Cynosure 10Q 2007 Q1 Quarterly report

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 March 31, 2007


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 000-51623

Cynosure, Inc.

(Exact name of registrant as specified in its charter)


Delaware		04-3125110
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

5 Carlisle Road
Westford, MA		01886
(Address of principal executive offices)		(Zip code)

(978) 256-4200
(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.þ Yeso No

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

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

The number of shares outstanding of each of the registrant’s classes of common stock, as of May 3, 2007:


Class	Number of Shares
Class A Common Stock, $0.001 par value		7,677,379
Class B Common Stock, $0.001 par value		4,004,531

Cynosure, Inc.

Table of Contents


		Page No.
PART I	Financial Information

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006		1
	Consolidated Statements of Income for the Three Month Periods Ended March 31, 2007 and 2006		2
	Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2007 and 2006		3
	Notes to Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		20
Item 4.	Controls and Procedures		20

PART II	Other Information

Item 1.	Legal Proceedings		20
Item 1A.	Risk Factors		21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 6.	Exhibits		37
SIGNATURES			38
EX-31.1 Section 302 Certification of C.E.O.
EX-31.2 Section 302 Certification of C.F.O.
EX-32.1 Section 906 Certification of C.E.O.
EX-32.2 Section 906 Certification of C.F.O.

Cynosure, Inc.

Consolidated Balance Sheets

(Unaudited, in thousands)


	March 31,			December 31,
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	12,293		$	13,690
Marketable securities		49,871			43,556
Accounts receivable, net		20,418			19,871
Amounts due from related parties (Note 11)		346			335
Inventories		19,267			17,624
Prepaid expenses and other current assets		3,668			4,977
Deferred income taxes		2,575			2,604

Total current assets		108,438			102,657


Property and equipment, net		6,145			5,662
Other assets		1,242			1,247


Total assets	$	115,825		$	109,566


Liabilities and Stockholders’ Equity
Current liabilities:
Short-term loan	$	—		$	167
Accounts payable		5,085			5,986
Amounts due to related party (Note 11)		2,131			1,052
Accrued expenses		11,313			11,077
Deferred revenue		3,651			3,476
Capital lease obligation		452			439

Total current liabilities		22,632			22,197


Capital lease obligation, net of current portion		1,021			1,069
Deferred revenue, net of current portion		289			311
Other noncurrent liability		136			119

Commitments and contingencies (Note 9)

Stockholders’ equity:
Preferred stock, $0.001 par value
Authorized - 5,000 shares
Issued — none		—			—
Class A and Class B common stock, $0.001 par value Authorized — 70,000 shares Issued — 11,670 and 11,210 shares as of March 31, 2007 and December 31, 2006, respectively		12			11
Additional paid-in capital		84,785			81,026
Retained earnings		7,938			5,820
Accumulated other comprehensive loss		(701	)		(700	)
Treasury stock, 36 shares, at cost		(287	)		(287	)

Total stockholders’ equity		91,747			85,870

Total liabilities and stockholders’ equity	$	115,825		$	109,566

The accompanying notes are an integral part of these consolidated financial statements

Cynosure, Inc.

Consolidated Statements of Income

(Unaudited, in thousands, except per share data)


	Three Months Ended
	March 31,
	2007		2006
Revenues	$	26,077	$	17,139
Cost of revenues (1)		9,922		8,032

Gross profit		16,155		9,107

Operating expenses (1):
Sales and marketing		9,262		5,458
Research and development		1,723		1,209
General and administrative		2,295		2,146

Total operating expenses		13,280		8,813

Income from operations		2,875		294
Interest income, net		505		652
Other income, net		56		130

Income before provision for income taxes and minority interest		3,436		1,076
Provision for income taxes		1,318		436
Minority interest in net income of subsidiary		—		14

Net income	$	2,118	$	626


Basic net income per share	$	0.19	$	0.06

Diluted net income per share	$	0.17	$	0.05

Basic weighted average common shares outstanding		11,345		11,031

Diluted weighted average common shares outstanding		12,374		12,178


(1)	Stock-based compensation is attributable to the following categories:
	Cost of revenues	$	98	$	6
	Sales and marketing		327		74
	Research and development		465		68
	General and administrative		460		150

		$	1,350	$	298

The accompanying notes are an integral part of these consolidated financial statements

Cynosure, Inc.

Consolidated Statements of Cash Flow

(Unaudited, in thousands)


	Three Months Ended
	March 31,
	2007			2006
Operating activities:
Net income	$	2,118		$	626
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization		620			486
Stock-based compensation expense		1,350			298
Accretion of discounts on marketable securities		49			(155	)
Deferred income taxes		29			(429	)
Minority interest in consolidated subsidiary		—			14
Changes in operating assets and liabilities:
Accounts receivable		(487	)		399
Due from related party		(12	)		(19	)
Inventories		(1,627	)		(1,489	)
Net book value of demonstration inventory sold		122			41
Prepaid expenses and other current assets		1,681			(104	)
Accounts payable		(906	)		1,337
Due to related party		1,079			525
Accrued expenses		218			(505	)
Deferred revenue		142			(1,411	)
Other noncurrent liability		17			21

Net cash provided by (used in) operating activities		4,393			(365	)

Investing activities:
Purchases of property and equipment		(1,141	)		(348	)
Proceeds from the sales and maturities of marketable securities		15,151			33,395
Purchases of marketable securities		(21,510	)		(86,424	)
Increase in other noncurrent assets		—			(8	)

Net cash used in investing activities		(7,500	)		(53,385	)

Financing activities:
Payment on short term loan		(168	)		—
Proceeds from exercise of stock options		1,297			22
Tax benefits related to stock options		769			—
Initial public offering costs		—			(21	)
Payments on capital lease obligation		(101	)		(84	)

Net cash provided by (used in) financing activities		1,797			(83	)

Effect of exchange rate changes on cash and cash equivalents		(87	)		(123	)

Net decrease in cash and cash equivalents		(1,397	)		(53,956	)
Cash and cash equivalents, beginning of the period		13,690			64,646

Cash and cash equivalents, end of the period	$	12,293		$	10,690


Supplemental cash flow information
Cash paid for interest	$	38		$	25

Cash paid for taxes	$	—		$	536


Supplemental noncash investing and financing activities
Assets acquired under capital lease	$	66		$	142

The accompanying notes are an integral part of these consolidated financial statements

Cynosure, Inc.

Notes to Consolidated Financial Statements

Note 1 — Interim Consolidated Financial Statements

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes that appear in the Annual Report of Cynosure, Inc. (Cynosure) as reported on Form 10-K for the year ended December 31, 2006. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows as of the dates and for the periods presented have been included. The results of operations for the three months ended March 31, 2007 may not be indicative of the results that may be expected for the year ended December 31, 2007, or any other period.

Note 2 — Stock-Based Compensation

Effective January 1, 2006, Cynosure adopted the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123(R),Share-Based Payment, (SFAS 123 (R)) using the modified-prospective-transition method. The modified prospective transition method is one in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. In addition, SFAS 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas, SFAS 123 permitted companies to record forfeitures based on actual forfeitures, which was Cynosure’s historical policy under SFAS 123. As a result, Cynosure has applied an estimated annual forfeiture rate of 1.0% in determining the expense recorded in the consolidated statements of income.

The stock-based compensation expense reduced both basic and diluted earnings per share by $0.08 and $0.02 for the three months ended March 31, 2007 and 2006, respectively. The accompanying financial statements reflect stock-based compensation expense of $1,350,000 and $298,000 and related tax benefits of $408,000 and $53,000 for the three months ended March 31, 2007 and 2006, respectively. Cynosure capitalized $33,000 and $5,000 of stock-based compensation expense as part of inventory during the three months ended March 31, 2007 and 2006, respectively. Cash received from option exercises was $1.3 million and $22,000 during the three months ended March 31, 2007 and 2006, respectively. Cynosure recognized $769,000 in actual tax benefits during the three months ended March 31, 2007 and did not recognize any actual tax benefit from option exercises during the three months ended March 31, 2006. Actual tax benefits are primarily the result of disqualifying dispositions of incentive stock options exercised which result in a reduction of income taxes payable.

Cynosure granted 283,250 stock options during the three months ended March 31, 2007; and did not grant any stock options during the three months ended March 31, 2006. Cynosure has elected to use the Black-Scholes model to determine the weighted average fair value of options, rather than a binomial model. The weighted-average fair value of the options granted during the three months ended March 31, 2007 was $14.73 using the following assumptions:


	Three Months Ended
	March 31,
	2007
Risk-free interest rate		4.77	%
Expected dividend yield		—
Expected lives	5.8		years
Expected volatility		70	%

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Due to Cynosure’s initial public offering in December 2005, Cynosure believes there is not adequate information on the volatility of its own shares. As such, Cynosure’s estimated expected stock price volatility is based on a weighted average of its own historical volatility and of the average volatilities of other guideline companies in the same industry. Cynosure believes this is more reflective and a better indicator of the expected future volatility, than using an average of a comparable market index or of a single

comparable company in the same industry. Cynosure’s expected term of options granted in the three months ended March 31, 2007 was derived from the short-cut method described in SEC’s Staff Accounting Bulletin (SAB) No. 107. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield of zero is based on the fact that Cynosure has never paid cash dividends and has no present intention to pay cash dividends.

Note 3 — Inventories

Cynosure states all inventories at the lower of cost or market, determined on a first-in, first-out method. Inventory includes material, labor and overhead and consists of the following:


	March 31,		December 31,
	2007		2006
	(in thousands)
Raw materials	$	1,348	$	1,848
Work in process		976		818
Finished goods		16,943		14,958

	$	19,267	$	17,624

Note 4 — Marketable Securities

Cynosure accounts for investments in marketable securities as available-for-sale securities in accordance with Statement of Financial Accounting Standards No. 115,Accounting for Certain Investments in Debt and Equity Securities(SFAS 115). Under SFAS 115, securities purchased to be held for indefinite periods of time and not intended at the time of purchase to be held until maturity are classified as available-for-sale securities with any unrealized gains and losses reported as a separate component of accumulated other comprehensive loss. Cynosure continually evaluates whether any marketable investments have been impaired and, if so, whether such impairment is temporary or other than temporary.

Cynosure’s available-for-sale securities at March 31, 2007 consist of approximately $49.7 million of investments in debt securities consisting of state and municipal bonds and corporate bonds and approximately $216,000 in equity securities. As of March 31, 2007, Cynosure’s equity security consisted of 133,511 shares of common stock of a public company with a fair market value of approximately $216,000. These shares were acquired in connection with the sale of Cynosure’s investment in a private company during 2006 and are considered available-for-sale securities in accordance with SFAS No. 115.

As of March 31, 2007, Cynosure’s marketable securities consist of the following (in thousands):


			Amortized		Unrealized		Unrealized
	Market Value		Cost		Gains		Losses
Corporate bonds	$	4,315	$	4,314	$	1	$	—
State and municipal bonds		45,340		45,349		—		9
Equity security		216		270		—		54

	$	49,871	$	49,933	$	1	$	63

As of March 31, 2007, the Company had 24 debt securities that were in an unrealized loss position, all of which have been in such a position for less than 12 months. The unrealized losses in the debt securities were caused by increasing market interest rates. The contractual term of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because Cynosure has the ability and the intent to hold these investments until a recovery of market value, Cynosure does not consider these investments to be other-than-temporarily impaired at March 31, 2007.

As of March 31, 2007, Cynosure’s debt securities mature as follows (in thousands):


	Maturities
	Total		Less Than One Year		One to Two Years
Corporate bonds	$	4,315	$	4,315	$	—
State and municipal bonds		45,340		42,530		2,810
	$	49,655	$	46,845	$	2,810

Note 5 — Warranty Costs

Cynosure typically provides a one-year parts and labor warranty on end-user sales of laser systems. Distributor sales generally include a warranty on parts only. Estimated future costs for initial product warranties are provided at the time of revenue recognition.

The following table provides the detail of the change in Cynosure’s product warranty accrual during the three months ended March 31, 2007, which is a component of accrued liabilities in the consolidated balance sheets at March 31, 2007:


	March 31,
	2007
	(in thousands)
Warranty accrual, beginning of period	$	2,803
Charged to costs and expenses relating to new sales		1,087
Costs incurred		(897	)

Warranty accrual, end of period	$	2,993

Note 6 — Segment Information

In accordance with Statement of Financial Accounting Standard No. 131,Disclosures about Segments of an Enterprise and Related Information(SFAS 131), operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. Cynosure’s chief decision-maker, as defined under SFAS 131, is a combination of the Chief Executive Officer and the Chief Financial Officer. Cynosure views its operations and manages its business as one segment, aesthetic treatment products and services.

The following table represents total revenue by geographic destination:


	Three Months Ended
	March 31,
	2007		2006
	(in thousands)
United States	$	14,079	$	9,578
Europe		6,999		5,001
Asia / Pacific		2,552		1,399
Other		2,447		1,161

Total	$	26,077	$	17,139

Net assets by geographic area are as follows:


	March 31,			December 31,
	2007			2006
	(in thousands)
United States	$	92,199		$	86,815
Europe		1,202			443
Asia / Pacific		302			374
Eliminations		(1,956	)		(1,762	)

Total	$	91,747		$	85,870

Long-lived assets by geographic area are as follows:


	March 31,		December 31,
	2007		2006
	(in thousands)
United States	$	6,878	$	6,435
Europe		353		316
Asia / Pacific		156		157

Total	$	7,387	$	6,909

No individual country within Europe or Asia/Pacific represented greater than 10% of total revenue, net assets or long-lived assets for any periods presented.

Note 7 — Net Income Per Common Share

Basic net income per share was determined by dividing net income by the weighted average common shares outstanding during the period. Diluted net income per share was determined by dividing net income by diluted weighted average shares outstanding. Diluted weighted average shares reflect the dilutive effect, if any, of common stock options based on the treasury stock method.

A reconciliation of basic and diluted shares is as follows:


	Three Months Ended
	March 31,
	2007		2006
	(in thousands)
Basic weighted average number of shares outstanding		11,345		11,031
Potential common shares pursuant to stock options		1,029		1,147


Diluted weighted average number of shares outstanding		12,374		12,178

During the three months ended March 31, 2007 and 2006 approximately 273,000 and 22,500 shares, respectively, were excluded from the calculation of diluted weighted average shares outstanding as the effect would have been anti-dilutive.

Note 8 — Comprehensive Income (Loss)

Comprehensive income (loss) is the change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. The components of total comprehensive income for the three month periods ended March 31, 2007 and 2006 are as follows:


	Three Months Ended
	March 31,
	2007			2006
	(in thousands)
Cumulative translation adjustment	$	(5	)	$	62
Unrealized gain (loss) on marketable securities		2			(4	)

Total other comprehensive (loss) income		(3	)		58
Reported net income		2,118			626

Total comprehensive income	$	2,115		$	684

Note 9 — Litigation

In May 2005, Dr. Ari Weitzner, individually and as putative representative of a purported class, filed a complaint against Cynosure under the federal Telephone Consumer Protection Act, or TCPA, in Massachusetts Superior Court in Middlesex County seeking monetary damages, injunctive relief, costs and attorneys fees. The complaint alleges that Cynosure violated the TCPA by sending unsolicited advertisements by facsimile to the plaintiff and other recipients without the prior express invitation or permission of the recipients. Under the TCPA, recipients of unsolicited facsimile advertisements are entitled to damages of up to $500 per facsimile for inadvertent violations and up to $1,500 per facsimile for knowing or willful violations. Although Cynosure is continuing to investigate the number of facsimiles transmitted during the period for which the plaintiff in the lawsuit seeks class certification and the number of these facsimiles that were “unsolicited” within the meaning of the TCPA, Cynosure expects the number of unsolicited facsimiles to be very large. Cynosure is vigorously defending the lawsuit and has filed initial

briefs and motions with the court. Cynosure is not able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

In December 2005, certain individuals commenced an arbitration against Cynosure along with Sona International Inc. Sona Med Spa Inc., Carousel Capital, Inc. and various individuals. The arbitration demand alleges fraud, violations of various state consumer protection laws and other causes of action in connection with the plaintiff’s acquisition of franchises from the Sona entities. Cynosure declined to participate in the arbitration because Cynosure had not agreed contractually to do so, and it has been dismissed from the arbitration by agreement of the parties.

In January 2006, Gentle Laser Solutions, Inc., Liberty Bell Med Spa, Inc. and Kevin T. Campbell filed suit against Cynosure and one of its former directors, along with Sona International Inc. Sona Lasers Centers, Inc. and various other individuals, in the Superior Court of New Jersey. The matter was later removed to the United States District Court in the District of New Jersey. The suit alleges fraud, breach of contract and other causes of action in connection with the plaintiffs’ acquisition of franchises from the Sona entities. Court-ordered conferences scheduled for December 1, 2006 and January 29, 2007 were postponed due to a pending motion to dismiss by Sona. Cynosure is not able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

In June 2006, Baltimore Laser Solutions, Inc. and Kevin T. Campbell, filed suit against Cynosure and one of its former directors, along with Sona International Inc., Sona Lasers Centers, Inc. and various other individuals, in the United States District Court in the District of Maryland. The suit alleges fraud, breach of contract and other causes of action in connection with the plaintiffs’ acquisition of franchises from the Sona entities. Cynosure is not able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

In September 2006, five groups of plaintiffs, all of whom are former Sona franchisees or franchises, filed suit against Cynosure in the United States District Court in the District of Minnesota. On January 18, 2007, Cynosure received a copy of an amended complaint, adding two more groups of plaintiffs. The suit alleges fraud, negligent misrepresentation and other causes of action in connection with our relationship with Sona. Cynosure has filed a motion to dismiss the amended complaint in its entirety. Cynosure is not able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

In addition to the matters discussed above, from time to time, Cynosure is subject to various claims, lawsuits, disputes with third parties, investigations and pending actions involving various allegations against Cynosure incident to the operation of its business, principally product liability. Each of these other matters is subject to various uncertainties, and it is possible that some of these other matters may be resolved unfavorably to Cynosure. Cynosure establishes accruals for losses that management deems to be probable and subject to reasonable estimate. Cynosure believes that the ultimate outcome of these matters will not have a material adverse impact on its consolidated financial position, results of operations or cash flows.

Note 10 — Sona MedSpa

In October 2005, Cynosure entered into a preferred vendor agreement with Sona MedSpa International, Inc. (Sona MedSpa), a spa franchisor that owns and operates hair removal clinics in the United States. Under the agreement, Cynosure sold certain laser systems to Sona Medspa for approximately $1.3 million, which was recorded as deferred revenue as of December 31, 2005 because the fee was not fixed or determinable at the time of sale.

In March 2006, Sona MedSpa notified Cynosure that Sona MedSpa was uncertain that it had the financial resources to honor its commitments to Cynosure and Cynosure determined that the collectibility of the fee was not probable and, as a result, reversed the related deferred revenue. Cynosure expensed as cost of goods sold approximately $667,000 of inventory delivered under the agreement. Additionally, Cynosure provided an allowance for doubtful accounts of $463,000 for accounts receivable associated with services provided prior to the October 2005 preferred vendor agreement. On May 2, 2006, Cynosure sent Sona MedSpa a notice of default with respect to Sona MedSpa’s failure to pay Cynosure amounts payable under two agreements between the parties. On June 2,

2006, Cynosure terminated the agreement with Sona MedSpa as the defaults under the agreements were not cured. On June 16, 2006, Cynosure commenced an arbitration with Sona MedSpa.

On November 27, 2006, Cynosure settled its arbitration with Sona MedSpa and each party released its claims against the other in exchange for consideration of $250,000 in cash. The settlement payment received by Cynosure was in reimbursement for legal expenses and, as such, is reflected as a reduction in general and administrative expenses in the accompanying consolidated statements of income for the three months ended March 31, 2007 as the period during which this payment was subject to certain avoidance action by a third-party had lapsed.

Note 11 — Related Party Transactions

As of March 31, 2007, El. En. S.p.A. (El.En.) owned 33% of Cynosure’s outstanding common stock. Purchases of inventory from El.En. during the three months ended March 31, 2007 and 2006 were approximately $1.5 million and $1.2 million, respectively. As of March 31, 2007 and December 31, 2006, amounts due to related party for these purchases were approximately $2.1 million and $1.1 million, respectively. Amounts due from El.En. as of March 31, 2007 and December 31, 2006 were $346,000 and $335,000, respectively, which represent services performed by Cynosure.

Note 12 — Income Taxes

Cynosure adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FAS 109, Accounting for Income Taxes, (FIN 48) on January 1, 2007. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Cynosure generally reports tax positions in its financial statements as they are reported on tax returns as filed or to be filed. A tax benefit is reflected in the financial statements only if it is “more-likely-than-not” that Cynosure will be able to sustain the tax position, based on its technical merits. Tax benefits from uncertain tax positions that reduce current or future income tax liabilities are reported in the financial statements only to the extent each benefit is recognized and measured, in accordance with the provisions of FIN 48. As a result of adopting FIN 48, Cynosure determined that no material cumulative effect adjustment was necessary to the opening balance of retained earnings as of January 1, 2007. Cynosure further determined, based on its analysis, that there were no significant unrecognized tax benefits that, if recognized, would affect the effective tax rate for the three months ended March 31, 2007.

Under FIN 48, a tax return benefit that does not qualify for financial reporting recognition is generally treated as a government loan or incorrect application of a tax law and may result in interest and penalty charges. Cynosure classifies interest and penalties related to income taxes as interest expense and other expense, respectively, within the statement of income. During the three months ended March 31, 2007, the Company did not recognize any interest and penalties in connection with the adoption of FIN 48 and does not have any amounts accrued for the payment of such interest and penalties as of March 31, 2007.

Cynosure files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. With few exceptions, Cynosure is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003.

Note 13 — Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115(SFAS 159), in order to permit entities to choose to measure many financial instruments and certain other eligible items at fair value at specified election dates and, thereby, mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. Unrealized gains and losses on items for which the fair value option has been elected shall be reported in earnings. The provisions of this Statement are to be applied prospectively as of January 1, 2008; however early adoption is permitted, subject to certain restrictions, as defined. This Statement does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. Cynosure does not expect that the adoption of SFAS 159 will have a material impact on its financial position or results of operations.

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

Forward-looking statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

	•		our ability to identify and penetrate new markets for our products and technology;

	•		our ability to innovate, develop and commercialize new products;

	•		our ability to obtain and maintain regulatory clearances;

	•		our sales and marketing capabilities and strategy in the United States and internationally;

	•		our intellectual property portfolio; and

	•		our estimates regarding expenses, future revenues, capital requirements and needs for additional financing.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in our Annual Report on Form 10-K for the year ended December 31, 2006, particularly in Part I — Item 1A, in this Quarterly Report, particularly in Part II — Item 1A, and in our other public filings with the Securities and Exchange Commission that could cause actual results or events to differ materially from the forward-looking statements that we make.

You should read this Quarterly Report and the documents that we have filed as exhibits to the Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. It is routine for internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations are made as of the date of this Quarterly Report on Form 10-Q and may change prior to the end of each quarter or the year. While we may elect to update forward-looking statements at some point in the future, we do not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and the condensed consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K filed with the SEC on March 12, 2007. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

Company Overview

We develop and market aesthetic treatment systems that are used by physicians and other practitioners to perform non-invasive procedures to remove hair, treat vascular lesions, rejuvenate skin through the treatment of shallow vascular lesions and pigmented lesions, temporarily reduce the appearance of cellulite, treat wrinkles, skin texture, skin discoloration and skin tightening, and to perform minimally invasive procedures for LaserBodySculpting and for the removal of unwanted fat. Our systems incorporate a broad range of laser and other light-based energy sources, including Alexandrite, pulse dye, Nd:Yag and diode lasers, as well as intense pulsed

light. We believe that we are one of only a few companies that currently offer aesthetic treatment systems utilizing Alexandrite and pulse dye lasers, which are particularly well suited for some applications and skin types. We offer single energy source systems as well as workstations that incorporate two or more different types of lasers or pulsed light technologies. We offer multiple technologies and system alternatives at a variety of price points depending primarily on the number and type of energy sources included in the system. Our newer products are designed to be easily upgradeable to add additional energy sources and handpieces, which provides our customers with technological flexibility as they expand their practices. As the aesthetic treatment market evolves to include new customers, such as aesthetic spas and additional physician specialties, we believe that our broad technology base and tailored solutions will provide us with a competitive advantage.

We sell over 15 different aesthetic treatment systems and have focused our development and marketing efforts on offering leading, or flagship, products for each of the major aesthetic procedure categories that we address. Our flagship products are:

	•		theApogee Elitesystem for hair removal;

	•		theCynergysystem for the treatment of vascular lesions;

	•		theTriActive LaserDermologysystem for the temporary reduction of the appearance of cellulite;

	•		theAffirmsystem for anti-aging, including treatments for wrinkles, skin texture, skin discoloration and skin tightening; and

	•		theSmartliposystem for LaserBodySculptingSM and the removal of unwanted fat.

In addition to their primary applications, theApogee EliteandCynergysystems can each be used by practitioners for a variety of other applications.

We recently expanded our anti-aging aesthetic solution to include the addition of a new 1320 nm wavelength Nd:YAG laser to theAffirmworkstation. TheAffirmproduct family now incorporates three energy sources. The new deep-heating component provided by the new 1320 nm wavelength Nd:YAG laser allows for tissue tightening as a result of tissue coagulation, which complements the system’s 1440 nm Nd:YAG laser for fractional micro-rejuvenation and Xenon Pulsed Light system for discoloration. We expect to begin shipping these new upgradeable systems in 2007.

We sell our products through a direct sales force in North America, four European countries, Japan and China and through international distributors in 47 other countries. As of December 31, 2006, we had sold more than 5,900 aesthetic treatment systems worldwide.

Financial Operations Overview

Revenues

We generate revenues primarily from sales of our products and parts and accessories and, to a lesser extent, from services, including product warranty revenues. During the three months ended March 31, 2007, we derived approximately 96% of our revenues from sales of our products and 4% of our revenues from service. During the three months ended March 31, 2006, we derived approximately 93% of our revenues from sales of our products, 6% of our revenues from service and 1% of our revenues from our revenue sharing arrangement. Generally, we recognize revenues from the sales of our products upon delivery to our customers, revenues from service contracts and extended product warranties ratably over the coverage period, revenues from service in the period in which the service occurs and revenues from our revenue sharing arrangement in the period the procedures are performed.

We sell our products directly in North America, four European countries, Japan and China and use distributors to sell our products in other countries where we do not have a direct presence. During the three months ended March 31, 2007, we derived 41% and in 2006, we derived 42% of our product revenues from sales of our products outside North America. As of March 31, 2007, we had 60 sales employees in North America, 15 sales employees in four

European countries, Japan and China and distributors in 47 countries. The following table provides revenue data by geographical region for the three months ended March 31, 2007 and 2006:


	Percentage of Revenues
	Three-Months			Three-Months
	Ended			Ended
	March 31,			March 31,
Region	2007			2006
North America		59	%		59	%
Europe		27			29
Asia/Pacific		10			8
Other		4			4

Total		100	%		100	%

See Note 6 to our consolidated financial statements included in this Quarterly Report for revenues and asset data by geographic region.

Cost of Revenues

Our cost of revenues consists primarily of material, labor and manufacturing overhead expenses and includes the cost of components and subassemblies supplied by third party suppliers. Cost of revenues also includes royalties incurred on products sold, service and warranty expenses, as well as salaries and personnel-related expenses, including stock-based compensation, for our operations management team, purchasing and quality control.

Sales and Marketing Expenses

Our sales and marketing expenses consist primarily of salaries, commissions and other personnel-related expenses, including stock-based compensation, for employees engaged in sales, marketing and support of our products, trade show, promotional and public relations expenses and management and administration expenses in support of sales and marketing. We expect our sales and marketing expenses to increase in absolute dollars, though we do not expect them to increase significantly as a percentage of revenues, as we expand our sales, marketing and distribution capabilities.

Research and Development Expenses

Our research and development expenses consist of salaries and other personnel-related expenses, including stock-based compensation, for employees primarily engaged in research, development and engineering activities and materials used and other overhead expenses incurred in connection with the design and development of our products. We expense all of our research and development costs as incurred. We expect our research and development expenditures to increase in absolute dollars, though we do not expect them to increase significantly as a percentage of revenues, as we continue to devote resources to research and develop new products and technologies.

General and Administrative Expenses

Our general and administrative expenses consist primarily of salaries and other personnel-related expenses, including stock-based compensation, for executive, accounting and administrative personnel, professional fees and other general corporate expenses. We expect our general and administrative expenses to increase in absolute dollars, though we do not expect them to increase significantly as a percentage of revenues.

Interest Income, net

Interest income consists primarily of interest earned on our marketable securities portfolio consisting mainly of state and municipal bonds and corporate bonds. Interest expense consists primarily of interest due on capitalized leases.

Other Income, net

Other income, net consists primarily of foreign currency remeasurement gains and losses.

Provision for Income Taxes

As of December 31, 2006, we had state tax credit carryforwards of approximately $209,000 to offset future tax liability, and state net operating loss carryforwards of approximately $561,000 to offset future taxable income. If not utilized, these credit and operating loss carryforwards will expire at various dates through 2019, and the losses will expire through 2026. We also had foreign net operating loss carryforwards of approximately $2,067,000 available to reduce future foreign taxable income which will expire at various times through 2024. Foreign net operating loss carryforwards include $1,875,000 in Germany and France, which do not expire.

Results of Operations

The following table contains selected income statement information, which serves as the basis of the discussion of our results of operations for the three months ended March 31, 2007 and 2006, respectively (in thousands, except for percentages):


	Three Months Ended
	March 31,
	2007					2006
			As a % of					As a % of
			Total					Total			$			%
	Amount		Revenues			Amount		Revenues			Change			Change
Revenues	$	26,077		100	%	$	17,139		100	%	$	8,938			52	%
Cost of revenues		9,922		38			8,032		47			1,890			24

Gross profit		16,155		62			9,107		53			7,048			77
Operating expenses
Sales and marketing		9,262		36			5,458		32			3,804			70
Research and development		1,723		7			1,209		7			514			43
General and administrative		2,295		9			2,146		13			149			7

Total operating expenses		13,280		51			8,813		51			4,467			51

Income from operations		2,875		11			294		2			2,581			878
Interest income, net		505		2			652		4			(147	)		(23	)
Other income, net		56		—			130		1			(74	)		(57	)

Income before provision for income taxes and minority interest		3,436		13			1,076		7			2,360			219
Provision for income taxes		1,318		5			436		3			882			202
Minority interest in net income of subsidiary		—		—			14		—			(14	)		(100	)

Net income	$	2,118		8	%	$	626		4	%	$	1,492			238	%

Revenues

Revenues in the three months ended March 31, 2007 exceeded revenues in the three months ended March 31, 2006 by $8.9 million or 52%. The increase in revenues was attributable to a number of factors (in thousands, except for percentages):


	Three Months Ended
	March 31,				$		%
	2007		2006		Change		Change
Product sales in North America	$	14,179	$	8,855	$	5,324		60	%
Product sales outside North America		8,770		5,587		3,183		57
Original equipment manufacturer sales and revenue sharing		274		274		—		—
Parts, accessories and service sales		2,854		2,423		431		18

Total Revenues	$	26,077	$	17,139	$	8,938		52	%

	•		Revenues from the sale of products in North America increased due to an increase in the number of product units sold, a higher average selling price due to a favorable change in product mix and from the introduction of new products, such as theAffirmandSmartlipo systems. The increase in North American revenues resulted in part from the continued expansion of our North American sales organization, including the hiring of 29 additional direct sales employees between December 31, 2005 and March 31, 2007.

	•		Revenues from sales of products outside of North America increased mainly attributable to an increase in sales in Europe of $1.6 million, or 36%, and an increase in sales in Asia Pacific of $1.3 million, or 215%, over the 2006 period, resulting from a favorable change in product mix and our increased focus on direct selling, for which we receive higher average selling prices as compared to sales through distributors. The remaining increase of $0.3 million relates to an increase in the volume of sales from distributors in the Middle East.

	•		Revenues from the sale of parts, accessories and services increased primarily as a result of the increase in our product sales over the past two years.

Cost of Revenues


	Three Months Ended
	March 31,						$		%
	2007			2006			Change		Change
Cost of revenues (in thousands)	$	9,922		$	8,032		$	1,890		24	%
Cost of revenues (as a percentage of total revenues)		38	%		47	%

The increase in the cost of revenues was primarily attributable to an increase in direct labor, overhead and material costs associated with increased sales of our products. Cost of revenues for the three months ended March 31, 2006 included a write-down of inventory related to the preferred vendor agreement with Sona MedSpa. See Note 10 in our Notes to Consolidated Financial Statements included in this Quarterly Report for further detail on this inventory write-down. The write-down of approximately $0.7 million of inventory associated with Sona MedSpa negatively affected our gross margin by 389 basis points for the three months ended March 31, 2006. The remaining improvement in gross margins is primarily the result of higher average selling prices of our products due to a favorable change in product mix as well as increased direct sales and the introduction of new products. We derived all of our North American product revenues from direct sales for both the three months ended March 31, 2007 and 2006.

Sales and Marketing


	Three Months Ended
	March 31,						$		%
	2007			2006			Change		Change
Sales and marketing (in thousands)	$	9,262		$	5,458		$	3,804		70	%
Sales and marketing (as a percentage of total revenues)		36	%		32	%

Sales and marketing expenses increased primarily due to an increase of $1.5 million in personnel costs and travel expenses associated with the expansion of our North American direct sales organization and $0.5 million in personnel costs and travel expenses associated with our international subsidiaries. Promotional costs increased $1.6 million, primarily due to our rebranding initiative as well as increased number of clinical workshops, trade shows and promotional efforts associated with our increase in direct sales employees. Sales and marketing expenses also increased due to an increase in stock-based compensation of approximately $0.2 million.

Research and Development


	Three Months Ended
	March 31,						$		%
	2007			2006			Change		Change
Research and development (in thousands)	$	1,723		$	1,209		$	514		43	%
Research and development (as a percentage of total revenues)		7	%		7	%

Research and development expenses increased primarily due to an increase in stock-based compensation of $0.4 million.

General and Administrative


	Three Months Ended
	March 31,						$		%
	2007			2006			Change		Change
General and administrative (in thousands)	$	2,295		$	2,146		$	149		7	%
General and administrative (as a percentage of total revenues)		9	%		13	%

General and administrative expenses increased primarily due to an increase in stock-based compensation of $0.3 million, offset by a decrease in legal expenses due to the reimbursement from Sona MedSpa of approximately $0.2 million. See Note 10 in our Notes to Consolidated Financial Statements included in this Quarterly Report for further detail on this settlement.

Interest Income, net and Other Income, net


	Three Months Ended
	March 31,				$			%
	2007		2006		Change			Change
Interest income, net (in thousands)	$	505	$	652	$	(147	)		(23	)%
Other income, net (in thousands)	$	56	$	130	$	(74	)		(57	)%

The decrease in interest income, net resulted from the shift in our investment portfolio to include investments in tax-exempt securities, which generally generate lower yields, gross of tax, than taxable securities. The decrease in other income, net is a result of smaller foreign currency remeasurement gains in the first quarter of 2007 compared to the foreign currency remeasurement gains in the first quarter of 2006.

Provision for Income Taxes


	Three Months Ended
	March 31,						$		%
	2007			2006			Change		Change
Provision for income taxes (in thousands)	$	1,318		$	436		$	882		202	%
Provision as a % of income before provision for income taxes and minority interest		38	%		41	%

The increase in our provision for income taxes is primarily attributable to the $2.4 million increase in our income before provision for income taxes and minority interest from $1.1 million in 2006 to $3.4 million in 2007. The decrease in our provision as a percentage of income before provision for income taxes is due to tax-free interest income composing a larger percentage of our income before provision for income taxes in 2007 than in 2006.

Liquidity and Capital Resources

We require cash to pay our operating expenses, make capital expenditures and pay our long-term liabilities. Since our inception, we have funded our operations through private and public placements of equity securities, short-term borrowings and funds generated from our operations. In December 2005, we completed our initial public offering of 5,750,000 shares our class A common stock at a price to the public of $15.00 per share. We sold 5,750,000 shares of our class A common stock, including an over-allotment option of 750,000 shares, and El.En. S.p.A., the selling stockholder in the offering, sold 1,000,000 of the shares. We received aggregate net proceeds of approximately $64.0 million from the sale of our shares, after deducting underwriting discounts and commission of approximately $5.0 million and expenses of the offering of approximately $2.3 million.

At March 31, 2007, our cash, cash equivalents and marketable securities were $62.2 million compared to $57.2 million as of December 31, 2006. Our cash and cash equivalents of $12.3 million are highly liquid investments with maturity of 90 days or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions and United States government obligations. Our marketable

securities of $49.9 million consist primarily of investments in various federal and state government obligations and corporate obligations, all of which mature by July 1, 2008.

We expect to continue to generate positive cash flows from operations in the future. Our future capital requirements depend on a number of factors, including the rate of market acceptance of our current and future products, the resources we devote to developing and supporting our products and continued progress of our research and development of new products. We expect our capital expenditures over the next 12 months generally to be consistent with our capital expenditures during the prior 12 months.

We believe that our current cash, cash equivalents and marketable securities, as well as cash generated from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future.

Cash Flows

Net cash provided by operating activities was $4.4 million for the three months ended March 31, 2007. This resulted primarily from net income for the period of $2.1 million, increased by approximately $2.0 million in depreciation and stock-based compensation expense and increased by approximately $0.1 million in deferred income tax benefits and accretion of discounts on marketable securities. Net changes in working capital items increased cash from operating activities by approximately $0.2 million principally related to a decrease in prepaid expenses and other current assets of $1.7 million and an increase in amounts due to related party of $1.1 million, offset by an increase in inventory for anticipated future sales and a decrease in accounts payable. Net cash used in investing activities was $7.5 million for the three months ended March 31, 2007, which consisted primarily of the net purchase of $6.4 million of marketable securities and $1.1 million used for fixed asset purchases. Net cash provided by financing activities during the three months ended March 31, 2006 was $1.8 million, principally relating to proceeds from option exercises and tax benefits related to stock options.

Net cash used in operating activities was $0.4 million for the three months ended March 31, 2006. This resulted primarily from net income for the period of $0.6 million, increased by approximately $0.8 million in depreciation and stock-based compensation expense and decreased by approximately $0.6 million in deferred income tax benefits and accretion of discounts on marketable securities. Net changes in working capital items decreased cash from operating activities by approximately $1.2 million principally related to an increase in inventory for anticipated future sales. Net cash used in investing activities was $53.4 million for the three months ended March 31, 2006, which consisted primarily of the net purchase of $53.0 million of marketable securities and $0.4 million used for fixed asset purchases. Net cash used in financing activities during the three months ended March 31, 2006 was $0.1 million, principally relating to payments of capital lease obligations.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations set forth above are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those described below. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities, and the reported amounts of revenues and expenses, that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies require significant judgment and estimates by us in the preparation of our financial statements.

Revenue Recognition and Deferred Revenue

In accordance with Staff Accounting Bulletin No. 104,Revenue Recognition in Financial Statements,we recognize revenue from sales of aesthetic treatment systems and accessories when each of the following four criteria are met:

	•		delivery has occurred;

	•		there is persuasive evidence of an agreement;

	•		the fee is fixed or determinable; and

	•		collection is reasonably assured.

Revenue from the sale of service contracts is deferred and recognized on a straight-line basis over the contract period as services are provided.

We defer until earned payments that we receive in advance of product delivery or performance of services. When we enter into arrangements with multiple elements, which may include sales of products together with service contracts and warranties, we allocate revenue among the elements based on each element’s fair value in accordance with the principles of Emerging Issues Task Force Issue Number 00-21,Revenue Arrangements with Multiple Deliverables. This allocation requires us to make estimates of fair value for each element.

Accounts Receivable and Concentration of Credit Risk

Our accounts receivable balance, net of allowance for doubtful accounts, was $20.4 million as of March 31, 2007, compared with $19.9 million as of December 31, 2006. The allowance for doubtful accounts as of March 31, 2007 was $1.1 million and as of December 31, 2006 was $1.0 million. We maintain an allowance, or reserve, for doubtful accounts based upon the aging of our receivable balances, known collectibility issues and our historical experience with losses. While our credit losses have historically been within our expectations and the allowances established, we may not continue to experience the same credit losses that we have in the past, which could cause our provisions for doubtful accounts to increase. We work to mitigate bad debt exposure through our credit evaluation policies, reasonably short payment terms and geographical dispersion of sales. Our revenues include export sales to foreign companies located principally in Europe, the Asia/Pacific region and the Middle East. We obtain letters of credit for foreign sales that we consider to be at risk.

Inventories and Allowance for Obsolescence

We state all inventories at the lower of cost or market value, determined on a first-in, first-out method. We monitor standard costs on a monthly basis and update them annually and as necessary to reflect changes in raw material costs and labor and overhead rates. Our inventory balance was $19.3 million as of March 31, 2007 compared to $17.6 million as of December 31, 2006. Our inventory allowance as of March 31, 2007 was $1.2 million and as of December 31, 2006 was $1.0 million. We provide inventory allowances when conditions indicate that the selling price could be less than cost due to physical deterioration, usage, obsolescence, reductions in estimated future demand and reductions in selling prices. We balance the need to maintain strategic inventory levels with the risk of obsolescence due to changing technology and customer demand levels. Unfavorable changes in market conditions may result in a need for additional inventory reserves that could adversely impact our gross margins. Conversely, favorable changes in demand could result in higher gross margins when we sell products.

Product Warranty Costs and Provisions

We provide a one-year parts and labor warranty on end-user sales of our aesthetic treatment systems. Distributor sales generally include a warranty on parts only. We estimate and provide for future costs for initial product warranties at the time revenue is recognized. We base product warranty costs on related material costs, technical support labor costs and overhead. We provide for the estimated cost of product warranties by considering historical material, labor and overhead expenses and applying the experience rates to the outstanding warranty period for products sold. As we sell new products to our customers, we must exercise considerable judgment in estimating the

expected failure rates and warranty costs. If actual product failure rates, material usage, service delivery costs or overhead costs differ from our estimates, we would be required to revise our estimated warranty liability.

Stock-Based Compensation

Effective January 1, 2006, we adopted the fair value recognition provisions of FASB Statement No. 123(R),Share-Based Payment, (SFAS 123 (R)) using the modified-prospective-transition method. The modified prospective transition method is one in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. In addition, SFAS 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas, SFAS 123 permitted companies to record forfeitures based on actual forfeitures, which was Cynosure’s historical policy under SFAS 123. As a result, we have applied an estimated annual forfeiture rate of 1.0% in determining the expense recorded in the consolidated statements of income.

Effective with the adoption of SFAS 123(R), we have elected to use the Black-Scholes option pricing model to determine the weighted average fair value of options, rather than a binomial model. The weighted-average fair values of the options granted during the three months ended March 31, 2007 was $14.73 using the following assumptions:


		Three Months Ended
		March 31,
		2007
Risk-free interest rate		4.77%
Expected dividend yield		—
Expected lives		5.8 years
Expected volatility		70%

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Due to our initial public offering in December 2005, we believe there is not adequate information on the volatility of our own shares. As such, our estimated expected stock price volatility is based on a weighted average of our own historical volatility and of the average volatilities of other similar companies in the same industry. We believe this is more reflective and a better indicator of the expected future volatility, than using an average of a comparable market index or of a comparable company in the same industry. Our expected term of options granted in the three months ended March 31, 2007 was derived from the short-cut method described in SEC’s Staff Accounting Bulletin No. 107. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends.

SFAS 123(R) is a new and very complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. There is little experience or guidance available with respect to developing these assumptions and models. In addition, given our initial public offering in December 2005, we have limited data in terms of historical forfeiture rates, volatilities and expected terms as a public company and, as such, we are developing our estimates for our volatilities and expected terms based on guideline companies within our industry. If actual forfeiture rates, volatilities and expected terms differ from our estimates, we would be required to revise our estimated stock-based compensation expense in future periods.

We account for transactions in which services are received from non-employees in exchange for equity instruments based on the fair value of such services received or of the equity instruments issued, whichever is more reliably measured, in accordance with SFAS No. 123 and the Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, or EITF Issue No. 96-18.

Income Taxes

We account for income taxes in accordance with SFAS No. 109,Accounting for Income Taxes. Under this method, we determine deferred tax assets and liabilities based upon the differences between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in the financial statements. Because we assume that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, giving rise to a deferred tax asset. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance.

We adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FAS 109, Accounting for Income Taxes, (FIN 48) on January 1, 2007. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

We generally report tax positions in our financial statements as they are reported on tax returns as filed or to be filed. A tax benefit is reflected in the financial statements only if it is “more-likely-than-not” that we will be able to sustain the tax position, based on its technical merits. Tax benefits from uncertain tax positions that reduce current or future income tax liabilities are reported in the financial statements only to the extent each benefit is recognized and measured, in accordance with the provisions of FIN 48. As a result of adopting FIN 48, we determined that no material cumulative effect adjustment was necessary to the opening balance of retained earnings as of January 1, 2007. We further determined, based on our analysis, that there were no significant unrecognized tax benefits that, if recognized, would affect the effective tax rate for the three months ended March 31, 2007.

Under FIN 48, a tax return benefit that does not qualify for financial reporting recognition is generally treated as a government loan or incorrect application of a tax law and may result in interest and penalty charges. We classify interest and penalties related to income taxes as interest expense and other expense, respectively, within the statement of income. During the three months ended March 31, 2007, we did not recognize any interest and penalties in connection with the adoption of FIN 48 and do not have any amounts accrued for the payment of such interest and penalties as of March 31, 2007.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115(SFAS 159), in order to permit entities to choose to measure many financial instruments and certain other eligible items at fair value at specified election dates and, thereby, mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. Unrealized gains and losses on items for which the fair value option has been elected shall be reported in earnings. The provisions of this Statement are to be applied prospectively as of January 1, 2008; however early adoption is permitted, subject to certain restrictions, as defined. This Statement does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. We do not expect that the adoption of SFAS 159 will have a material impact on our financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments.

Interest Rate Sensitivity.We maintain an investment portfolio consisting mainly of state and municipal government obligations, corporate obligations and certificates of deposit. Each security matures by July 1, 2008. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. We have the ability to hold our fixed income investments until maturity (excluding acquisitions or mergers). Therefore, we do not expect our operating results or cash flows to be affected to any significant degree by any sudden change in market interest rates on our securities portfolio. The following table provides information about our investment portfolio. For investment securities, the table presents principal cash flows (in thousands) and weighted average interest rates by expected maturity dates.


	Fair Value
	at March 31,
	2007			FY 2007			FY 2008
Investments (at fair value)	$	49,655		$	46,845		$	2,810
Weighted average interest rate		4.32	%		4.26	%		5.46	%

Foreign Currency Exchange.A significant portion of our operations is conducted through operations in countries other than the United States. Revenues from our international operations that were recorded in U.S. dollars represented approximately 43% of our total international revenues during the three months ended March 31, 2007. Substantially all of the remaining 57% were sales in euros, British pounds, Japanese yen and Chinese yuan. Since we conduct our business in U.S. dollars, our main exposure, if any, results from changes in the exchange rate between these currencies and the U.S. dollar. Our functional currency is the U.S. dollar. Our policy is to reduce exposure to exchange rate fluctuations by having most of our assets and liabilities, as well as most of our revenues and expenditures, in U.S. dollars, or U.S. dollar linked. Therefore, we believe that the potential loss that would result from an increase or decrease in the exchange rate is immaterial to our business and net assets.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of March 31, 2007. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms and were effective.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — Other Information

Item 1. Legal Proceedings

In May 2005, Dr. Ari Weitzner, individually and as putative representative of a purported class, filed a complaint against us under the federal Telephone Consumer Protection Act, or TCPA, in Massachusetts Superior Court in Middlesex County seeking monetary damages, injunctive relief, costs and attorneys fees. The complaint alleges that we violated the TCPA by sending unsolicited advertisements by facsimile to the plaintiff and other recipients

without the prior express invitation or permission of the recipients. Under the TCPA, recipients of unsolicited facsimile advertisements are entitled to damages of up to $500 per facsimile for inadvertent violations and up to $1,500 per facsimile for knowing or willful violations. Although we are continuing to investigate the number of facsimiles transmitted during the period for which the plaintiff in the lawsuit seeks class certification and the number of these facsimiles that were “unsolicited” within the meaning of the TCPA, we expect the number of unsolicited facsimiles to be very large. We are vigorously defending the lawsuit and have filed initial briefs and motions with the court. We are not able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

In December 2005, certain individuals commenced an arbitration against us along with Sona International Inc., Sona Med Spa Inc., Carousel Capital, Inc. and various individuals. The arbitration demand alleges fraud, violations of various state consumer protection laws and other causes of action in connection with the plaintiffs’ acquisition of franchises from the Sona entities. We declined to participate in the arbitration because we had not agreed contractually to do so, and we have been dismissed from the arbitration by agreement of the parties.

In January 2006, Gentle Laser Solutions, Inc., Liberty Bell Med Spa, Inc. and Kevin T. Campbell filed suit against us and one of our former directors, along with Sona International Inc., Sona Lasers Centers, Inc. and various other individuals, in the Superior Court of New Jersey. The matter was later removed to the U. S. District Court in the District of New Jersey. The suit alleges fraud, breach of contract and other causes of action in connection with the plaintiffs’ acquisition of franchises from the Sona entities. Court-ordered conferences scheduled for December 1, 2006 and January 29, 2007 were postponed due to a pending motion to dismiss by Sona. We are not able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

In June 2006, Baltimore Laser Solutions, Inc. and Kevin T. Campbell, filed suit against us and one of our former directors, along with Sona International Inc., Sona Lasers Centers, Inc. and various other individuals, in the U. S. District Court in the District of Maryland. The suit alleges fraud, breach of contract and other causes of action in connection with the plaintiffs’ acquisition of franchises from the Sona entities. We are not able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

In September 2006, five groups of plaintiffs, all of whom are former Sona franchisees or franchises, filed suit against us in the U. S. District Court in the District of Minnesota. On January 18, 2007, we received a copy of an amended complaint, adding two groups of plaintiffs. The suit alleges fraud, negligent misrepresentation and other causes of action in connection with our relationship with Sona. On February 13, 2007, we filed a motion to dismiss the amended complaint in its entirety. We are not able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

In addition to the matters discussed above, from time to time, we are subject to various claims, lawsuits, disputes with third parties, investigations and pending actions involving various allegations against us incident to the operation of its business, principally product liability. Each of these other matters is subject to various uncertainties, and it is possible that some of these other matters may be resolved unfavorably to us. We establish accruals for losses that management deems to be probable and subject to reasonable estimate. We believe that the ultimate outcome of these matters will not have a material adverse impact on our consolidated financial position, results of operations or cash flows.

Item 1A. Risk Factors

The following important factors, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Quarterly Report or presented elsewhere by management from time to time.

Risks Related to Our Business and Industry

We have a history of operating losses, and we may not maintain profitability.

Although we were profitable in 2004 and 2005, we incurred operating losses in three of the last five years. Our net losses were approximately $0.7 million in 2006, $0.5 million in 2003, and $1.9 million in 2002. We may not be able to sustain or increase profitability on a quarterly or annual basis. If we are unable to maintain profitability, the market value of our stock will decline, and you could lose all or a part of your investment.

If we fail to obtain Alexandrite rods or our air cooling system from our sole suppliers, our ability to manufacture and sell our products and components would be impaired.

We use Alexandrite rods to manufacture the lasers for ourApogeeproducts. We depend exclusively on Northrop Grumman SYNOPTICS to supply Alexandrite rods to us, and we are aware of no alternative supplier meeting our quality standards. We offer ourSmartCool(R) treatment cooling systems for use with our laser aesthetic treatment systems, and we depend exclusively on Zimmer Elektromedizin GmbH to supplySmartCoolsystems to us. Both Alexandrite lasers and ourSmartCool systems are important to our business.

We do not have long-term arrangements with Northrop Grumman SYNOPTICS or Zimmer Elektromedizin for the supply of Alexandrite rods orSmartCoolsystems, but instead purchase from them on a purchase order basis. Northrop Grumman SYNOPTICS and Zimmer Elektromedizin are not required, and may not be able or willing, to meet our future requirements at current prices, or at all. Any extended interruption in our supplies of Alexandrite rods or ourSmartCooltreatment cooling systems could materially harm our business.

We compete against companies that have longer operating histories, more established products and greater resources than we do, which may prevent us from achieving further market penetration or improving operating results.

Competition in the aesthetic laser industry is intense. Our products compete against products offered by public companies, such as Candela Corporation, Cutera, Inc., Laserscope, Lumenis Ltd., Palomar Medical Technologies, Inc., Syneron Medical Ltd. and Thermage, Inc., as well as several smaller specialized private companies, such as Radiancy, Inc. Some of these competitors have significantly greater financial and human resources than we do and have established reputations, as well as worldwide distribution channels and sales and marketing capabilities that are larger and more established than ours. Additional competitors may enter the market, and we are likely to compete with new companies in the future. We also face competition from medical products, such as BOTOX(R) and collagen injections, and surgical and non-surgical aesthetic procedures, such as face lifts, sclerotherapy, electrolysis, microdermabrasion and chemical peels. We may also face competition from manufacturers of pharmaceutical and other products that have not yet been developed. As a result of competition with these companies, products and procedures, we could experience loss of market share and decreasing revenue as well as reduced prices and profit margins, any of which would harm our business and operating results.

Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products. Factors affecting our competitive position include:

	•		product performance and design;

	•		ability to sell products tailored to meet the applications needs of clients and patients;

	•		quality of customer support;

	•		product pricing;

	•		product safety;

	•		sales, marketing and distribution capabilities;

	•		success and timing of new product development and introductions; and

	•		intellectual property protection.

Some of our competitors have more established products and customer relationships than we do, which could inhibit our further market penetration efforts. For example, we have encountered, and expect to continue to encounter, situations where, due to pre-existing relationships, potential customers determine to purchase additional products from our competitors. If we are unable to compete effectively, our business and operating results will be harmed.

In addition, some of our current and potential competitors have significantly greater financial, research and development, manufacturing and sales and marketing resources than we have. Our competitors could utilize their greater financial resources to acquire other companies to gain enhanced name recognition and market share, as well as to acquire new technologies or products that could effectively compete with our product lines.

If we do not continue to develop and commercialize new products and identify new markets for our products and technology, we may not remain competitive, and our revenues and operating results could suffer.

The aesthetic laser and light-based treatment system industry is subject to continuous technological development and product innovation. If we do not continue to be innovative in the development of new products and applications, our competitive position will likely deteriorate as other companies successfully design and commercialize new products and applications. Accordingly, our success depends in part on developing new and innovative applications of laser and other light-based technology and identifying new markets for and applications of existing products and technology. If we are unable to develop and commercialize new products and identify new markets for our products and technology, our products and technology could become obsolete and our revenues and operating results could be adversely affected.

To remain competitive, we must:

	•		develop or acquire new technologies that either add to or significantly improve our current products;

	•		convince our target customers that our new products or product upgrades would be attractive revenue-generating additions to their practices;

	•		sell our products to non-traditional customers, including primary care physicians, gynecologists and other specialists;

	•		identify new markets and emerging technological trends in our target markets and react effectively to technological changes; and

	•		maintain effective sales and marketing strategies.

If our new products do not gain market acceptance, our revenues and operating results could suffer.

The commercial success of the products and technology we develop will depend upon the acceptance of these products by providers of aesthetic procedures and their patients and clients. It is difficult for us to predict how successful recently introduced products, or products we are currently developing, will be over the long term. If the products we develop do not gain market acceptance, our revenues and operating results could suffer.

We expect that many of the products we develop will be based upon new technologies or new applications of existing technologies. It may be difficult for us to achieve market acceptance of some of our products, particularly the first products that we introduce to the market based on new technologies or new applications of existing technologies.

If demand for our aesthetic treatment systems by non-traditional physician customers and spas does not develop as we expect, our revenues will suffer and our business will be harmed.

Our revenues from non-traditional physician customers and spa purchasers of our products have increased significantly since January 1, 2004. We believe, and our growth expectations assume, that we and other companies selling lasers and other light-based aesthetic treatment systems have only begun to penetrate these markets and that

our revenues from selling to these markets will continue to increase. If our expectations as to the size of these markets and our ability to sell our products to participants in these markets are not correct, our revenues will suffer and our business will be harmed.

We rely upon third party suppliers for the components and subassemblies of many of our products, making us vulnerable to supply shortages and price fluctuations, which could harm our business.

Many of the components and subassemblies that comprise our aesthetic treatment systems are currently manufactured for us by a limited number of suppliers. In addition, one third party supplier assembles and tests many of the components and subassemblies for ourApogee, Cynergy, Affirm, AcclaimandVStarproduct families. We do not have long-term contracts with any of these third parties, including the third party supplier that assembles many of our components and subassemblies, for the supply of parts or services. Any interruption in the supply of components or subassemblies, or our inability to obtain substitute components or subassemblies from alternate sources at acceptable prices in a timely manner, or our inability to obtain assembly and testing services, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business and operating results.

We sell our products in numerous international markets. Our operating results may suffer if we are unable to manage our international operations effectively.

We sell our products in 53 foreign countries, and we therefore are subject to risks associated with having international operations. Sales of our products outside of North America accounted for 38% of our product revenue for the three months ended March 31, 2007, 42% of our revenue for 2006 and 41% of our revenue in 2005.

Our international sales are subject to a number of risks, including:

	•		foreign certification and regulatory requirements;

	•		difficulties in staffing and managing our foreign operations;

	•		import and export controls; and

	•		political and economic instability.

Revenue from our international sales could be adversely affected by fluctuations in currency exchange rates, which would cause our operating results to suffer.

We face risks associated with changes in foreign currency exchange rates. Revenues outside of North America that were recorded in U.S. dollars represented approximately 43% of our total revenues outside of North America for the three months ended March 31, 2007. Substantially all of the remaining 57% of our total revenues outside of North America for the three months ended March 31, 2007 were sales in euros, British pounds, Japanese yen and Chinese yuan. Since we report our financial position and results of operations in U.S. dollars, our reported results of operations may be adversely affected by changes in the exchange rate between these currencies and the U.S. dollar. We have not historically engaged in hedging activities relating to our non-U.S. dollar operations. We may incur negative foreign currency translation charges as a result of changes in currency exchange rates, which could cause our operating results to suffer.

We rely on third party distributors to market, sell and service a significant portion of our products. If these distributors do not commit the necessary resources to effectively market, sell and service our products or if our relationships with these distributors are disrupted, our business and operating results may be harmed.

In North America, the United Kingdom, Germany, Spain, France, Japan and China, we sell our products through our internal sales organization. Outside of these markets, we sell our products through third party distributors. Our sales and marketing success in these other markets depends on these distributors, in particular their sales and service expertise and relationships with the customers in the marketplace. Sales of our aesthetic treatment systems by third party distributors represented 18% of our revenue for the three months ended March 31, 2007. We do not control

these distributors, and they may not be successful in marketing our products. Third party distributors may terminate their relationships with us, or fail to commit the necessary resources to market and sell our products to the level of our expectations. Currently, we have written distributor agreements in place with 18 of our 19 third party distributors. The third party distributors with which we do not have written distributor agreements may terminate their relationships with us and stop selling and servicing our products with little or no notice. If current or future third party distributors do not perform adequately, or if we fail to maintain our existing relationships with these distributors or fail to recruit and retain distributors in particular geographic areas, our revenue from international sales may be adversely affected and our operating results could suffer.

Because we do not require training for users of our products, and sell our products to non-physicians, there exists an increased potential for misuse of our products, which could harm our reputation and our business.

Federal regulations allow us to sell our products to or on the order of practitioners licensed by law to use or order the use of a prescription device. The definition of “licensed practitioners” varies from state to state. As a result, our products may be purchased or operated by physicians with varying levels of training and, in many states, by non-physicians, including nurse practitioners, chiropractors and technicians. Outside the United States, many jurisdictions do not require specific qualifications or training for purchasers or operators of our products. We do not supervise the procedures performed with our products, nor do we require that direct medical supervision occur. We and our distributors offer product training sessions, but neither we nor our distributors require purchasers or operators of our products to attend training sessions. The lack of required training and the purchase and use of our products by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to costly product liability litigation.

Product liability suits could be brought against us due to a defective design, material or workmanship or due to misuse of our products. These lawsuits could be expensive and time consuming and result in substantial damages to us and increases in our insurance rates.

If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to substantial and costly litigation by our customers or their patients or clients. Misusing our products or failing to adhere to operating guidelines for our products can cause severe burns or other damage to the eyes, skin or other tissue. We are routinely involved in claims related to the use of our products. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us. Our current insurance coverage may not be sufficient to cover these claims. Moreover, in the future, we may not be able to obtain insurance in amount or scope sufficient to provide us with adequate coverage against potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and reduce product sales. We would need to pay any product losses in excess of our insurance coverage out of cash reserves, harming our financial condition and adversely affecting our operating results.

We may incur substantial expenses if our past practices are shown to have violated the Telephone Consumer Protection Act.

We previously used facsimiles to disseminate information about our clinical workshops to large numbers of customers and potential customers. These facsimiles were transmitted by third parties retained by us, and were sent to recipients whose facsimile numbers were supplied by us as well as other recipients whose facsimile numbers we purchased from other sources. In May 2005, we stopped sending unsolicited facsimiles to customers and potential customers.

Under the federal Telephone Consumer Protection Act, or TCPA, recipients of unsolicited facsimile “advertisements” are entitled to damages of up to $500 per facsimile for inadvertent violations and up to $1,500 per facsimile for knowing or willful violations. Recipients of unsolicited facsimile advertisements may seek enforcement of the TCPA in state courts. The TCPA also permits states to initiate a civil action in a federal district court to enforce the TCPA against a party who engages in a pattern or practice of violations of the TCPA. In addition, complaints may be filed with the Federal Communications Commission, which has the power to assess penalties against parties for violations of the TCPA.

In May 2005, we were sued in Massachusetts state court by Dr. Ari Weitzner, individually and as putative representative of a purported class under the TCPA. The lawsuit alleges that we violated the TCPA by sending unsolicited advertisements by facsimile. Although we are continuing to investigate the number of facsimiles transmitted during the period for which the plaintiff in the lawsuit seeks class certification, and the number of these facsimiles that were “unsolicited” within the meaning of the TCPA, we expect the number of unsolicited facsimiles to be very large.

We are vigorously defending the Weitzner lawsuit, but litigation is subject to numerous uncertainties and we are unable to predict the ultimate outcome of this matter. Even if we prevail in this lawsuit, other individual or class action claims may be brought against us alleging past violations of the TCPA. Moreover, the amount of any potential liability in connection with this lawsuit or other possible lawsuits will depend, to a large extent, on whether a class in a class action lawsuit is certified and, if one is certified, on the scope of the class, neither of which we can predict at this time.

We have not recorded a liability related to this lawsuit or other possible future lawsuits. However, we may determine in the future that an accrual is required, and we may be required to pay damages in respect of this lawsuit or other possible future lawsuits arising out of our past transmission of facsimiles, any of which could materially and adversely affect our results of operations, cash flows and financial condition. Regardless of the outcome, this lawsuit or other possible future lawsuits may cause us to incur significant expenses and divert the attention of our management and key personnel from our business operations.

We have tendered a claim with respect to the Weitzner lawsuit to our general liability insurance carrier and coverage has been disputed. Although the carrier has previously provided coverage for several small individual claims brought against us under the TCPA, the carrier has denied coverage for this claim. Even if coverage is determined to apply, since the potential liability under this claim and other possible future claims could be substantial, our coverage may not be sufficient to satisfy any damages that we may be required to pay.

Our financial results may fluctuate from quarter to quarter, which makes our results difficult to predict and could cause our results to fall short of expectations.

Our financial results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons, comparing our financial results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our future quarterly and annual expenses as a percentage of our revenues may be significantly different from those we have recorded in the past or which we expect for the future. Our financial results in some quarters may fall below our expectations or the expectations of market analysts or investors. Any of these events could cause our stock price to fall. Each of the risk factors listed in this “Risk Factors” section, and the following factors, may adversely affect our financial results:

	•		continued availability of attractive equipment leasing terms for our customers, which may be negatively influenced by interest rate increases;

	•		increases in the length of our sales cycle; and

	•		reductions in the efficiency of our manufacturing processes.

If there is not sufficient demand for the procedures performed with our products, practitioner demand for our products could decline, which would adversely affect our operating results.

Most procedures performed using our aesthetic treatment systems are elective procedures that are not reimbursable through government or private health insurance. The cost of these elective procedures must be borne by the patient. As a result, the decision to undergo a procedure that utilizes our products may be influenced by a number of factors, including:

	•		patient awareness of procedures and treatments;

	•		the cost, safety and effectiveness of the procedure and of alternative treatments;

	•		the success of our and our customers’ sales and marketing efforts to purchasers of these procedures; and

	•		consumer confidence, which may be affected by economic and other conditions.

If there is not sufficient demand for the procedures performed with our products, practitioner demand for our products would be reduced, which would adversely affect our operating results.

Our business and operations are experiencing rapid growth. If we fail to effectively manage our growth, our business and operating results could be harmed.

We have experienced significant growth in the scope of our operations and the number of our employees. For example, our revenue increased from $27.1 million in 2003 to $78.4 million in 2006, and the number of our employees increased from 138 at the beginning of 2003 to 238 as of March 31, 2007. This growth has placed significant demands on our management, as well as our financial and operational resources. If we do not effectively manage our growth, the efficiency of our operations and the quality of our products could suffer, which could adversely affect our business and operating results. To effectively manage this growth, we will need to continue to:

	•		implement appropriate operational, financial and management controls, systems and procedures;

	•		expand our manufacturing capacity and scale of production;

	•		expand our sales, marketing and distribution infrastructure and capabilities; and

	•		provide adequate training and supervision to maintain high quality standards.

We may be unable to attract and retain management and other personnel we need to succeed.

Our success depends on the services of our senior management and other key research and development, manufacturing, sales and marketing employees. The loss of the services of one or more of these employees could have a material adverse effect on our business. We consider retaining Michael R. Davin, our president and chief executive officer, to be key to our efforts to develop, sell and market our products and remain competitive. We have entered into an employment agreement with Mr. Davin; however, the employment agreement is terminable by him on short notice and may not ensure his continued service with our company. Our future success will depend in large part upon our ability to attract, retain and motivate highly skilled employees. We cannot be certain that we will be able to do so.

Any acquisitions that we make could disrupt our business and harm our financial condition.

From time to time, we evaluate potential strategic acquisitions of complementary businesses, products or technologies, as well as consider joint ventures and other collaborative projects. We may not be able to identify appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate any businesses, products or technologies that we acquire. We do not have any experience with acquiring companies or products. Any acquisition we pursue could diminish our cash available to us for other uses or be dilutive to our stockholders, and could divert management’s time and resources from our core operations.

El.En. has substantial control over us. In addition, El.En. and our executive officers and directors have the ability to control all matters submitted to stockholders for approval.

In addition to the factors discussed above regarding El.En.’s ability to control the election of a majority of the members of our board of directors, El.En. and our executive officers and directors, in the aggregate, beneficially own approximately 33% of our outstanding common stock. As a result, if these stockholders were to act together, they would be able to control all matters submitted to our stockholders for approval. For example, these persons could control any amendment of our certificate of incorporation and bylaws and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire. Please also see the discussion under “Risks Related to Our Relationship with El.En. — El.En. has substantial control over us and could delay or prevent a change of control.”

Provisions in our corporate charter documents and under Delaware law may delay or prevent attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

	•		a dual class capital structure that allows El.En. to control the election of a majority of the members of our board of directors;

	•		the classification of the members of our directors who are elected by holders of our class A common stock and class B common stock, voting together as a single class;

	•		limitations on the removal of directors who are elected by holders of our class A common stock and class B common stock, voting together as a single class;

	•		advance notice requirements for stockholder proposals and nominations;

	•		the inability of class A stockholders to act by written consent or to call special meetings; and

	•		the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors.

The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation, and the right of the holders of shares of our class B common stock to elect a majority of the members of our board of directors may not be modified without the approval of the holders of at least a majority of the shares of our class B common stock outstanding. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of the voting power of our shares of capital stock entitled to vote and the affirmative vote of holders of at least a majority of the shares of class B common stock outstanding.

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of our company.

Our stock price may be volatile.

Our class A common stock price may be volatile. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our class A common stock may be influenced by many factors, including:

	•		the success of competitive products or technologies;

	•		regulatory developments in the United States and foreign countries;

	•		developments or disputes concerning patents or other proprietary rights;

	•		the recruitment or departure of key personnel;

	•		variations in our financial results or those of companies that are perceived to be similar to us;

	•		market conditions in the our industry and issuance of new or changed securities analysts’ reports or recommendations; and

	•		general economic, industry and market conditions.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our class A common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our class A common stock, including shares of our class B common stock that have been converted into shares of our class A common stock, in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our class A common stock. We also intend to register all shares of our class A common stock that we may issue under our employee benefit plans.

Risks Related to Our Relationship with El.En.

El.En. has substantial control over us and could delay or prevent a change of control.

El.En., our largest stockholder, is able to control the election of a majority of the members of our board of directors. El.En. owns 96% of our outstanding class B common stock, which comprises 33% of our aggregate outstanding common stock. Until El.En. beneficially owns less than 20% of the aggregate number of shares of our class A common stock and class B common stock outstanding or less than 50% of the number of shares of our class B common stock outstanding, El.En., as holder of a majority of the shares of our class B common stock, will have the right:

	•		to elect a majority of the members of our board of directors;

	•		to approve amendments to our bylaws adopted by our class A and class B stockholders, voting as a single class; and

	•		to approve amendments to any provisions of our restated certificate of incorporation relating to the rights of holders of common stock, the powers, election and classification of the board of directors, corporate opportunities and the rights of holders of class A common stock and class B common stock to elect and remove directors, act by written consent and call special meetings of stockholders.

In addition, the holders of shares of our class B common stock will vote with our class A stockholders for the election of the remaining directors.

Because El.En. is the holder of a majority of the shares of our class B common stock, El.En.’s approval will be required for any of the actions described above. In addition, because El.En. will be able to control the election of a majority of our board, and because of its substantial holdings of our capital stock, El.En. will likely have the ability to delay or prevent a change of control of our company that may be favored by other directors or stockholders and otherwise exercise substantial control over all corporate actions requiring board or stockholder approval.

El.En. and its subsidiaries market and sell products that compete with our products, and any competition by El.En. could have a material adverse effect on our business.

El.En. is a leading laser manufacturer in Europe and a leading light-based medical device manufacturer worldwide. El.En. and its subsidiaries develop and produce laser systems with scientific, industrial, commercial and medical applications. Although we have exclusive North American distribution rights for ourPhotoLight, TriActive LaserDermologyandSmartlipoproducts, El.En. may compete with us in North America with its other products. In the event that our distribution agreements with El.En. terminate, El.En. may compete with us in North America with these products. El.En. markets, sells, promotes and licenses products that compete with our products outside of North America. El.En. has significantly greater financial, technical and human resources than we have and is better equipped to research, develop, manufacture and commercialize products. In addition, El.En. has more extensive experience in light-based technologies. Our business could be materially and adversely affected by competition from El.En.

Conflicts of interest may arise between us and El.En., and these conflicts might ultimately be resolved in a manner unfavorable to us.

For financial reporting purposes, our financial results are included in El.En.’s consolidated financial statements. One of our directors, Andrea Cangioli, and the spouse of one of our directors, Leonardo Masotti, are also officers or directors of El.En. These two directors own or have an interest in substantial amounts of El.En. stock. Ownership interests of our directors in El.En. stock, or service as a director of our company while at the same time serving as, or being the spouse of, a director or officer of El.En., could give rise to conflicts of interest when a director or officer is faced with a decision that could have different implications for the two companies.

Conflicts may arise with respect to possible future distribution and research and development arrangements with El.En. or another El.En. affiliated company in which the terms and conditions of the arrangements are subject to negotiation between us and El.En. or such other El.En. affiliated company. These potential conflicts could also arise, for example, over matters such as:

	•		the nature, timing, marketing, distribution and price of our products and El.En.’s products that compete with each other;

	•		intellectual property matters; and

	•		business opportunities that may be attractive to both El.En. and us.

In order to address potential conflicts of interest between us and El.En., our restated certificate of incorporation contains provisions regulating and defining the conduct of our affairs as they may involve El.En. and El.En. affiliated companies and El.En.’s officers and directors who serve as our directors. These provisions recognize that we and El.En. and El.En. affiliated companies engage and may continue to engage in the same or similar business activities and lines of business and will continue to have contractual and business relations with each other. These provisions expressly permit El.En. and its affiliated companies to compete against us and narrowly limit corporate opportunities that El.En. or its directors or officers who serve as our directors must make available to us.

Our class A share price may decline because of future sales of our shares by El.En.

El.En. may sell all or part of the shares of our class B common stock that it owns, at which time those shares would automatically convert into shares of our class A common stock. El.En. is not subject to any contractual obligation to maintain its ownership position in our shares, except that it has agreed with the lead-managing underwriter of our December 2005 initial public offering, Citigroup Global Markets Inc., that it will not, without Citigroup’s prior consent, sell or otherwise dispose of any shares of our common stock until December 9, 2007, other than:

	•		up to 33% of the shares of our common stock that it beneficially owned on December 8, 2005, the date of the prospectus relating to our initial public offering, until June 9, 2007; and

	•		up to an additional 33% of the shares of our common stock that it beneficially owned on December 8, 2005 during the period between June 9, 2007 and December 9, 2007.

Consequently, El.En. may not maintain its ownership of our common stock. Sales by El.En. of substantial amounts of our common stock in the public market could adversely affect prevailing market prices for our class A common stock.

If El.En. sells the shares of our stock held by it and no longer has control over us, our commercial relationship with El.En. may be adversely affected.

El.En. has advised us that it currently does not intend to sell its shares of our common stock in the foreseeable future. However, El.En.’s plans and intentions may change at any time and, other than El.En.’s agreement with the underwriters discussed above not to sell more than specified amounts of shares of our common stock before December 9, 2007, El.En. is not subject to any contractual obligation to maintain an ownership position in our shares.

If El.En. sells our shares and no longer has control over us, El.En. will cease to include our financial results in its consolidated financial statements, and El.En.’s interests may differ significantly from ours. If this occurs, our commercial relationship with El.En. may be adversely affected, which, in turn, could have a material adverse effect on our business. For example, if El.En. does not have a continuing interest in our financial success, it may be more inclined to compete with us in North America and in other markets, not to enter into future commercial agreements with us or to terminate or not renew our existing distribution agreements. If any of these events were to occur, it could harm our business.

Risks Related to Intellectual Property

If we infringe or are alleged to infringe intellectual property rights of third parties, our business could be adversely affected.

Our products may infringe or be claimed to infringe patents or patent applications under which we do not hold licenses or other rights. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successfully asserted against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay manufacturing or sales of the product that is the subject of the suit.

As a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to seek a license from the third party and be required to pay license fees or royalties or both, as we have with Palomar. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could harm our business significantly.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in our industry. In addition to infringement claims against us, we may become a party to other types of patent litigation and other proceedings, including interference proceedings declared by the United States Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products and technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

If we are unable to obtain or maintain intellectual property rights relating to our technology and products, the commercial value of our technology and products will be adversely affected and our competitive position could be harmed.

Our success and ability to compete depends in part upon our ability to obtain protection in the United States and other countries for our products by establishing and maintaining intellectual property rights relating to or incorporated into our technology and products. We own a variety of patents and patent applications in the United States and corresponding patents and patent applications in many foreign jurisdictions. To date, however, our patent estate has not stopped other companies from competing against us, and we do not know how successful we would be should we choose to assert our patents against suspected infringers. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how, particularly with respect to our Alexandrite and pulse dye lasers. We generally seek to protect this information in part by confidentiality agreements with our employees, consultants and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors.

Risks Related to Government Regulation

If we fail to obtain and maintain necessary U.S. Food and Drug Administration clearances for our products and indications or if clearances for future products and indications are delayed or not issued, our business would be harmed.

Our products are classified as medical devices and are subject to extensive regulation in the United States by the Food and Drug Administration, or FDA, and other federal, state and local authorities. These regulations relate to manufacturing, labeling, sale, promotion, distribution, importing and exporting and shipping of our products. In the United States, before we can market a new medical device, or a new use of, or claim for, an existing product, we must first receive either 510(k) clearance or premarket approval from the FDA, unless an exemption applies. Both of these processes can be expensive and lengthy and entail significant user fees, unless exempt. The FDA’s 510(k) clearance process usually takes from three to 12 months, but it can last longer. The process of obtaining premarket approval is much more costly and uncertain than the 510(k) clearance process. It generally takes from one to three years, or even longer, from the time the premarket approval application is submitted to the FDA until an approval is obtained.

In order to obtain premarket approval and, in some cases, a 510(k) clearance, a product sponsor must conduct well controlled clinical trials designed to test the safety and effectiveness of the product. Conducting clinical trials generally entails a long, expensive and uncertain process that is subject to delays and failure at any stage. The data obtained from clinical trials may be inadequate to support approval or clearance of a submission. In addition, the occurrence of unexpected findings in connection with clinical trials may prevent or delay obtaining approval or clearance. If we conduct clinical trials, they may be delayed or halted, or be inadequate to support approval or clearance, for numerous reasons, including:

	•		FDA, other regulatory authorities or an institutional review board may place a clinical trial on hold;

	•		patients may not enroll in clinical trials, or patient follow-up may not occur, at the rate we expect;

	•		patients may not comply with trial protocols;

	•		institutional review boards and third party clinical investigators may delay or reject our trial protocol;

	•		third party clinical investigators may decline to participate in a trial or may not perform a trial on our anticipated schedule or consistent with the clinical trial protocol, good clinical practices, or other FDA requirements;

	•		third party organizations may not perform data collection and analysis in a timely or accurate manner;

	•		regulatory inspections of our clinical trials or manufacturing facilities may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials, or invalidate our clinical trials;

	•		changes in governmental regulations or administrative actions; and

	•		the interim or final results of the clinical trials may be inconclusive or unfavorable as to safety or effectiveness.

Medical devices may be marketed only for the indications for which they are approved or cleared. The FDA may not approve or clear indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to existing products. Our clearances can be revoked if safety or effectiveness problems develop.

After clearance or approval of our products, we are subject to continuing regulation by the FDA, and if we fail to comply with FDA regulations, our business could suffer.

Even after clearance or approval of a product, we are subject to continuing regulation by the FDA, including the requirements that our facility be registered and our devices listed with the agency. We are subject to Medical Device Reporting regulations, which require us to report to the FDA if our products may have caused or contributed to a death or serious injury or malfunction in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. We must report corrections and removals to the FDA where the correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug, and Cosmetic Act caused by the device that may present a risk to health, and maintain records of other corrections or removals. The FDA closely regulates promotion and advertising and our promotional and advertising activities could come under scrutiny. Since 1994, we have received five untitled letters from the FDA regarding alleged violations caused by our promotional activities. We have responded to these letters and the FDA has found our responses acceptable. If the FDA objects to our promotional and advertising activities or finds that we failed to submit reports under the Medical Device Reporting regulations, for example, the FDA may allege our activities resulted in violations.

The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:

	•		untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

	•		repair, replacement, refunds, recall or seizure of our products;

	•		operating restrictions or partial suspension or total shutdown of production;

	•		refusing or delaying our requests for 510(k) clearance or premarket approval of new products or new intended uses;

	•		withdrawing 510(k) clearance or premarket approvals that have already been granted; and

	•		criminal prosecution.

If any of these events were to occur, they could harm our business.

Federal regulatory reforms may adversely affect our ability to sell our products profitably.

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

We have modified some of our products without FDA clearance. The FDA could retroactively determine that the modifications were improper and require us to stop marketing and recall the modified products.

Any modifications to one of our FDA-cleared devices that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or a premarket approval. We may be required to submit extensive pre-clinical and clinical data depending on the nature of the changes. We may not be able to obtain additional 510(k) clearances or premarket approvals for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and operating results. We have made modifications to our devices in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices, which could harm our operating results and require us to redesign our products.

If we fail to comply with the FDA’s Quality System Regulation and laser performance standards, our manufacturing operations could be halted, and our business would suffer.

We are currently required to demonstrate and maintain compliance with the FDA’s Quality System Regulation, or QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Because our products involve the use of lasers, our products also are covered by a performance standard for lasers set forth in FDA regulations. The laser performance standard imposes specific record keeping, reporting, product testing and product labeling requirements. These requirements include affixing warning labels to laser products as well as incorporating certain safety features in the design of laser products. The FDA enforces the QSR and laser performance standards through periodic unannounced inspections. We have been, and anticipate in the future being, subject to such inspections. Our failure to comply with the QSR or to take satisfactory corrective action in response to an adverse QSR inspection or our failure to comply with applicable laser performance standards could result in enforcement actions, including a public warning letter, a shutdown of or restrictions on our manufacturing operations, delays in approving or clearing a product, refusal to permit the import or export of our products, a recall or seizure of our products, fines, injunctions, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraphs, any of which could cause our business and operating results to suffer.

If we fail to comply with state laws and regulations, or if state laws or regulations change, our business could suffer.

In addition to FDA regulations, most of our products are also subject to state regulations relating to their sale and use. These regulations are complex and vary from state to state, which complicates monitoring compliance. In addition, these regulations are in many instances in flux. For example, federal regulations allow our prescription products to be sold to or on the order of “licensed practitioners,” that is, practitioners licensed by law to use or order the use of a prescription device. Licensed practitioners are defined on a state-by-state basis. As a result, some states permit non-physicians to purchase and operate our products, while other states do not. Additionally, a state could change its regulations at any time to prohibit sales to particular types of customers. We believe that, to date, we have sold our prescription products only to licensed practitioners. However, our failure to comply with state laws or regulations and changes in state laws or regulations may adversely affect our business.

We or our distributors may be unable to obtain or maintain international regulatory qualifications or approvals for our current or future products and indications, which could harm our business.

Sales of our products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. In many countries, our third party distributors are responsible for obtaining and maintaining regulatory approvals for our products. We do not control our third party distributors, and they may not be successful in obtaining or maintaining these regulatory approvals. In addition, the FDA regulates exports of medical devices from the United States.

Complying with international regulatory requirements can be an expensive and time consuming process, and approval is not certain. The time required to obtain foreign clearances or approvals may be longer than that required for FDA clearance or approval, and requirements for such clearances or approvals may differ significantly from FDA requirements. Foreign regulatory authorities may not clear or approve our products for the same indications cleared or approved by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA clearance or approval in addition to other risks. Although we or our distributors have obtained regulatory approvals in the European Union and other countries outside the United States for many of our products, we or our distributors may be unable to maintain regulatory qualifications, clearances or approvals in these countries or obtain qualifications, clearances or approvals in other countries. For example, we are in the process of seeking regulatory approvals from the Japanese Ministry of Health, Labour and Welfare for the direct sale of our products into that country. If we are not successful in doing so, our business will be harmed. We may also incur significant costs in attempting to obtain and in maintaining foreign regulatory clearances, approvals or qualifications.

Foreign regulatory agencies, as well as the FDA, periodically inspect manufacturing facilities both in the United States and abroad. If we experience delays in receiving necessary qualifications, clearances or approvals to market our products outside the United States, or if we fail to receive those qualifications, clearances or approvals, or if we fail to comply with other foreign regulatory requirements, we and our distributors may be unable to market our products or enhancements in international markets effectively, or at all. Additionally, the imposition of new requirements may significantly affect our business and our products. We may not be able to adjust to such new requirements.

New regulations may limit our ability to sell to non-physicians, which could harm our business.

Currently, we sell our products primarily to physicians and, outside the United States, to aestheticians. In addition, we recently began marketing our products to the growing aesthetic spa market, where non-physicians under physician supervision perform aesthetic procedures at dedicated facilities. However, federal, state and international regulations could change at any time, disallowing sales of our products to aestheticians, and limiting the ability of aestheticians and non-physicians to operate our products. Any limitations on our ability to sell our products to non-physicians or on the ability of aestheticians and non-physicians to operate our products could cause our business and operating results to suffer.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On December 13, 2005, we completed an initial public offering of 5,750,000 shares of our class A common stock at a price to the public of $15.00 per share. We sold 4,750,000 shares of the class A common stock, including an over-allotment option of 750,000 shares, and El.En., the selling stockholder in the offering, sold 1,000,000 of the shares. The offer and sale of all of the shares in the initial public offering were registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-1 (File No. 333-127463), which was declared effective by the Securities and Exchange Commission on November 8, 2005. We received aggregate net proceeds of approximately $64.0 million, after deducting underwriting discounts and commission of approximately $5.0 and expenses of the offering of approximately $2.3 million. None of the underwriting discounts and commissions or offering expenses were incurred or paid to directors or officers of ours or their associates or to persons owning 10 percent or more of our common stock or to any affiliates of ours. From the effective date of the registration statement through March 31, 2007, we used approximately $5.5 million for general corporate purposes, with the remaining $58.5 million in proceeds invested in cash and cash equivalents.

Item 6. Exhibits

(a) Exhibits


Exhibit No.		Description
31.1		Certification of the Principal Executive Officer

31.2		Certification of the Principal Financial Officer

32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant certifies that it has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


		Cynosure, Inc.

		(Registrant)
Date: May 7, 2007	By:	/s/ Michael R. Davin Michael R. Davin
		Chairman, President, Chief Executive Officer
Date: May 7, 2007	By:	/s/ Timothy W. Baker Timothy W. Baker
		Executive Vice President, Chief Financial
		Officer and Treasurer

EXHIBIT INDEX


Exhibit No.		Description
31.1		Certification of the Principal Executive Officer

31.2		Certification of the Principal Financial Officer

32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Good

Cynosure (CYNO) Inactive 10-Q2007 Q1 Quarterly report

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