157~~141(R) will materially impact our consolidated financial position and consolidated results of operations.

In ~~February~~December 2007, the FASB issued FAS ~~159,~~160,~~The Fair Value Option for~~Noncontrolling Interests in Consolidated Financial ~~Assets and Financial Liabilities – Including~~Statements, an Amendment of ~~FASB Statement 115~~ARB No. 51,or FAS 160, which changes the accounting and reporting for minority interests such that ~~provides companies with an option~~minority interests will be recharacterized as noncontrolling interests and will be required to ~~report certain financial assets~~be reported as a component of equity, and ~~liabilities~~requires that purchases or sales of equity interests that do not result in ~~their entirety~~a change in control be accounted for as equity transactions and, upon a loss of control, requires the interest sold, as well as any interest retained, to be recorded at fair ~~value. This statement~~value with any gain or loss recognized in earnings. FAS 160 is effective asfor fiscal years beginning on or after December 15, 2008 and interim periods within those years. We do not believe that the adoption of the ~~beginning~~provisions of ~~an entity’s first~~FAS 160 will materially impact our consolidated financial position and consolidated results of operations.

In March 2008, the FASB issued FAS 161,Disclosures about Derivative Instruments and Hedging Activities,or FAS 161.FAS 161 requires additional disclosures related to the use of derivative instruments, the accounting for derivatives and how derivatives impact financial statements. FAS 161 is effective for fiscal ~~year that begins~~years and interim periods beginning after November 15, 2007. The fair value option may be applied instrument by instrument, and may be applied only to entire instruments. A business entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.2008. We are currently evaluating ~~our options provided for under this statement and their potential~~the impact of adopting FAS 161 on our consolidated financial ~~statements when implemented. This statement is being reviewed in conjunction with the requirements of FAS 157 discussed above.~~statements.

NOTE 3—STOCK-BASED COMPENSATION AND PER SHARE INFORMATION

Stock-Based Compensation

We have three stock-based compensation plans — the 1990 Stock Option Plan, the 1993 Stock Option Plan and the 2002 Stock Incentive Plan. The 1990 and 1993 Stock Option Plans have been terminated with respect to granting additional stock options. Under these plans, stock options are awarded to certain officers, directors and employees of the Company at the discretion of the Company’s management and/or Board of Directors. Options to employees generally vest on a quarterly basis over three years. Shares available for grant under the 2002 Stock Incentive Plan at September 30, 2007 were approximately 1,228,000. Such amount reflects the approval of an additional 1.0 million shares at the 2007 annual meeting of stockholders.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Our options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. For options granted prior and subsequent to January 1, 2006, we did and expect to continue to estimate their fair values using the Black-Scholes option-pricing model. This option pricing model requires us to make several assumptions regarding the key variables used in the model to calculate the fair value of its stock options. The risk-free interest rate used by us is based on the U.S. Treasury yield curve in effect for the expected lives of the options at their dates of grant. Beginning July 1, 2005, we have used a dividend yield of zero as we do not intend to pay dividends on our common stock in the foreseeable future. The most critical assumption used in calculating the fair value of stock options is the expected volatility of our common stock. We believe that the historic volatility of our common stock is a reliable indicator of future volatility, and accordingly, have used a stock volatility factor based on the historical volatility of our common stock over a period of time approximating the estimated lives of our stock options. The expected term is estimated by analyzing our historical share option exercise experience over a ~~five-year~~five year period, in accordance with the provisions of SEC Staff Accounting Bulletin 107. Compensation expense is recognized using the straight-line method for all stock-based awards issued after January 1, 2006 or unvested as of January 1, 2006. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant based on our historical experience and future expectations. FAS 123R requires forfeitures to be estimated at the time of the grant and revised as necessary in subsequent periods if actual forfeitures differ from those estimates.

A summary of option activity under our stock option plans for the ~~nine~~three months ended ~~September 30, 2007~~March 31, 2008 is as follows:

Weighted
average
Weighted remaining
average contractual term Aggregate
Shares exercise price (years) intrinsic value (1)
Options outstanding at December 31, 2006 3,858,000 $ 6.75
Plus: Options granted 408,000 $ 6.49
Less: Options exercised (121,000 ) $ 4.41
Options canceled or expired (249,000 ) $ 8.87

Options outstanding at September 30, 2007 3,896,000 $ 6.66 5.80 $ 5,963,000

Options exercisable at September 30, 2007 3,247,000 $ 6.57 5.11 $ 5,735,000
Options expired during the nine months ended September 30, 2007 116,000 $ 9.96


						Weighted average
						remaining		Aggregate
				Weighted average		contractual term		intrinsic
	Shares			exercise price		(years)		value
Options outstanding at December 31, 2007		4,411,000		$	6.30		—		—
Plus: Options granted		718,000		$	3.01		—		—
Less:
Options exercised		(139,000	)	$	2.28		—		—
Options canceled or expired		(450,000	)	$	9.34		—		—

Options outstanding at March 31, 2008		4,540,000		$	5.61		6.11	$	722,000

Options exercisable at March 31, 2008		2,770,000		$	6.46		3.91	$	604,000
Options expired during the quarter ended March 31, 2008		276,000		$	8.46				—


~~(1)~~		~~The intrinsic value calculation does not include negative values. This can occur when the fair market value on the reporting date is less than the exercise price of a grant.~~

Cash proceeds along with fair value disclosures related to grants, exercises and vesting options are provided in the following table (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2007		2006		2007		2006		2008		2007
Proceeds from stock options exercised	$	17	$	1,799	$	476	$	2,419	$	315	$	197
Tax benefit related to stock options exercised (1)		N/A		N/A		N/A		N/A		N/A		N/A
Intrinsic value of stock options exercised (2)	$	1	$	588	$	311	$	1,071	$	197	$	66
Weighted-average fair value of options granted during period	$	3.73	$	3.82	$	3.46	$	4.13	$	1.73	$	4.50
Total fair value of shares vested during the period	$	280	$	484	$	1,062	$	1,114	$	336	$	424

remainder is ~~being~~ credited to revenue ~~in the period earned.~~and represents services provided by BIOLASE to P&G. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2008 and 2007, $63,000 and ~~$313,000, respectively,~~$125,000 of the payments received was recognized inlicense fees and royalty ~~revenue.~~revenue, respectively.

NOTE ~~8 —~~ 8—BANK LINE OF CREDIT AND DEBT

On September 28, 2006, we entered into a Loan and Security Agreement, (“or Loan ~~Agreement”)~~Agreement with Comerica Bank ~~(the “Lender”)~~or the Lender which replaced the loan agreement previously held with Bank of the ~~West (“BOW”).~~West. Under the Loan Agreement, the Lender agreed to extend a revolving loan, ~~(the “Revolving Line”)~~or the Revolving Line, to us in the maximum principal amount of $10.0 million. Advances under the Revolving Line may not exceed the lesser of $10.0 million or the Borrowing Base (80% of eligible accounts receivable and 35% of eligible inventory), less any amounts outstanding under letters of credit or foreign exchange contract reserves. Notwithstanding the foregoing, advances of up to $6.0 million may be made without regard to the Borrowing Base. On October 5, 2007, we entered into an Amendment to the Loan Agreement which extends the agreement for an additional year. The entire unpaid principal amount plus any accrued but unpaid interest and all other amounts due under the Loan Agreement are due and payable in full on September 28, 2009, ~~(the “Maturity Date”),~~or the Maturity Date, but can be extended by us for an additional year upon Lender approval. Our obligations under the Loan Agreement bear interest on the outstanding daily balance thereof at one of the following rates, to be selected by us: (i) LIBOR plus 2.50%, or (ii) prime rate, as announced by the Lender, plus 0.25%. As security for the payment and performance of our obligations under the Loan Agreement, we granted the Lender a first priority security interest in existing and later-acquired Collateral (as defined in the Loan Agreement, and which excludes intellectual property).

The Loan Agreement requires compliance with certain financial covenants, including: (i) minimum effective tangible net worth; (ii) maximum leverage ratio; (iii) minimum cash amount at Lender of $6.0 million; and (iv) minimum liquidity ratio. The Loan Agreement also contains covenants that require Lender’s prior written consent for us, among other things, to: (i) transfer any part of ~~its~~our business or property; (ii) make any changes in our location or name, or replace our CEO or CFO; (iii) consummate mergers or acquisitions; (iv) incur liens; or, (v) pay dividends or repurchase stock. The Loan Agreement contains customary events of default, any one of which will result in the right of the Lender to, among other things, accelerate all obligations under the Loan Agreement, set-off obligations under the Loan Agreement against any balances or deposits of ours held by the bank, or sell the ~~Collateral.~~collateral. We have obtained the Lender’s consent for the termination of our former CEO in November 2007, the resignation of our former CFO in January 2008, the appointment of our successor CEO in January 2008 and the appointment of our CFO in April 2008 and were in compliance with ~~such financial~~all other covenants as of ~~September 30, 2007.~~March 31, 2008.

As of ~~September 30, 2007~~March 31, 2008 and December 31, ~~2006, no amounts were~~2007, $2.0 and $3.6 million, respectively, was outstanding under the Loan ~~Agreement.~~Agreement at interest rates of 5.5% and 7.5%, respectively (the Lender’s announced prime rate as of such dates plus 0.25%).

Certain subsidiaries of ours have entered into unconditional guaranties, dated as of September 28, 2006, pursuant to which such subsidiaries have guaranteed the payment and performance of our obligations under the Loan Agreement.

In December ~~2006,~~2007, we financed ~~$890,000~~approximately $1.1 million of insurance premiums payable in ~~ten~~eleven equal monthly installments of approximately ~~$91,000~~$107,000 each, including a finance charge of ~~5.89%~~5.39%. As of ~~September 30, 2007, the financed amount~~March 31, 2008, we had ~~been paid in full.~~approximately $733,000 outstanding.

NOTE ~~9 —~~ 9—COMMITMENTS AND CONTINGENCIES

Litigation

plaintiffs filed a fourth amended complaint which defendants answered on October 20, 2006. In addition, in August 2004, three stockholders filed derivative lawsuits in the Superior Court in Orange County, California seeking recovery on our behalf and alleging, among other things, breach of fiduciary duty by two officers and by the members of our Board of Directors, who were named as defendants. The cases were consolidated and the plaintiffs in the consolidated derivative action raised claims on our behalf that include alleged misrepresentations in 2003 and 2004 as to the demand for our products, our financial results and future prospects. In both the class action and the derivative suit the parties have entered into settlement agreements, the respective courts have approved the settlments and the lawsuits have been concluded.

On April 20, 2007, the parties entered into a Stipulation of Settlement (the “Derivative Stipulation”) in which they agreed to settle the derivative litigation. Under the Derivative Stipulation, in exchange for a release of all claims against the defendant officers and directors that were or could have been alleged in the complaints in the derivative cases and dismissal of the derivative suit, our directors and officers liability insurance carrier agreed to pay on behalf of the individual defendants $500,000 to or as directed by us (including a $100,000 attorney’s fee to plaintiff) and we have agreed to adopt or maintain certain corporate governance measures described in the Derivative Stipulation. The Derivative Stipulation and a motion for approval of the settlement were filed in the Orange County Superior Court on April 24, 2007. On July 13, 2007, the Court held a hearing on the motion for final approval of the settlement of the derivative action and also for an award of attorneys fees and reimbursement of expenses. On July 20, 2007, the Court entered a Final Judgment and Order of Dismissal with Prejudice approving the settlement and the Derivative Stipulation, dismissing the litigation and releasing as to Biolase and all Biolase stockholders all settled derivative claims and barring all stockholders from pursuing the settled derivative claims.

On April 23, 2007, the Court in the federal class action entered an Order preliminarily approving the settlement of the class action, as contained in a Stipulation of Settlement (the “Class Stipulation”) filed with the Court. On August 15, 2007, the Court entered an Order and Final Judgment approving the settlement. Under the Class Stipulation, in exchange for a release of all claims and dismissal of the litigation, our directors and officers liability insurance carrier paid $1,950,000 in cash to fund payments to the class members, net of fees and costs to plaintiffs’ counsel. Such amount included the amount the carrier paid to settle the derivative action as discussed in the preceding paragraph. As a result, we incurred no cost in the settlements. In the settlement agreements, the defendants admitted no wrongdoing.

July 2006. As of March 31, 2006, we determined that it was probable that these shares of common stock would be released from escrow in or before July 2006. Accordingly, we recorded a patent infringement legal settlement charge of approximately $348,000 in 2006. In July 2006, we released these shares from escrow. The common stock issued, the escrow shares of common stock and the warrant shares had certain registration rights, and a Registration Statement on Form S-3 was filed with the Securities and Exchange Commission, or SEC, to register for sale any of these shares which remained unsold. This Registration Statement became effective on April 17, 2007. The total consideration had an estimated value of approximately $7.4 million including the value of the patents acquired in January 2005. As of December 31, 2004, we accrued approximately $6.4 million for the settlement of the existing litigation with $3.0 million included in current liabilities and $3.4 million recorded as a long-term liability. In January 2005, we recorded an intangible asset of $0.5 million representing the estimated fair value of the intellectual property acquired. The estimated fair value of the patents was determined with the assistance of an independent ~~evaluation~~valuation expert using a relief from royalty and a discounted cash flow methodology. As a result of the acquisition, Diodem immediately withdrew its patent infringement claims against us and the case was formally dismissed on May 31, 2005. We did not pay, and have no obligation to pay, any royalties to Diodem on past or future sales of our products, but we agreed to pay additional consideration if any of the acquired patents held by us are licensed to a third ~~party.~~party by a certain date. In order to secure performance by us of these financial obligations, the parties entered into an intellectual property security agreement, pursuant to which, subject to the rights of existing creditors and the rights of any future creditors to the extent provided in the agreement, we granted Diodem a security interest in all of their rights, title and interest in the royalty patents. In September 2007, Diodem filed a motion with the ~~United States~~U.S. District Court in the Central District of California requesting that the original case be reopened for limited discovery concerning Diodem’s claims that we breached various of our obligations and representations in the settlement agreement and seeking damages in the range of $3.85 million to $5.2 million plus costs and attorneys fees incurred in recovering said alleged damages. The District Court denied Diodem’s motion finding, in part, that if Diodem wishes to pursue claims for breach of the settlement agreement, it must file a new lawsuit for breach of contract. ~~Although the outcome of litigation is always uncertain, if~~On February 20, 2008, Diodem ~~files~~filed a lawsuit for breach of the settlement agreement wein Los Angeles Superior Court, naming us and a wholly-owned subsidiary, BL Acquisition II, Inc. as defendants. The complaint assets two claims, both alleging breaches of the Agreement. Diodem seeks damages of not less than $4.0 million. On April 28, 2008, Biolase and BL Acquisition II, Inc. filed demurrers and a motion to strike that, in essence, request the court to dismiss Diodem’s complaint. We intend to vigorously defend ~~such action.~~Diodem’s claims.

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

Securities and Exchange Commission Inquiry

Following the restatement of our financial statements in September 2003, we received, in late October 2003, and subsequently in 2003 and 2004, informal requests from the ~~Securities and Exchange Commission, or~~ SEC to voluntarily provide information relating to the restatement. We have provided information to the SEC and intend to continue to cooperate in responding to the inquiry. ~~We have had no communication from the SEC in over two years related to this matter.~~ In accordance with its normal practice, the SEC has not advised us when its inquiry may be concluded, and we are unable to predict the outcome of this inquiry.

NOTE ~~10 —~~10— SEGMENT INFORMATION

We currently operate in a single business segment. For the ~~three and nine months~~quarter ended ~~September 30, 2007,~~March 31, 2008, sales in Europe, Middle East and Africa, ~~(“EMEA”)~~or EMEA accounted for approximately ~~9% and 8% respectively,~~7% of net revenue, and sales in Canada, Asia, Latin America and Pacific Rim countries accounted for approximately ~~18% and 29%, respectively,~~19% of net revenue. For the ~~three and nine months~~quarter ended ~~September 30, 2006,~~March 31, 2007, sales in EMEA accounted for approximately ~~5% and 11%, respectively,~~8% of net revenue, and sales in Canada, Asia, Latin America and Pacific Rim countries accounted for approximately ~~29% and 29%, respectively,~~34% of net revenue.

Net revenue by geographic location based on the location of customers was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2007		2006		2007		2006		2008		2007
United States	$	9,360	$	11,163	$	28,841	$	30,363	$	14,016	$	8,697
Europe, Middle East, Africa		1,182		905		3,852		5,241		1,342		1,237
Canada, Asia, Latin America, Pacific Rim		2,270		4,998		13,356		14,249
Canada, Asia, Latin America and Pacific Rim										3,683		5,126

	$	12,812	$	17,066	$	46,049	$	49,853	$	19,041	$	15,060

NOTE ~~11 —~~ 11—CONCENTRATIONS

Revenue from our Waterlase systems, our principal product, comprised ~~62%~~61% and ~~68%~~74% of total net revenues for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2008 and 2007, ~~respectively, and 82% and 78% of total net revenues, respectively, for the same periods in 2006.~~respectively. Revenue from our ~~diode~~Diolase systems comprised ~~15%~~19% and ~~13%~~6% of total revenue for the ~~three and nine months ended September 30, 2007, respectively, and 3% and 6%, for the~~ same ~~periods of 2006.~~periods.

Approximately ~~69%~~63% and ~~63%~~64% of our ~~products and services~~ revenue in the ~~three~~quarters ended March 31, 2008 and ~~nine months ended September 30,~~ 2007, respectively, was generated through sales to HSIC. Approximately 28% and 10% of our products and services revenue in the three and nine month periods of 2006 was generated through sales to HSIC. These percentages in 2006 reflect sales to HSIC for the period subsequent to entering into the distribution agreement with HSIC, or September 1, 2006. Prior to entering into the distribution agreement with HSIC, many dentists financed their purchases through third-party leasing companies. In these transactions, the leasing company was the purchaser. Approximately 16% and 23% of our products and services revenue for the three and nine months ended September 30, 2006, respectively, was generated from National Technology Leasing Corporation (“NTL”), who purchased laser systems from us and leased them to dentists. One international distributor accounted for approximately ~~4% and 13%~~10% of our ~~products~~revenues in the quarter ended March 31, 2008 and ~~services~~17% of our revenues for the ~~three and nine months~~quarter ended ~~September 30, 2007, respectively, and approximately 14% in each of the same periods of 2006.~~March 31, 2007.

We maintain our cash and cash equivalents accounts with established commercial banks. Such cash deposits ~~generally~~periodically exceed the Federal Deposit Insurance Corporation insured limit of $100,000 for each ~~depository.~~account.

Accounts receivable concentrations have resulted from sales to HSIC and one international distributor that totaled ~~$3.6~~$5.3 million and ~~$600,000~~$1.9 million or ~~46%~~52% and 8%18%, respectively, at ~~September 30, 2007.~~March 31, 2008. Accounts receivable concentrations from sales to HSIC and one international distributor totaled ~~$10.4~~$6.0 million and ~~$1.5~~$1.6 million or ~~69%~~53.0% and ~~10%~~14.4%, respectively, at December 31, ~~2006.~~2007.

We currently buy certain key components of our products from single suppliers. Although there are a limited number of manufacturers of these key components, management believes that other suppliers could provide similar key components on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect consolidated operating results.

NOTE ~~12 —~~ 12—COMPREHENSIVE LOSS

Components of comprehensive loss were as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2007 2006 2007 2006
Net loss $ (3,508 ) $ (1,007 ) $ (6,132 ) $ (5,727 )
Other comprehensive income (loss) items:
Unrealized gain on marketable securities — 68 — 86
Foreign currency translation adjustments 557 112 1,038 (33 )

Comprehensive loss $ (2,951 ) $ (827 ) $ (5,094 ) $ (5,674 )


	Three Months Ended
	March 31,
	2008		2007
Net income (loss)	$	26	$	(1,723	)
Other comprehensive (loss) income items:
Foreign currency translation adjustments		57		(230	)

Comprehensive income (loss)	$	83	$	(1,953	)

NOTE ~~13 —~~ 13—INCOME TAXES

In June 2006, the FASB issued FASB Interpretation Number FIN 48,Accounting for Uncertainty in Income Taxes, An Interpretation of FASB Statement No. 109,(“or FIN ~~48”).~~48. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted FIN 48 as of January 1, 2007, as required. We have elected to classify interest and penalties as a component of our income tax provision. As a result of the implementation of FIN 48, we recognized a $156,000 liability for unrecognized tax benefits, which was accounted for as an increase in the January 1, 2007 accumulated deficit balance. For the ~~nine~~three months ended ~~September 30, 2007,~~March 31, 2008, we recorded an increase of ~~$39,000~~$15,000 in the liability for unrecognized tax benefits, including related estimates of penalties and interest.

~~NOTE 14 — SUBSEQUENT EVENT~~

On November 6, 2007, we issued a press release announcing that, effective November 5, 2007, we had terminated Jeffrey W. Jones from his positions as Chief Executive Officer and President of Biolase and terminated Keith G. Bateman from his position as Executive Vice President, Global Sales and Marketing. The Board of Directors appointed Federico Pignatelli as interim Chief Executive Officer and President. We are currently conducting a search for a new CEO to replace Mr. Jones. James R. Largent, an independent director, will assume interim responsibilities in overseeing and assisting in sales and marketing programs and future strategies in those areas. While serving in their executive capacities, Messrs. Pignatelli and Largent will not serve on any board committees that require independent directors.

On November 6, 2007, Comerica Bank provided the necessary consent, as required by the Loan Agreement, to the appointment of Federico Pignatelli as Interim Chief Executive Officer replacing Jeffrey W. Jones.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements include, but are not limited to, statements pertaining to financial items, plans, strategies or objectives of management for future operations, our financial condition or prospects, and any other statement that is not historical fact, including any statement using terminology such as “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” or the negativities of these terms or other comparable terminology. For all of the foregoing forward-looking statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. These statements are only predictions and actual events or results may differ materially from our expectations for a number of reasons including those set forth under “Risk Factors” in Item 1A of this quarterly report and our Annual Report on Form 10-K for the year ended December 31, ~~2006.~~2007. These forward-looking statements represent our judgment as of the date hereof. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.


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

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

The following discussion of our results of operations and financial condition should be read together with the unaudited consolidated financial statements and the notes to those statements included elsewhere in this report and our audited consolidated financial statements and the notes to those statements for the year ended December 31, ~~2006.~~2007. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in any forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” and elsewhere in this report.

Overview

We are a medical technology company that develops, manufactures and markets lasers and related products focused on technologies for improved applications and procedures in dentistry and medicine. In particular, our ~~principal~~principle products provide dental laser systems that allow dentists, periodontists, endodontists, oral surgeons and other specialists to perform a broad range of dental procedures, including cosmetic and complex surgical applications. Our systems are designed to provide clinically superior performance for many types of dental procedures, with less pain and faster recovery times than are generally achieved with drills, scalpels and other traditional dental instruments. We have clearance from the U.S. Food and Drug Administration, or FDA, to market our laser systems in the United States and also have the necessary approvals to sell our laser systems in Canada, the European Union and certain other international markets.

We offer two categories of laser system products: (i) Waterlase ~~system~~family of products and (ii) ~~Diode system.~~Diolase family of products. Our flagship product category, the Waterlase ~~system,~~family of products, uses a patented combination of water and laser to perform most procedures currently performed using dental drills, scalpels and other traditional dental instruments for cutting soft and hard ~~tissue.~~tissue including bone. We also offer aour Diolase family of ~~Diode~~diode laser system products to perform soft tissue and cosmetic procedures, including tooth whitening.

On August 8, 2006, we entered into a License and Distribution Agreement with Henry Schein, Inc., or HSIC, a large distributor of healthcare products to office-based practitioners, pursuant to which we granted HSIC the exclusive right to distribute our complete line of dental laser systems, accessories and services in the United States and Canada. The agreement has an initial term of three years, following which it will automatically renew for an additional period of three years, provided that HSIC has achieved its minimum purchase ~~requirements and for an additional license fee of $5.0 million.~~requirements. Under the agreement, HSIC is obligated to meet certain minimum purchase requirements and is entitled to receive incentive payments if certain purchase targets are achieved. If HSIC has not met the minimum purchase requirements at the midpoint of each of the first two three-year periods, we will have the option, upon repayment of a portion of the license fee, to (i) shorten the remaining term of the agreement to one year, (ii) grant distribution rights held by HSIC to other persons (or distribute products ~~ourself)~~ourselves), (iii) reduce certain discounts on products given to HSIC under the agreement and (iv) cease paying future incentive payments. We maintain the right to grant certain intellectual property rights to third parties, but by doing so may incur the obligation to refund a portion of the upfront license fee to HSIC.

On May 9, 2007, we entered intoAddendum 1 to License and Distribution Agreementwith HSIC, which addendum iswas effective as of April 1, 2007 and ~~modifies~~modified the License and Distribution Agreement entered into with HSIC on August 8, 2006, to add the terms and conditions under which HSIC has the exclusive right to distribute our newezlasediode dental

for theezlase.system. If HSIC has not met the minimum purchase requirement for any 12-month period ending on March 31, we will have the option, upon 30 days written notice, to (i) convert ~~HSIC’s~~ezlasedistribution rights to a non-exclusive basis for a minimum period of one year, after which period we would have the option to withdraw ~~HSIC’s~~ezlasedistribution rights, and (ii) reduce the distributor discount onezlaseproducts.

On ~~June 29, 2006,~~March 3, 2008, we ~~received~~entered into a ~~one-time payment from The Procter & Gamble Company, or P&G, of $3.0 million for a license~~second addendum to the HSIC agreement that modifies certain of our patents pursuant to a binding letter agreement, subsequently replaced by a definitive agreement effective January 24, 2007, which was recorded as deferred revenue when received. In the event of a material uncured breachterms of the ~~definitive~~initial agreement as amended. Pursuant to Addendum 2 to the agreement, HSIC is obligated to meet certain minimum purchase requirements and is entitled to receive incentive payments if certain purchase targets are achieved. If HSIC has not met the minimum purchase requirements, we will have the option to (i) shorten the remaining term of the Agreement to one year, (ii) grant distribution rights held by ~~us, we could be required~~HSIC to ~~refund~~other persons (or distribute products ourselves), (iii) reduce certain ~~payments made~~discounts on products given to usHSIC under the ~~agreement, including~~Agreement and (iv) cease paying future incentive payments. Additionally, under certain circumstances, if HSIC has not met the ~~$3.0 million payment. The license fee from P&G is being amortized over a two-year period beginning in January 2007. Additionally, P&G is required~~minimum purchase requirements, we have the right to ~~make quarterly payments~~purchase back the exclusive distributor rights granted to ~~us in the amount of $250,000, beginning with a payment for the third quarter of 2006 and continuing until the first product~~HSIC under the ~~agreement is shipped by P&G for large-scale commercial distribution~~agreement. We also agreed to actively promote Henry Schein Financial Services as our exclusive leasing and financing partner.

We intend to augment the activities of HSIC in the United ~~States. Seventy-five percent~~States and Canada with the efforts of ~~each $250,000 payment is being treated as prepaid royalties~~our direct sales force; however, our future revenue will be largely dependent upon the efforts and ~~is being credited against royalty payments owed~~success of HSIC in selling our products. Since September 1, 2006, nearly all of our domestic sales were made through HSIC and we expect this to ~~us, and~~continue for the ~~remainder is being credited~~foreseeable future. We cannot assure you that HSIC will devote sufficient resources to ~~revenue in the period earned.~~selling our products or, even if sufficient resources are directed to our products, that such efforts will be sufficient to increase net revenue.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions and estimates that affect the amounts reported. The following is a summary of those accounting policies that we believe are necessary to understand and evaluate our reported consolidated financial results.

Revenue Recognition.Effective September 1, 2006, nearly all of our domestic sales are to HSIC; prior to this date, we sold our products directly to customers through our direct sales force. Internationally, we sell products through direct sales representatives and through distributors. We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104,Revenue Recognition, which requires that four basic criteria must be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and title and the risks and rewards of ownership have been transferred to our customer, or services have been rendered; (iii) the price is fixed or determinable; and (iv) collectibility is reasonably assured.

We apply Emerging Issues Task Force, or EITF, 00-21,Accounting for Revenue Arrangements with Multiple Deliverables, which requires us to evaluate whether the separate deliverables in our arrangements can be unbundled in our revenue recognition. Sales of our Waterlase systems include separate deliverables consisting of the product, disposables used with the Waterlase system, installation and training. For these sales, we apply the residual value method, which requires us to allocate to the delivered elements the total arrangement consideration less the fair value of the undelivered elements. Sales of our Diode systems include separate deliverables consisting of the product, disposables and training. For these sales, we apply the relative fair value method, which requires us to allocate the total arrangement consideration to the relative fair value of each element. ~~Deferred revenue~~Revenue attributable to the undelivered elements, primarily training and installation, are included in deferred revenue when the product is shipped and are recognized when the related service is performed or upon expiration of time offered under the agreement.

The key judgment related to our revenue recognition relates to the collectibility of payment from the customer. We evaluate the customer’s credit worthiness prior to the shipment of the product. Based on our assessment of the credit information available to us, we may determine the credit risk is higher than normally acceptable, and we will either decline the purchase or defer the revenue until payment is reasonably assured.

Although all sales are final, we accept returns of products in certain, limited circumstances and record a provision for sales returns based on historical experience concurrent with the recognition of revenue. The sales returns allowance is recorded as a reduction of accounts receivable and revenue.

We recognize revenue for royalties under licensing agreements for our patented technology when the product using our technology is sold. We estimate and recognize the amount earned based on historical performance and current knowledge

which provides the Staff’s views regarding interactions between FAS 123R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. We have incorporated the provisions of SAB 107 in ~~the~~our adoption of FAS 123R.

Under the modified prospective transition method, the provisions of FAS 123R apply to new awards and to awards outstanding on January 1, 2006 and subsequently modified, repurchased or cancelled. Under the modified prospective transition method, compensation expense recognized in 2006 includes compensation costs for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of FAS 123, and compensation costs for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard.

Valuation of Accounts Receivable.We maintain an allowance for uncollectible accounts receivable to estimate the risk of extending credit to customers. We evaluate our allowance for doubtful accounts based upon our knowledge of customers and their compliance with credit terms. The evaluation process includes a review of customers’ accounts on a regular basis which incorporates input from sales, service and finance personnel. The review process evaluates all account balances with amounts outstanding 60 days and other specific amounts for which information obtained indicates that the balance may be uncollectible. The allowance for doubtful accounts is adjusted based on such evaluation, with a corresponding provision included in general and administrative expenses. Account balances are charged off against the allowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.

Valuation of Inventory.Inventory is valued at the lower of cost, ~~(determined~~determined using the first-in, first-out ~~method)~~method, or market. We periodically evaluate the carrying value of inventory and maintain an allowance for excess and obsolete inventory to adjust the carrying value as necessary to the lower of cost or market. We evaluate quantities on hand, physical condition and technical functionality, as these characteristics may be impacted by anticipated customer demand for current products and new product introductions. Unfavorable changes in estimates of excess and obsolete inventory would result in an increase in cost of revenue and a decrease in gross profit.

Valuation of Long-Lived Assets.Property, plant and equipment, and certain intangibles with finite lives are amortized over their useful lives. Useful lives are based on our estimate of the period that the assets will generate revenue or otherwise productively support our business goals. We monitor events and changes in circumstances which could indicate that the carrying balances of long-lived assets may exceed the undiscounted expected future cash flows from those assets. If such a condition were to exist, we would recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

Valuation of Goodwill and Other Intangible Assets.Goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. We conducted our annual impairment analysis of our goodwill and trade names as of June 30, 2007 and 2006, and concluded there had been no ~~further~~ impairment in trade names and no impairment in goodwill. ~~Subsequent to~~During the period June 30, 2007 through March 31, 2008, we reviewed critical indicators and determined that no triggering events ~~have~~ occurred that would have a material effect on the value of these assets.

Warranty Cost.Waterlase systems sold are covered by a warranty against defects in material and workmanship for a period of ~~up to~~ one year while ourezlasesystem warranty period is up to two years. Estimated warranty expenses are recorded as

an accrued liability, with a corresponding ~~charge~~provision to cost of revenue. This estimate is recognized concurrent with the recognition of revenue. The accrual is based on our historical experience and our expectation of future conditions. An increase in warranty claims or in the costs associated with servicing those claims would result in an increase in the accrual and a decrease in gross profit.

Litigation and Other Contingencies.We regularly evaluate our exposure to threatened or pending litigation and other business contingencies. Because of the uncertainties related to the amount of loss from litigation and other business contingencies, the recording of losses relating to such exposures requires significant judgment about the potential range of outcomes. As additional information about current or future litigation or other contingencies becomes available, we will assess whether such information warrants the recording of expense relating to contingencies. To be recorded as expense, a loss contingency must be both probable and reasonably estimable. If a loss contingency is material but is not both probable and estimable, we will disclose the matter in the notes to the consolidated financial statements.

Income Taxes.Based upon our operating losses during 2007 and 2006 and the available evidence, management determined that it is more likely than not that ~~our~~the deferred tax assets as of March 31, 2008 will not be realized, excluding ~~our~~the foreign deferred ~~tax asset and consequently we maintain a valuation allowance against our net deferred tax asset, excluding the foreign portion.~~assets. In this determination, we considered factors such as our earnings history, future projected earnings and tax planning strategies. If sufficient evidence of our ability to generate sufficient future taxable income tax benefits becomes apparent, we may reduce our valuation allowance, resulting in tax benefits in our ~~consolidated~~ statement of operations and in additional paid-in-capital. Management evaluates the potential realization of our deferred tax assets and assesses the need for reducing the valuation allowance periodically.

Off-Balance Sheet Arrangements. We have no off-balance sheet financing or contractual arrangements.

1819

Domestic revenues were $14.0 million, or 74% of ~~our~~ net revenue, for the ~~quarters~~three months ended ~~September 30, 2007 and 2006, respectively. Overall, our Waterlase laser system sales declined by 44%, while our Diode laser system sales increased by 280%.~~

~~Domestic revenues were $9.4~~March 31, 2008 versus $8.7 million, or ~~73%~~58% of net revenue, for the three months ended March 31, 2007. Approximately half of this increase related to demonstration units sold Henry Schein to be used for sales and marketing purposes. International revenues for the quarter ended March 31, 2008 were $5.0 million, or 26% of net revenue, as compared with $6.4 million, or 42% of net revenue, for the quarter ended ~~September 30, 2007 versus $11.2 million, or 65%~~March 31, 2007. The majority of ~~net revenue, for~~this decrease was in Canada as sales into this country were particularly strong in the ~~same~~first quarter of 2006. International revenues for the quarter ended September 30, 2007 were $3.5 million, or 27% of net revenue, as compared with $5.9 million, or 35% of net revenue, for the quarter ended September 30, 2006.2007.

We believe that there were various factors which, in the aggregate, had a significant negative effect on laser systems sales in the quarter ended September 30, 2007 as compared to the quarter ended September 30, 2006. First, general economic conditions in the quarter ended September 30, 2007 with respect to credit availability may have caused many dentists considering the purchase of a Waterlase MD laser system to postpone their purchase decision. Second, we believe that a variety of sales and marketing execution issues, which have led to a management change announced on November 6, 2007, negatively affected our Waterlase MD system sales. Lastly, the decline in sales to one international distributor accounted for 80% of the decrease in international revenue in the quarter ended September 30, 2007 as compared to the quarter ended September 30, 2006.

License fees and royalty revenue increased to $902,000 in the third quarter of 2007 from $197,000 in the third quarter of 2006, primarily generated by the amortization of license fees and related payments received from HSIC and The Procter and Gamble Company, or P&G.

Gross Profit. Gross profit for the ~~quarter~~three months ended ~~September 30, 2007 decreased~~March 31, 2008 increased by ~~$2.0~~$1.4 million to ~~$6.6~~$9.6 million, or ~~51%~~50% of net revenue, as compared with gross profit of ~~$8.6~~$8.1 million, or ~~51%~~54% of net revenue, for the ~~quarter~~three months ended ~~September 30, 2006. Gross margin excluding license fees~~March 31, 2007. The improvement in gross profit dollars of $1.4 million was primarily driven by a $2.1 million volume increase partially offset by $360,000 discounts on demonstration unit sales and ~~royalty revenue was 48%~~increase in symposium costs of products and services revenue for the quarter ended September 30, 2007 compared to 50% for the same period in 2006. Fixed expenses included in cost of revenue represented a higher percentage of the comparatively lower revenues from period to period, resulting in a lower gross margin on products and services revenue.$295,000.

Operating Expenses. Operating expenses for the ~~quarter~~three months ended ~~September 30, 2007~~March 31, 2008 increased by ~~$422,000~~$163,000, or 4%2%, to ~~$10.2~~$10.1 million as compared to ~~$9.8~~$10.0 million for the ~~quarter~~three months ended ~~September 30, 2006. As~~March 31, 2007, but decreased as a percentage of net revenue to 53% from 66% on higher net revenue from period to period. While operating expenses ~~increased~~in total showed minimal change, we are in the process of redeploying expense priorities to ~~79% from 57%.~~spend more effectively and to spend in areas that build our foundation for the future.

Sales and Marketing Expense. Sales and marketing expenses for the ~~quarter~~three months ended ~~September 30, 2007 increased~~March 31, 2008 decreased by ~~$782,000,~~$788,000, or approximately ~~14%~~12%, to ~~$6.3~~$5.6 million, or ~~49%~~29% of net revenue, as compared with ~~$5.5~~$6.4 million, or ~~32%~~42% of net revenue, for the ~~quarter~~three months ended ~~September 30, 2006.~~March 31, 2007. Convention and ~~seminar~~seminars expenses ~~increased~~decreased by ~~$726,000;~~$524,000, travel and entertainment expenses ~~increased~~decreased by ~~approximately $298,000~~$197,000 and ~~payroll related~~advertising expenses ~~increased~~decreased by ~~$40,000~~$281,000 in the quarter ended ~~September 30, 2007~~March 31, 2008 compared towith the same quarter of ~~2006.~~2007. Partially offsetting the decreases was an increase in regional meetings expense of $116,000. While we expect to continue investing in sales and marketing expenses and programs in order to grow our revenues, we believe it is likely that these expenses, excluding commissions, will decrease in future 2008 periods compared to the respective periods in 2007.

General and Administrative Expense.General and administrative expenses for the ~~quarter~~three months ended ~~September 30, 2007 decreased~~March 31, 2008 increased by ~~$365,000,~~$700,000, or ~~12%~~29%, to ~~$2.6~~$3.1 million, or ~~20%~~16% of net revenue, as compared with ~~$3.0~~$2.4 million, or ~~17%~~16% of net revenue, for the ~~quarter~~three months ended ~~September 30, 2006.~~March 31, 2007. The ~~decrease~~increase in general and administrative expenses resulted primarily from ~~a reduction in the~~increased legal and consulting fees of $704,000, increased accounts receivable bad debt expense of ~~$492,000.~~$103,000 due to a recovery in the 2007 period and increased payroll related expenses of $165,000. These increases were partially offset by a decrease in audit fees of $381,000. We believe that our general and administrative expenses may increase in 2008 in comparison to comparable periods in 2007.

Engineering and Development Expense.Engineering and development expenses ~~were approximtely $1.3 million~~ for the ~~quarters~~three months ended ~~September 30, 2007 and 2006, and as percentages~~March 31, 2008 increased by $251,000, or 21%, to $1.5 million, or 8% of net revenue, ~~were 10% and~~as compared with $1.2 million, or 8%~~, respectively.~~

~~Patent Infringement Legal Settlement~~~~. In January 2005, we acquired~~ of net revenue, for the ~~intellectual property portfolio~~three months ended March 31, 2007. The increase is primarily related to increased payroll related expenses of ~~Diodem, consisting~~$158,000, increased regulatory expenses of ~~certain U.S. and international patents~~$225,000 partially offset by decreased prototyping expenses of ~~which four were asserted against us, and settled the existing litigation between us and Diodem, for consideration of $3.0 million~~$246,000. We expect to continue to invest in cash, 361,664 shares of our common stock, and a five-year warrant to purchase 81,037 shares of common stock at an exercise price of $11.06 per share. In connection with the Diodem patent litigation settlement, 45,208 shares of our common stock were issued to Diodem and placedadditional development projects in ~~an escrow account. In the first quarter of 2006, we determined that it was probable the shares would be released from escrow,~~2008 and accordingly ~~we recorded a $432,000 charge based on the fair market value of~~it is probable that our common stock on March 31, 2006. In the quarter ended June 30, 2006, we favorably adjusted the charge by $52,000 based upon the fair market value of our common stock of $8.40 per share as of June 30, 2006. In July 2006, we released these shares from escrowengineering and ~~accordingly favorably adjusted the charge by an additional $32,000 based upon the fair market value of our common stock of $7.71 per share as of July 14, 2006.~~development expenses will increase in 2008 in comparison to comparable periods in 2007.

Non-Operating Income (Loss)

Gain (Loss) on Foreign Currency Transactions. We realized a ~~$34,000 loss on foreign currency transactions for the quarter ended September 30, 2007, compared to a $26,000~~$616,000 gain on foreign currency transactions for the ~~quarter~~three months ended ~~September 30, 2006~~March 31, 2008, compared to a $53,000 gain on foreign currency transactions for the three months ended March 31, 2007 due to the treatment of intercompany balances as short term. The increase is due to changes in exchange rates between the U.S. dollar and the Euro, the Australian dollar and the New Zealand ~~dollar.~~dollar and an increase in foreign currency denominated transactions and balances. We have not engaged in hedging transactions to offset foreign currency fluctuations. Therefore, we are at risk for changes in the value of the U.S. dollar relative to the value of these foreign currencies.

Interest Income. Interest income resulted from interest earned on our cash and investments balances. Interest income for the ~~quarter~~three months ended ~~September 30, 2007~~March 31, 2008 was ~~$156,000~~$58,000 as compared with ~~$112,000~~$152,000 for the ~~quarter~~three months ended ~~September 30, 2006.~~March 31, 2007. The decrease is the result of lower average cash balances during the 2008 period compared to the same period in 2007.

Interest Expense. Interest expense ~~for the quarter ended September 30, 2007 consisted~~consists primarily of interest on the financing of our business insurance ~~premiums. In 2006, interest expense consisted primarily of~~premiums and interest on outstanding balances on our line of ~~credit, standby fees under the line of credit, and the periodic use of the line of credit during the period.~~credit. Interest expense for the quarter ended ~~September 30, 2007~~March 31, 2008 was ~~$3,000~~$24,000 as compared to ~~$44,000~~$16,000 for the quarter ended ~~September 30, 2006.~~March 31, 2007.

and interest. As of September 30, 2007, we have a $27.8 million valuation allowance against our net deferred tax assets. Based upon our operating losses and the weight of the available evidence, management believes it is more likely than not that we will not realize all of these deferred tax assets.

~~Nine~~three months ended ~~September 30, 2007 compared with nine months ended September 30, 2006~~

~~Net Revenue.~~Net revenue for the nine months ended September 30, 2007 was $46.0 million, a decrease of $3.9 million, or 8%, as compared with net revenue of $49.9 million for the nine months ended September 30, 2006. Laser system net revenue decreased by approximately 11% in the nine months ended September 30, 2007 compared to the same period of 2006.

Non-laser system net revenue, which includes the sale of consumable products, advanced training programs and extended service contracts and shipping revenue, decreased by approximately 20% in the nine months ended September 30, 2007 as compared to the same period in 2006. The decrease in non-laser system net revenues was primarily driven by the recognition in the 2006 period of approximately $1.0 million in revenue previously recorded as a deferred revenue obligation that was subsequently determined to have been earned in the nine months ended September 30, 2006, compared with $150,000 of similar revenue in the same period of 2007. Also decreasing was training and shipping revenue partially offset by an increase in revenue related to the sale of extended service contracts.

License fees and royalty revenue increased to $2.9 million for the nine months ended September 30, 2007 from $384,000 for the same period in 2006, primarily generated by the amortization of license fees and related payments received from HSIC and P&G.

Sales of our Waterlase systems comprised 68% and 78% of our net revenue and sales of our Diode laser systems comprised 13% and 6% of our net revenue for the nine months ended September 30, 2007 and 2006, respectively.

Domestic revenues were $28.8 million, or 63% of net revenue, for the nine months ended September 30, 2007 versus $30.4 million, or 61% of net revenue, for the same period in 2006. International revenues for the nine months ended September 30, 2007 were $17.2 million, or 37% of net revenue, as compared with $19.5 million, or 39% of net revenue, for the nine months ended September 30, 2006.

~~Gross Profit~~. Gross profit for the nine months ended September 30, 2007 decreased by $208,000 to $24.7 million, or 54% of net revenue, as compared with gross profit of $24.9 million, or 50% of net revenue for the nine months ended September 30, 2006. Gross margin excluding the license fees and royalty revenue was 51% of products and services revenue for the nine months ended September 30, 2007 compared to 50% for the same period in 2006.

~~Other Income, Net~~~~. For the nine months ended September 30, 2006, other income included $10,000 related to the sale and leaseback of our former facility in San Clemente, California in March 2001.~~

~~Operating Expenses~~. Operating expenses for the nine months ended September 30, 2007 increased by $346,000, or 1%, to $31.1 million as compared to $30.7 million for the nine months ended September 30, 2006, and increased as a percentage of net revenue to 68% from 62%.

~~Sales and Marketing Expense~~. Sales and marketing expenses for the nine months ended September 30, 2007 increased by $2.1 million, or approximately 12%, to $19.6 million, or 43% of net revenue, as compared with $17.5 million, or 35% of net revenue, for the nine months ended September 30, 2006. Convention and seminar expenses increased by $2.0 million in the nine months ended September 30, 2007 compared with the same period of 2006, and travel and entertainment expenses increased by approximately $701,000 as compared to the same period in 2006. Offsetting the increases was a decrease in payroll related costs of approximately $519,000, primarily related to lower commission expense on decreased sales.

~~General and Administrative Expense.~~General and administrative expenses for the nine months ended September 30, 2007 decreased by $1.3 million, or 15%, to $7.8 million, or 17% of net revenue, as compared with $9.1 million, or 18% of net revenue, for the nine months ended September 30, 2006. The decrease in general and administrative expenses resulted primarily from a reduction in professional fees of approximately $601,000 and a reduction in the accounts receivable bad debt expense of $1.1 million, partially offset by increased audit fees of $209,000.

~~Engineering and Development Expense.~~Engineering and development expenses for the nine months ended September 30, 2007 decreased by $90,000 or 2%, to $3.7 million, or 8% of net revenue, as compared with $3.8 million, or 8% of net revenue, for the nine months ended September 30, 2006.

~~Patent Infringement Legal Settlement~~. In January 2005, we acquired the intellectual property portfolio of Diodem, consisting of certain U.S. and international patents of which four were asserted against us, and settled the existing litigation between us and Diodem, for consideration of $3.0 million in cash, 361,664 shares of our common stock, and a five-year warrant to purchase 81,037 shares of common stock at an exercise price of $11.06 per share. In connection with the Diodem patent litigation settlement, 45,208 shares of our common stock were issued to Diodem and placed in an escrow account. In the first quarter of 2006, we determined that it was probable the shares would be released from escrow, and accordingly, we recorded a $432,000 charge based on the fair market value of our common stock on March 31, 2006. In the quarter ended June 30, 2006, we favorably adjusted the charge by $52,000 based upon the fair market value of our common stock of $8.40 per share as of June 30, 2006. In July 2006, we released these shares from escrow and accordingly favorably adjusted the charge by an additional $32,000 based upon the fair market value of our common stock of $7.71 per share as of July 14, 2006.

~~Non-Operating Income (Loss)~~

~~Gain on Foreign Currency Transactions~~. We realized a $34,000 gain on foreign currency transactions for the nine months ended September 30, 2007, compared to a $170,000 gain on foreign currency transactions for the nine months ended September 30, 2006 due to the changes in exchange rates between the U.S. dollar and the Euro, the Australian dollar and the New Zealand dollar. We have not engaged in hedging transactions to offset foreign currency fluctuations. Therefore, we are at risk for changes in the value of the U.S. dollar relative to the value of these foreign currencies.

~~Interest Income~~. Interest income resulted from interest earned on our cash and investments balances. Interest income for the nine months ended September 30, 2007 was $434,000 as compared with $346,000 for the nine months ended September 30, 2006.

~~Interest Expense~~. Interest expense for the nine months ended September 30, 2007 consisted primarily of interest on the financing of our business insurance premiums. In 2006, interest expense consisted primarily of interest on outstanding balances on our line of credit, standby fees under the line of credit, and the periodic use of the line of credit during the period. Interest expense for the nine months ended September 30, 2007 was $26,000 as compared to $382,000 for the nine months ended September 30, 2006.

~~Income Taxes~~~~. An income tax provision of $219,000 was recognized for the nine months ended September 30, 2007 as compared with $70,000 for the nine months ended September 30, 2006.~~2007. As a result of the implementation of FIN 48, we recognized a $156,000 liability for unrecognized tax benefits, including related estimates of penalties and interest, which was accounted for as an increase in the January 1, 2007 accumulated deficit balance. For the ~~nine~~three months ended ~~September 30,~~March 31, 2008 and 2007, we recorded an increase of ~~$39,000~~$15,000 and $17,000, respectively, in the liability for unrecognized tax benefits, including related estimates of penalties and interest. As of ~~September 30, 2007,~~March 31, 2008, we have a valuation allowance against our net deferred tax assets, excluding foreign operations, in the amount of ~~$27.8~~$26.0 million. Based upon our operating losses and the weight of the available evidence, management believes it is more likely than not that we will not realize all of these deferred tax assets.

Liquidity and Capital Resources

At ~~September 30, 2007,~~March 31, 2008, we had approximately ~~$13.0~~$11.9 million in net working capital, ~~a decrease~~an increase of ~~$4.3 million~~$900,000 from ~~$17.3~~$11.0 million at December 31, ~~2006.~~2007. Our principal sources of liquidity at ~~September 30, 2007~~March 31, 2008 consisted of our cash and cash equivalents balance of ~~$11.9~~$13.9 million and a $10.0 million revolving bank line of credit with Comerica Bank, ~~(the “Lender”).~~or the Lender. Advances under the revolving bank line of credit may not exceed the lesser of $10.0 million or the Borrowing Base (80% of eligible accounts receivable and 35% of eligible inventory), less any amounts outstanding under letters of credit or foreign exchange contract reserves. Notwithstanding the foregoing, advances of up to $6.0 million may be made without regard to the Borrowing Base. ~~On October 5, 2007, we entered into an Amendment to the Loan Agreement which extends the agreement for an additional year.~~ The entire unpaid principal amount plus any accrued but unpaid interest and all other amounts due under the Loan Agreement are due and payable in full on September 28, 2009, but can be extended by us for an additional year upon Lender approval. Our obligations under the line of credit bear interest on the outstanding daily balance at our choice of either: (i) LIBOR plus 2.50%, or (ii) prime rate plus 0.25%. As security for the payment and performance of

our obligations under the Loan Agreement, we granted the Lender a first priority security interest in certain collateral, which excludes intellectual property.

The line of credit requires compliance with certain financial covenants, including: (i) minimum effective tangible net worth; (ii) maximum leverage ratio; (iii) minimum cash amount at the Lender of $6.0 million; and (iv) minimum liquidity ratio. The line also contains covenants that require the Lender’s prior written consent for us, among other things, to: (i) transfer any part of our business or property; (ii) make any changes in our location or name, or replace our CEO or CFO; (iii) consummate mergers or acquisitions; (iv) incur liens; or, (v) pay dividends or repurchase stock. The line contains customary events of default, any one of which will result in the right of the Lender to, among other things, accelerate all obligations under the line, set-off obligations under the line against any of our balances or deposits held by the Lender, or sell the collateral. We had no outstanding ~~balance~~balances on our line of credit of $2.0 million at ~~September 30, 2007~~March 31, 2008 and $3.6 million at December 31, ~~2006.~~2007.

For the ~~nine~~three months ended ~~September 30, 2007,~~March 31, 2008, our operating activities ~~used~~provided cash of approximately ~~$3.6 million,~~$799,000, compared to ~~$2.3~~cash usage of $1.9 million ~~of cash provided by operating activities~~ for the ~~nine~~three months ended ~~September 30, 2006.~~March 31, 2007. The most significant change in operating assets and liabilities for the ~~nine~~three months ended ~~September 30, 2007~~March 31, 2008 as reported in our consolidated statements of cash flows was an accounts ~~payable and accrued liabilities~~receivable decrease of $3.6 million, primarily the result of relatively higher inventory purchases in the quarter ended December 31, 2006 compared to the quarter ended September 30, 2007 and payments of our financed annual insurance premiums. Accounts receivable decreased by $8.2$1.1 million (before the change in allowance for doubtful accounts), primarily the result of ~~improved collections and~~ lower net revenue in the ~~third~~first quarter of ~~2007~~2008 versus the fourth quarter of ~~2006.~~2007. Other significant changes in operating assets and liabilities were ~~an inventory increase~~a decrease of ~~$3.0 million~~$541,000 in prepaid expenses and other assets; and a decrease of ~~$1.4~~$1.0 million in deferred revenue. Contributing to the cash provided from operations in the nine months ended September 30, 2006 were the $3.0 million payment received from The Proctor & Gamble Company for the license to certain of our patents pursuant to a binding letter agreement and the $5.0 million license fee payment from HSIC.

On January 10, 2006, we entered into a five-year facility lease with initial monthly installments of $39,000 and annual adjustments over the lease term. These amounts are included in the outstanding obligations as of ~~September 30, 2007~~March 31, 2008 listed below.

The following table presents our expected cash requirements for contractual obligations outstanding as of ~~September 30, 2007~~March 31, 2008 for the years ending as indicated below (in thousands):


	Less Than		1 to 3		3 to 5		More Than				Less Than		1 to 3		3 to 5		More Than
	1 Year		Years		Years		5 years		Total		1 Year		Years		Years		5 years		Total
Operating leases	$	628	$	1,159	$	344	$	—	$	2,131	$	545	$	1,131	$	55	$	—	$	1,731
SurgiLight agreement		25		50		—		—		75		25		25		—		—		50
Insurance premium financing												840		—		—		—		840

Total	$	653	$	1,209	$	344	$	—	$	2,206	$	1,410	$	1,156	$	55	$	—	$	2,621

In addition to the amounts shown in the table above, $209,000 of unrecognized tax benefits have been recorded as liabilities in accordance with FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, An Interpretation of FASB Statement No. 109, or FIN 48, and we are uncertain as to if or when such amounts may be settled. Related to these unrecognized tax benefits, we have also recorded a liability for potential penalties and interest of $19,000 and $16,000, respectively, at March 31, 2008.

AsEffective November 5, 2007, we terminated the employment of ~~September~~Jeffrey W. Jones, our President and Chief Executive Officer. On January 30, 2008, we entered into a Separation and General Release Agreement with Mr. Jones relating to the termination of his employment. The agreement superseded the Employment Agreement we had with Mr. Jones dated December 29, 2005. Pursuant to the terms of the agreement, we agreed to pay Mr. Jones a severance amount of $374,822 and pay COBRA premiums on his behalf of $1,712 per month for the period from December 2007 ~~two executive officers~~through February 2008. The severance amount was paid on February 2, 2008.

Following the termination of Mr. Jones, we appointed Federico Pignatelli, one of our current directors and Chairman Emeritus, as Interim President and Chief Executive Officer. Mr. Pignatelli subsequently resigned his position as Interim Chief Executive Officer in January 2008 following the appointment of Jake St. Philip as our Chief Executive Officer. Mr. Pignatelli will remain our President in 2008 for which he will receive a salary of $150,000.

Effective November 5, 2007, we terminated the employment of Keith G. Bateman, our Executive Vice President, Global Sales and Marketing. On January 22, 2008, we entered into a Separation and General Release Agreement with Mr. Bateman relating to the termination of his employment. Pursuant to the terms of the agreement, we agreed to pay Mr. Bateman a severance amount of $187,263 and pay COBRA premiums on his behalf of $1,311 per month for the period from December 2007 through May 2008. The severance amount was paid on January 31, 2008.

On January 2, 2008, Richard L. Harrison resigned as our Chief Financial Officer. On January 30, 2008, Frederick M. Capallo, our Corporate Controller, was appointed Interim Chief Financial Officer. On April 30, 2008, we appointed David M. Mulder as Chief Financial Officer.

Messrs. St. Philip and Mulder have employment agreements that obligate us to pay them severance benefits under certain conditions, including termination without cause and resignation with good reason. In the event ~~that both officers were~~Mr. St. Philip is terminated by us without cause or ~~they resigned~~he resigns with good reason, ~~as of September 30, 2007,~~ the total severance benefits payable would be approximately ~~$483,000~~$600,000 based on compensation in effect as of ~~September~~January 2, 2008, the date Mr. St. Philip was appointed as our current Chief Executive Officer. In the event Mr. Mulder is terminated by us without cause or he resigns with good reason, the total severance benefits payable would be approximately $255,000 based on compensation in effect as of April 30, ~~2007.~~2008, the date Mr. Mulder was appointed as our current Chief Financial Officer.

In addition, ~~as of September 30, 2007, three executive officers~~Messrs. St. Philip and ~~some~~Mulder along with certain other members of management are entitled to ~~certain~~ severance benefits payable upon termination following a change in control, in which ~~case the~~would total ~~severance benefits payable would be~~ approximately $3.7 million based on compensation in effect as of September 30, 2007. We have agreements with three executive officers to pay bonuses for which $237,000 was paid in the nine months ended September 30, 2007 and $12,000 was included in accrued compensation at September 30, 2007.$3.1 million. Also, we have agreements with certain ~~other~~ employees to pay bonuses based on targeted performance criteria.

We believe we currently possess sufficient resources, including amounts available under our revolving bank line of credit, to meet the cash requirements of our operations for at least the next year. Our capital requirements will depend on many factors, including, among other things, the effects of any acquisitions we may pursue as well as the rate at which our business grows, with corresponding demands for working capital and manufacturing capacity. We could be required or may elect to seek additional funding through public or private equity or debt financing. However, the ~~improved or~~ extended credit facility, or additional funds raised through public or private equity or other debt financing, may not be available on terms acceptable to us or at all.

risk for changes in the value of the dollar relative to the value of the foreign currency. An increase in the relative value of the dollar would lead to less income from sales denominated in foreign currencies unless we increase prices, which may not be possible due to competitive conditions in the respective foreign territories. Conversely, a decrease in the relative value of the dollar would lead to more income from sales denominated in foreign currencies. Additionally, we are obligated to pay expenses relating to international subsidiaries in their respective local currencies. Thus, we are also at risk for changes in the value of the dollar relative to the foreign currency with respect to our obligation to pay expenses relating to our international subsidiaries’ operations. An increase in the value of the dollar relative to the foreign currencies would reduce the expenses associated with the operations of our international subsidiaries’ facilities, whereas a decrease in the relative value of the dollar to the foreign currency value would increase the cost associated with the operations of our international subsidiaries’ facilities.

We currently have a line of credit which bears interest at rates based on the ~~Prime~~prime rate or LIBOR. At ~~September 30, 2007, there were no balances~~March 31, 2008, $2.0 million was outstanding onunder the line of ~~credit.~~credit at a rate of 5.5%, which was subsequently repaid in full on April 1, 2008. A change in the ~~Prime~~prime rate or LIBOR would have an effect of an increase or decrease in interest expense on any balances outstanding.

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

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure 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 defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~September 30, 2007.~~March 31, 2008. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of ~~September 30, 2007.~~March 31, 2008.

Changes in Internal Control over Financial Reporting

In our Annual Report on Form 10-K for the year ended December 31, ~~2006,~~2007, we disclosed management’s assessment that our internal control over financial reporting contained noa material ~~weaknesses. No~~weakness with respect to the controls over the recording of realized and unrealized foreign currency transaction gains or losses resulting from the fluctuation in exchange rates on transactions between BIOLASE and its subsidiaries. The assessment by our management as of March 31, 2008 is that our remedial efforts have been completed relating to the material weakness reported in our December 31, 2007 Annual Report included, but was not limited to, the quarterly settlement of our intercompany balances and recognition of realized transaction gains or losses to the consolidated statement of operations. Except for the implementation of these remedial measures, no change in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the ~~nine months ended September 30, 2007~~first quarter of 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER ~~INFORMATION.~~INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

In August 2004, we and certain of our officers were named as defendants in several putative shareholder class action lawsuits filed in the United States District Court for the Central District of California. The complaints purported to seek unspecified damages on behalf of an alleged class of persons who purchased our common stock between October 29, 2003 and July 16, 2004. The complaints allege that we and our officers violated federal securities laws by failing to disclose material information about the demand for our products and the fact that we would not achieve the alleged forecasted growth. The claimed misrepresentations include certain statements in our press releases and the registration statement we filed in connection with our public offering of common stock in March 2004. In January 2006, defendants’ motion to dismiss the second amended consolidated class action complaint was granted and the action was dismissed, with leave to further amend, by the order of the Honorable David O. Carter, United States District Judge for the Central District of California. On March 10, 2006, the plaintiffs filed a third amended complaint. The third amended complaint makes the same allegations regarding violations of the federal securities laws but is limited to an alleged class of investors who purchased or otherwise acquired our common stock pursuant to or traceable to the public offering of our common stock that closed in March 2004. Defendants filed a motion to dismiss that complaint and on July 25, 2006, the Court ruled on the motion, granting the motion on the grounds that lead plaintiffs lack standing, denying the motion on the grounds that the complaint fails to state a claim and allowing plaintiffs to file a fourth amended complaint and a motion to appoint new lead plaintiffs. On August 23, 2006, plaintiffs filed a fourth amended complaint which defendants answered on October 20, 2006. In addition, in August 2004, three stockholders filed derivative lawsuits in the Superior Court in Orange County, California seeking recovery on our behalf and alleging, among other things, breach of fiduciary duty by two officers and by the members of our Board of Directors, who were named as defendants. The cases were consolidated and the plaintiffs in the consolidated derivative action raised claims on our behalf that include alleged misrepresentations in 2003 and 2004 as to the demand for our products, our financial results and future prospects. In both the class action and the derivative suit the parties have entered into settlement agreements, the respective courts have approved the settlments and the lawsuits have been concluded.

In January 2005, we acquired the intellectual property portfolio of Diodem, LLC, or Diodem, consisting of certain U.S. and international patents of which four were asserted against us, and settled the existing litigation between us and Diodem, for consideration of $3.0 million in cash, 361,664 shares of common stock (valued at the common stock fair market value on the closing date of the transaction for a total of approximately $3.5 million) and a five-year warrant exercisable into 81,037 shares of common stock at an exercise price of $11.06 per share. In addition, 45,208 additional shares of common stock were placed in escrow, to be released to Diodem, if certain criteria specified in the purchase agreement were satisfied in or before July 2006. As of March 31, 2006, we determined that it was probable that these shares of common stock would be released from escrow in or before July 2006. Accordingly, we recorded a patent infringement legal settlement charge of approximately $348,000 in 2006. In July 2006, we released these shares from escrow. The common stock issued, the escrow shares of common stock and the warrant shares had certain registration rights, and a Registration Statement on Form S-3 was filed with

Statement became effective on April 17, 2007. The total consideration had an estimated value of approximately $7.4 million including the value of the patents acquired in January 2005. As of December 31, 2004, we accrued approximately $6.4 million for the settlement of the existing litigation with $3.0 million included in current liabilities and $3.4 million recorded as a long-term liability. In January 2005, we recorded an intangible asset of $0.5 million representing the estimated fair value of the intellectual property acquired. The estimated fair value of the patents was determined with the assistance of an independent ~~evaluation~~valuation expert using a relief from royalty and a discounted cash flow methodology. As a result of the acquisition, Diodem immediately withdrew its patent infringement claims against us and the case was formally dismissed on May 31, 2005. We did not pay and have no obligation to pay any royalties to Diodem on past or future sales of our products, but we agreed to pay additional consideration if any of the acquired patents held by us are licensed to a third ~~party.~~party by a certain date. In order to secure performance by us of these financial obligations, the parties entered into an intellectual property security agreement, pursuant to which, subject to the rights of existing creditors and the rights of any future creditors to the extent provided in the agreement, we granted Diodem a security interest in all of their rights, title and interest in the royalty patents. In September 2007, Diodem filed a motion with the ~~United States District~~U.S.District Court in the Central District of California requesting that the original case be reopened for limited discovery concerning Diodem’s claims that we breached various of our obligations and representations in the settlement agreement and seeking damages in the range of $3.85 million to $5.2 million plus costs and attorneys fees incurred in recovering said alleged damages. The District Court denied Diodem’s motion finding, in part, that if Diodem wishes to pursue claims for breach of the settlement agreement, it must file a new lawsuit for breach of contract. ~~Although the outcome of litigation is always uncertain, if~~On February 20, 2008, Diodem ~~files~~filed a lawsuit for breach of the settlement agreement wein Los Angeles Superior Court, naming us and a wholly-owned subsidiary, BL Acquisition II, Inc. as defendants. The complaint asserts two claims, both alleging breaches of the Agreement. Diodem seeks damages of not less than $4.0 million. On April 28, 2008, Biolase and BL Acquisition II, Inc. filed demurrers and a motion to strike that, in essence, request the court to dismiss Diodem’s complaint. We intend to vigorously defend ~~such action.~~Diodem’s claims.

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

Securities and Exchange Commission Inquiry

ITEM 1A. RISK FACTORS.

Risk Factors

The discussion orof our business and operations should be read together with the risk factors contained in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2006~~2007 which was filed with the Securities and Exchange Commission, or SEC, and describes the various risks and uncertainties to which we are or may be subject. ~~The following is a summary description of any~~At March 31, 2008, there have been no material changes to the risk factors ~~as to which there may have been a material change from, or which may be in addition to, those set forth~~ in our Annual Report on Form 10-K for the year ended December 31, ~~2006.~~2007. You should carefully review these risks, together with those described in our Annual Report on Form 10-K and in other reports we file with the ~~Securities and Exchange Commission~~SEC in evaluating our business.

~~Major Changes in key personnel on whom we depend could adversely affect our operations.~~

Our success is dependent upon our senior management team, as well as our ability to attract and retain qualified personnel. On November 6, 2007, we issued a press release announcing that, effective November 5, 2007, we had terminated Jeffrey W. Jones from his positions as Chief Executive Officer and President of Biolase and terminated Keith G. Bateman from his positions as Executive Vice President, Global Sales and Marketing. The Board of Directors appointed Federico Pignatelli as interim Chief Executive Officer and President. We are currently conducting a search for a new CEO to replace Mr. Jones. We can provide no assurance that we will be able to retain our existing senior management team or that we will be able to attract qualified replacement personnel. These changes in our senior management and on the Board may be disruptive to our business, and, during this current transition period, there may be uncertainty among investors, vendors, customers, rating agencies, employees and others concerning our future direction and performance. Moreover, our future success will depend to a significant extent on our ability to identify and hire a new Chief Executive Officer and Executive Vice President, Global Sales and Marketing. If we are unable to identify and retain effective permanent replacements for our former Chief Executive Officer and President and our Executive Vice President, Global Sales and Marketing, our results of operations and financial condition may be adversely affected.

~~Changes in our assumptions with respect to uncertain tax positions may have an adverse effect on our consolidated results of operations.~~

~~We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48,~~~~Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109~~(“FIN 48”) as of January 1, 2007, as required. As a result of the implementation of FIN 48, we recognized a $156,000 liability for unrecognized tax benefits, which was accounted for as an increase in the January 1, 2007 accumulated deficit balance. In 2007 and subsequent periods, the income tax assets and liabilities we recognize for uncertain tax positions, if any, will be adjusted when the related income tax liabilities are paid, the income tax positions are settled with the taxing authorities, the related statutes of limitations expire or under other

ITEM 6. EXHIBITS


Exhibit No.		Description
10.1		~~First~~ Employment Agreement dated January 2, 2008 between the Registrant and Jake P. St. Philip.

10.2		Stock Option Agreement dated March 7, 2008 between the Registrant and Jake P. St. Philip. (Filed with Registrant’s Form S-8 filed April 4, 2008 and incorporated herein by reference)

10.3		Separation and General Release Agreement dated January 22, 2008 between the Registrant and Keith G. Bateman.

10.4		Separation and General Release Agreement dated January 31, 2008 between the Registrant and Jeffrey W. Jones.

10.5†		Amendment to ~~Loan~~the License and ~~Security~~Distribution Agreement dated ~~Ocotber 5, 2007,~~February 29, 2008, by and ~~betweeen Comerica Bank~~between Biolase Technology, Inc. and ~~Biolase Technology,~~Henry Schein, Inc.

31.1		Certification of ~~Federico Pignatelli~~Jake St. Philip pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

31.2		Certification of ~~Richard L. Harrison~~David M. Mulder pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

32.1		Certification of ~~Federico Pignatelli~~Jake St. Philip pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of ~~Richard L. Harrison~~David M. Mulder pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


†		Confidential treatment was requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of ~~1934.~~1934, as amended. In accordance with Rule 24b-2, these confidential portions were omitted from this exhibit and filed separately with the Securities and Exchange Commission.

2826


		Page

	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Consolidated Balance Sheets as of ~~September 30, 2007~~March 31, 2008 and December 31, ~~2006~~ 2007		3

	Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2008 and March 31, 2007 ~~and September 30, 2006~~		4

	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2008 and March 31, 2007 ~~and September 30, 2006~~		5

	Notes to Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		2423

Item 4.	Controls and Procedures		24

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		24

Item 1A.	Risk Factors		25

Item ~~1A.~~4.	~~Risk Factors~~ Submission of Matters to a Vote of Security Holders		25

Item 5.	Other Information		25

Item 6.	Exhibits		26

~~Item 4.~~		~~Submission of Matters to a Vote of Security Holders~~ Signatures		27

~~Item 5.~~	~~Other Information~~		27

~~Item 6.~~	~~Exhibits~~		28

~~Signatures~~			29
~~EXHIBIT 10.1~~
~~EXHIBIT 31.1~~
~~EXHIBIT 31.2~~
~~EXHIBIT 32.1~~
~~EXHIBIT 32.2~~


				Weighted-Average
Unvested Options	Options			Grant-Date Fair Value
Unvested options at December 31, 2007		1,238,000		$	2.59
Granted		718,000		$	1.73
Vested		(112,000	)	$	3.00
Forfeited		(74,000	)	$	3.19

Unvested options at March 31, 2008		1,770,000		$	2.19


	September 30,		December 31,		March 31,		December 31,
	2007		2006		2008		2007
Raw materials	$	2,845	$	2,554	$	2,379	$	3,194
Work-in-process		1,620		663		1,370		784
Finished goods		6,309		4,557		3,865		3,649

Inventory, net	$	10,774	$	7,774	$	7,614	$	7,627


	September 30,			December 31,			March 31,			December 31,
	2007			2006			2008			2007
Land	$	341		$	315		$	378		$	352
Building		937			867			1,037			967
Leasehold improvements		910			938			921			921
Equipment and computers		4,955			4,436			4,978			4,790
Furniture and fixtures		959			934			1,015			1,015
Construction in progress		25			62			44			44

		8,127			7,552			8,373			8,089
Accumulated depreciation and amortization		(3,773	)		(2,701	)		(4,476	)		(4,049	)

Property, plant and equipment, net	$	4,354			4,851		$	3,897		$	4,040


	As of September 30, 2007										As of December 31, 2006										As of March 31, 2008											As of December 31, 2007
			Accumulated										Accumulated											Accumulated										Accumulated
	Gross		Amortization			Impairment			Net		Gross		Amortization			Impairment			Net		Gross			Amortization			Impairment			Net		Gross		Amortization			Impairment			Net
Patents (4-10 years)	$	1,814	$	(973	)	$	—		$	841	$	1,814	$	(786	)	$	—		$	1,028	$	1,914		$	(1,104	)	$	—		$	810	$	1,914	$	(1,038	)	$	—		$	876
Trademarks (6 years)		69		(69	)		—			—		69		(69	)		—			—		69			(69	)		—			—		69		(69	)		—			—
Tradenames (Indefinite life)		979		—			(747	)		232		979		—			(747	)		232
Trade names (Indefinite life)																						979			—			(747	)		232		979		—			(747	)		232
Other (4 to 6 years)		593		(466	)		—			127		593		(384	)		—			209		593			(519	)		—			74		593		(493	)		—			100


Total	$	3,455	$	(1,508	)	$	(747	)	$	1,200	$	3,455	$	(1,239	)	$	(747	)	$	1,469	$	3,555		$	(1,692	)	$	(747	)	$	1,116	$	3,555	$	(1,600	)	$	(747	)	$	1,208
																							��

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


						Weighted
						average
				Weighted		remaining
				average		contractual term		Aggregate
	Shares			exercise price		(years)		intrinsic value (1)
Options outstanding at December 31, 2006		3,858,000		$	6.75
Plus: Options granted		408,000		$	6.49
Less: Options exercised		(121,000	)	$	4.41
Options canceled or expired		(249,000	)	$	8.87

Options outstanding at September 30, 2007		3,896,000		$	6.66		5.80	$	5,963,000

Options exercisable at September 30, 2007		3,247,000		$	6.57		5.11	$	5,735,000
Options expired during the nine months ended September 30, 2007		116,000		$	9.96


(1)		FAS 123R requires that the excess tax benefits received related to stock option exercises be presented as financing cash inflows. We currently do not receive a tax benefit related to the exercise of stock options due to our net operating losses.

(2)		The intrinsic value of stock options exercised is the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant.


Deferred revenue is comprised of the following (in thousands):					March 31, 2008			December 31, 2007
	September 30,		December 31,
	2007		2006
License fee from Henry Schein, Inc. – unamortized portion	$	3,194	$	4,444
License fee from Procter & Gamble – unamortized portion		1,875		3,000
License fee from Henry Schein, Inc. — unamortized portion					$	2,361		$	2,778
License fee from Procter & Gamble — unamortized portion						1,125			1,500
Royalty advances from Procter & Gamble		938		—		1,313			1,125
Undelivered elements (training, installation and product) and other		990		818		888			1,329
Extended warranty contracts		1,366		1,447		1,181			1,153

Total deferred revenue		8,363		9,709		6,868			7,885


Less long-term amounts:
License fee from Henry Schein, Inc.		1,528		2,778		(694	)		(1,111	)
License fee from Proctor & Gamble		375		1,500
Royalty advances from Proctor & Gamble		938		—
Royalty advances from Procter & Gamble						(1,313	)		(1,125	)

Total deferred revenue, long-term		2,841		4,278
Total deferred revenue, long term						(2,007	)		(2,236	)

Total deferred revenue, current portion	$	5,522	$	5,431	$	4,861		$	5,649


	BIOLASE TECHNOLOGY, INC., a Delaware corporation
	By:	/s/ ~~FEDERICO PIGNATELLI~~JAKE ST. PHILIP
		~~Federico Pignatelli~~Jake St. Philip
		~~Interim~~ Chief Executive Officer (Principal Executive Officer)


	By:	/s/ ~~RICHARD L. HARRISON~~DAVID M. MULDER
		~~Richard L. Harrison~~David M. Mulder
		~~Executive~~Excutive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)


Exhibit No.		Description

10.1		~~First~~ Employment Agreement dated January 2, 2008 between the Registrant and Jake P. St. Philip.

10.2		Stock Option Agreement dated March 7, 2008 between the Registrant and Jake P. St. Philip. (Filed with Registrant’s Form S-8 filed April 4, 2008 and incorporated herein by reference)

10.3		Separation and General Release Agreement dated January 22, 2008 between the Registrant and Keith G. Bateman.

10.4		Separation and General Release Agreement dated January 31, 2008 between the Registrant and Jeffrey W. Jones.

10.5†		Amendment to ~~Loan~~the License and ~~Security~~Distribution Agreement dated ~~Ocotber 5, 2007,~~February 29, 2008, by and ~~betweeen Comerica Bank~~between Biolase Technology, Inc. and ~~Biolase Technology,~~Henry Schein, Inc.

31.1		Certification of ~~Federico Pignatelli~~Jake St. Philip pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

31.2		Certification of ~~Richard L. Harrison~~David M. Mulder pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

32.1		Certification of ~~Federico Pignatelli~~Jake St. Philip pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of ~~Richard L. Harrison~~David M. Mulder pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.