Cynosure (CYNO) 10-Q 2007 Q2 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 June 30, 2007

OR

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

For the transition period from       to

Commission File Number 000-51623

Cynosure, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	04-3125110 (I.R.S. Employer 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 Yes o 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 filer o          Accelerated filer þ          Non-accelerated filer o

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

     The number of shares outstanding of each of the registrant’s classes of common stock, as of August 1, 2007:

Class	Number of Shares
Class A Common Stock, $0.001 par value		8,336,995
Class B Common Stock, $0.001 par value		3,929,161

Cynosure, Inc.

Table of Contents

		Page No.
PART I Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006		1
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007 and 2006		2
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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		21
PART II Other Information
Item 1.	Legal Proceedings		22
Item 1A.	Risk Factors		23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 4.	Submission of Matters to a Vote of Security Holders		23
Item 6.	Exhibits		25
SIGNATURES			26
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

Cynosure, Inc.
Consolidated Balance Sheets

(Unaudited, in thousands)

	June 30,			December 31,
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	23,112		$	13,690
Marketable securities		48,299			43,556
Accounts receivable, net		21,856			19,871
Amounts due from related parties (Note 11)		10			335
Inventories		22,144			17,624
Prepaid expenses and other current assets		3,325			4,977
Deferred income taxes		2,625			2,604
Total current assets		121,371			102,657
Property and equipment, net		6,273			5,662
Other assets		1,317			1,247
Total assets	$	128,961		$	109,566
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term loan	$	—		$	167
Accounts payable		5,113			5,986
Amounts due to related party (Note 11)		2,380			1,052
Accrued expenses		14,562			11,077
Deferred revenue		5,166			3,476
Capital lease obligation		455			439
Total current liabilities		27,676			22,197
Capital lease obligation, net of current portion		912			1,069
Deferred revenue, net of current portion		280			311
Other noncurrent liability		153			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 — 12,244 and 11,210 shares as of June 30, 2007 and December 31, 2006, respectively		12			11
Additional paid-in capital		90,270			81,026
Retained earnings		10,649			5,820
Accumulated other comprehensive loss		(704	)		(700	)
Treasury stock, 36 shares, at cost		(287	)		(287	)
Total stockholders’ equity		99,940			85,870
Total liabilities and stockholders’ equity	$	128,961		$	109,566

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

1

Cynosure, Inc.
Consolidated Statements of Income

(Unaudited, in thousands, except per share data)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Revenues	$	30,132	$	18,131	$	56,209	$	35,270
Cost of revenues		11,068		7,541		20,990		15,573
Gross profit		19,064		10,590		35,219		19,697
Operating expenses:
Sales and marketing		9,875		6,149		19,137		11,607
Research and development		1,767		1,039		3,490		2,248
General and administrative		2,933		2,031		5,228		4,177
Total operating expenses		14,575		9,219		27,855		18,032
Income from operations		4,489		1,371		7,364		1,665
Interest income, net		596		731		1,101		1,383
Other income, net		28		276		84		406
Income before provision for income taxes and minority interest		5,113		2,378		8,549		3,454
Provision for income taxes		2,402		915		3,720		1,351
Minority interest in net income of subsidiary		—		22		—		36
Net income	$	2,711	$	1,441	$	4,829	$	2,067
Basic net income per share	$	0.23	$	0.13	$	0.41	$	0.19
Diluted net income per share	$	0.21	$	0.12	$	0.39	$	0.17
Basic weighted-average common shares outstanding		11,964		11,044		11,654		11,038
Diluted weighted-average common shares outstanding		12,686		12,138		12,530		12,158

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

2

Cynosure, Inc.
Consolidated Statements of Cash Flow

(Unaudited, in thousands)

	Six Months Ended
	June 30,
	2007			2006
Operating activities:
Net income	$	4,829		$	2,067
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization		1,327			991
Stock-based compensation expense		2,847			790
Accretion of discounts on marketable securities		127			(446	)
Deferred income taxes		8			(546	)
Minority interest in consolidated subsidiary		—			27
Changes in operating assets and liabilities:
Accounts receivable		(1,853	)		(1,611	)
Due from related party		325			(50	)
Inventories		(4,455	)		(2,516	)
Net book value of demonstration inventory sold		150			108
Prepaid expenses and other current assets		1,557			(529	)
Accounts payable		(895	)		927
Due to related party		1,326			279
Accrued expenses		3,417			482
Deferred revenue		1,650			(1,404	)
Other noncurrent liability		35			42
Net cash provided by (used in) operating activities		10,395			(1,389	)
Investing activities:
Purchases of property and equipment		(1,990	)		(1,042	)
Proceeds from the sales and maturities of marketable securities		32,203			66,152
Purchases of marketable securities		(37,150	)		(121,416	)
Decrease (increase) in other noncurrent assets		4			(8	)
Net cash used in investing activities		(6,933	)		(56,314	)
Financing activities:
Payment on short term loan		(168	)		—
Proceeds from exercise of stock options		4,563			158
Tax benefits related to stock options		1,864			164
Payments of initial public offering costs		—			(38	)
Payments on capital lease obligation		(208	)		(171	)
Net cash provided by financing activities		6,051			113
Effect of exchange rate changes on cash and cash equivalents		(91	)		(322	)
Net increase (decrease) in cash and cash equivalents		9,422			(57,912	)
Cash and cash equivalents, beginning of the period		13,690			64,646
Cash and cash equivalents, end of the period	$	23,112		$	6,734
Supplemental cash flow information
Cash paid for interest	$	80		$	53
Cash paid for taxes	$	—		$	1,081
Supplemental noncash investing and financing activities
Assets acquired under capital lease	$	66		$	345

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

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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 and six months ended June 30, 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

     Cynosure follows the provisions of Financial Accounting Standards Board (FASB) Statement No. 123(R),Share-Based Payment, (SFAS 123 (R)). SFAS 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the period. 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 basic and diluted earnings per share by $0.09 and $0.08, respectively, for the three months ended June 30, 2007 and reduced both basic and diluted earnings per share by $0.03 for the three months ended June 30, 2006. Stock-based compensation expense reduced basic and diluted earnings per share by $0.17 and $0.15, respectively, for the six months ended June 30, 2007 and reduced basic and diluted earnings per share by $0.06 and $0.05, respectively, for the six months ended June 30, 2006. The accompanying financial statements reflect stock-based compensation expense of $1,497,000 and $492,000 and related tax benefits of $472,000 and $117,000 for the three months ended June 30, 2007 and 2006, respectively. The accompanying financial statements reflect stock-based compensation expense of $2,847,000 and $790,000 and related tax benefits of $880,000 and $170,000 for the six months ended June 30, 2007 and 2006, respectively. Cynosure capitalized $39,000 and $72,000 of stock-based compensation expense as part of inventory during the three and six months ended June 30, 20007, respectively, and capitalized $5,000 and $14,000 during the three and six months ended June 30, 2006, respectively. Cash received from option exercises was $4,563,000 and $158,000 during the six months ended June 30, 2007 and 2006, respectively. Cynosure recognized $1,864,000 in actual tax benefits from these option exercises during the six months ended June 30, 2007 and recognized $164,000 during the six months ended June 30, 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 295,750 stock options during the six months ended June 30, 2007 and 242,000 during the six months ended June 30, 2006. Cynosure uses the Black-Scholes model to determine the weighted-average fair value of options. The weighted-average fair value of the options granted during the six months ended June 30, 2007 was $14.93 using the following assumptions:

	Six Months Ended
	June 30,
	2007
Risk-free interest rate		4.64% - 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

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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 six months ended June 30, 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:

	June 30,		December 31,
	2007		2006
	(in thousands)
Raw materials	$	1,967	$	1,848
Work in process		830		818
Finished goods		19,347		14,958
	$	22,144	$	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 June 30, 2007 consist of approximately $48.2 million of investments in debt securities consisting of state and municipal bonds and corporate bonds and approximately $138,000 in equity securities. As of June 30, 2007, Cynosure’s equity security consisted of 133,511 shares of common stock of a public company with a fair market value of approximately $138,000. 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 115.

     As of June 30, 2007, Cynosure’s marketable securities consisted of the following (in thousands):

			Amortized		Unrealized		Unrealized
	Market Value		Cost		Gains		Losses
Corporate bonds	$	1,645	$	1,645	$	—	$	—
State and municipal bonds		46,516		46,527		1		(12	)
Equity security		138		270		—		(132	)
	$	48,299	$	48,442	$	1	$	(144	)

     As of June 30, 2007, the Company had 16 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 June 30, 2007.

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     As of June 30, 2007, Cynosure’s debt securities mature as follows (in thousands):

	Maturities
			Less Than		One to
	Total		One Year		Two Years
Corporate bonds	$	1,645	$	1,645	$	—
State and municipal bonds		46,516		43,721		2,795
	$	48,161	$	45,366	$	2,795

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 six months ended June 30, 2007, which is a component of accrued liabilities in the consolidated balance sheet at June 30, 2007:

	June 30,
	2007
	(in thousands)
Warranty accrual, beginning of period	$	2,803
Charged to costs and expenses relating to new sales		1,997
Costs incurred		(1,764	)
Warranty accrual, end of period	$	3,036

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 determining 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				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
	(in thousands)
United States	$	16,197	$	9,625	$	30,276	$	19,203
Europe		7,088		3,936		14,087		8,937
Asia / Pacific		3,662		2,476		6,214		3,875
Other		3,185		2,094		5,632		3,255
Total	$	30,132	$	18,131	$	56,209	$	35,270

Net assets by geographic area are as follows:

	June 30,			December 31,
	2007			2006
	(in thousands)
United States	$	99,430		$	86,815
Europe		2,315			443
Asia / Pacific		255			374
Eliminations		(2,060	)		(1,762	)
Total	$	99,940		$	85,870

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Long-lived assets by geographic area are as follows:

	June 30,		December 31,
	2007		2006
	(in thousands)
United States	$	7,007	$	6,435
Europe		431		316
Asia / Pacific		151		157
Total	$	7,590	$	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 basic 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				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
	(in thousands)
Basic weighted-average number of shares outstanding		11,964		11,044		11,654		11,038
Potential common shares pursuant to stock options		722		1,094		876		1,120
Diluted weighted-average number of shares outstanding		12,686		12,138		12,530		12,158

     During the three months ended June 30, 2007, no shares were considered anti-dilutive and therefore excluded from the calculation of diluted weighted-average shares. During the three months ended June 30, 2006, approximately 237,000 shares were excluded from the calculation of diluted weighted-average shares as the effect would have been anti-dilutive. During the six months ended June 30, 2007 and 2006, approximately, 273,000 and 141,000 shares were excluded from the calculation of diluted weighted-average shares outstanding as the effect would have been anti-dilutive.

Note 8 — Comprehensive Income

     Comprehensive income 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 and six months ended June 30, 2007 and 2006 are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	(in thousands)
Cumulative translation adjustment	$	50		$	25		$	45		$	(95	)
Unrealized loss on marketable securities		(53	)		(28	)		(51	)		(32	)
Total other comprehensive loss		(3	)		(3	)		(6	)		(127	)
Reported net income		2,711			1,441			4,829			2,067
Total comprehensive income	$	2,708		$	1,438		$	4,823		$	1,940

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

7

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 alleged fraud, negligent misrepresentation and other causes of action in connection with our relationship with Sona. In May 2007, the amended complaint was dismissed in its entirety.

     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

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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 six months ended June 30, 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 June 30, 2007, El. En. S.p.A. (El.En.) owned 32% of Cynosure’s outstanding common stock. Purchases of inventory from El.En. during the three months ended June 30, 2007 and 2006 were approximately $2.2 million and $991,000, respectively. Purchases of inventory from El.En. during the six months ended June 30, 2007 and 2006, were approximately $3.7 million and $2.1 million, respectively. As of June 30, 2007 and December 31, 2006, amounts due to related party for these purchases were approximately $2.4 million and $1.1 million, respectively. Amounts due from El.En. as of June 30, 2007 and December 31, 2006 were approximately $10,000 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 and six months ended June 30, 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 six months ended June 30, 2007, the Company recognized $139,000 of interest and penalties in connection with the adoption of FIN 48 and has accrued $139,000 for the payment of such interest and penalties as of June 30, 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.

     As part of an Internal Revenue Service audit, Cynosure discovered in May 2007 that it erroneously claimed an intercompany bad-debt deduction from its German subsidiary of approximately $1.7 million on its 2003 U.S. federal income tax return. The deduction increased the amount of the U,S. net operating loss (NOL) carryforward as of

9

December 31, 2003. During 2004 and 2005, the Company utilized this NOL carryforward to reduce taxable income and also recognized the financial statement benefit through a reduction in its tax provision for those two years. In accordance with SEC Staff Accounting Bulletin (SAB) No. 99 and SAB No. 108, Cynosure assessed the materiality of this error on Cynosure’s financial statements for the years ended December 31, 2004, 2005 and 2006 using both the roll-over method and iron-curtain method as defined in SAB No. 108. Cynosure concluded the effect of this error was not material to Cynosure’s financial statements for the years ended December 31, 2004, 2005 and 2006 and, as such, these financial statements are not materially misstated. Cynosure also concluded that providing for the correction of the error in 2007 would not have a material effect on Cynosure’s financial statements for the year ended December 31, 2007. As such, Cynosure recorded a provision for income taxes of $702,000 during the three months ended June 30, 2007 for the tax liability and related interest required to correct this error.

Note 13 — Recent Accounting Pronouncements

     In February 2007, the FASB 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 SFAS 159 are to be applied prospectively as of January 1, 2008; however early adoption is permitted, subject to certain restrictions, as defined. SFAS 159 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.

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     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.

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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 began 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 six months ended June 30, 2007, we derived approximately 96% of our revenues from sales of our products and 4% of our revenues from service. For the comparable period in 2006, we derived approximately 95% of our revenues from sales of our products and 5% of our revenues from service. Generally, we recognize revenues from the sales of our products upon delivery to our

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customers, revenues from service contracts and extended product warranties ratably over the coverage period and revenues from service in the period in which the service occurs.

     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 sales force. During the six months ended June 30, 2007 and 2006, we derived 37% and 40%, respectively, of our product revenues from sales of our products outside North America. As of June 30, 2007, we had 57 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 six months ended June 30, 2007 and 2006:

	Percentage of Revenues
	Six Months Ended
	June 30,
	2007			2006
Region
North America		60	%		57	%
Europe		25			25
Asia/Pacific		11			12
Other		4			6
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

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     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 (NOL) 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

THREE MONTHS ENDED JUNE 30, 2007 AND 2006

     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 June 30, 2007 and 2006, respectively (in thousands, except for percentages):

	Three Months Ended
	June 30,
	2007					2006
			As a % of					As a % of
			Total					Total			$			%
	Amount		Revenues			Amount		Revenues			Change			Change
Revenues	$	30,132		100	%	$	18,131		100	%	$	12,001			66	%
Cost of revenues		11,068		37			7,541		42			3,527			47
Gross profit		19,064		63			10,590		58			8,474			80
Operating expenses
Sales and marketing		9,875		33			6,149		34			3,726			61
Research and development		1,767		6			1,039		6			728			70
General and administrative		2,933		10			2,031		11			902			44
Total operating expenses		14,575		48			9,219		51			5,356			58
Income from operations		4,489		15			1,371		8			3,118			227
Interest income, net		596		2			731		4			(135	)		(18	)
Other income, net		28		—			276		2			(248	)		(90	)
Income before provision for income taxes and minority interest		5,113		17			2,378		13			2,735			115
Provision for income taxes		2,402		8			915		5			1,487			163
Minority interest in net income of subsidiary		—		—			22		—			(22	)		(100	)
Net income	$	2,711		8	%	$	1,441		8	%	$	1,270			88	%

Revenues

     Revenues in the three months ended June 30, 2007 exceeded revenues in the three months ended June 30, 2006 by $12.0 million or 66%. The increase in revenues was attributable to a number of factors (in thousands, except for percentages):

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	Three Months Ended
	June 30,				$			%
	2007		2006		Change			Change
Product sales in North America	$	16,775	$	9,276	$	7,499			81	%
Product sales outside North America		9,851		6,341		3,510			55
Original equipment manufacturer sales and revenue sharing		277		301		(24	)		(8	)
Parts, accessories and service sales		3,230		2,213		1,017			46
Total Revenues	$	30,132	$	18,131	$	12,001			66	%

• 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 success of our recently introduced newer products, such as theAffirmandSmartliposystems. The increase in North American revenues resulted in part from the continued expansion of our North American sales organization, including the hiring of 26 additional direct sales employees between December 31, 2005 and June 30, 2007.

• Revenues from sales of products outside of North America increased mainly due to an increase in sales in Europe of $2.8 million, or 88%, and an increase in sales in Asia Pacific of $1.1 million, or 60%, 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 decrease of $0.4 million relates to a decrease 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
	June 30,							$		%
	2007				2006			Change		Change
Cost of revenues (in thousands)	$	11,068			$	7,541		$	3,527		47	%
Cost of revenues (as a percentage of total revenues)		37	%			42	%

     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. The 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 offset by royalties incurred on products sold, which we began incurring in October 2006. We derived all of our North American product revenues from direct sales for the three months ended June 30, 2007 and 2006.

Sales and Marketing

	Three Months Ended
	June 30,						$		%
	2007			2006			Change		Change
Sales and marketing (in thousands)	$	9,875		$	6,149		$	3,726		61	%
Sales and marketing (as a percentage of total revenues)		33	%		34	%

     Sales and marketing expenses increased primarily due to an increase of $2.1 million in personnel costs and travel expenses associated with the expansion of our North American direct sales organization and $0.4 million in personnel costs and travel expenses associated with our international subsidiaries. Promotional costs increased $1.0 million, primarily due to an 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
	June 30,						$		%
	2007			2006			Change		Change
Research and development (in thousands)	$	1,767		$	1,039		$	728		70	%
Research and development (as a percentage of total revenues)		6	%		6	%

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     Research and development expenses increased primarily due to an increase in stock-based compensation of $0.5 million.

General and Administrative

	Three Months Ended
	June 30,						$		%
	2007			2006			Change		Change
General and administrative (in thousands)	$	2,933		$	2,031		$	902		44	%
General and administrative (as a percentage of total revenues)		10	%		11	%

     General and administrative expenses increased primarily due to an increase in professional fees of $0.3 million, a $0.2 million increase in our international subsidiaries administrative expenses, an increase in bank charges of $0.1 million and an increase in stock-based compensation of $0.3 million.

Interest Income, net and Other Income, net

	Three Months Ended
	June 30,				$			%
	2007		2006		Change			Change
Interest income, net (in thousands)	$	596	$	731	$	(135	)		(18	)%
Other income, net (in thousands)	$	28	$	276	$	(248	)		(90	)%

     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 second quarter of 2007 compared to the foreign currency remeasurement gains in the second quarter of 2006.

Provision for Income Taxes

	Three Months Ended
	June 30,						$		%
	2007			2006			Change		Change
Provision for income taxes (in thousands)	$	2,402		$	915		$	1,487		163	%
Provision as a % of income before provision for income taxes and minority interest		47	%		38	%

     The increase in our provision for income taxes is primarily attributable to the $2.7 million increase in our income before provision for income taxes and minority interest from $2.4 million in 2006 to $5.1 million in 2007. The increase in our provision as a percentage of income before provision for income taxes is due to a provision for income taxes of $702,000 recorded during the three-months ended June 30, 2007 for an erroneously claimed intercompany bad-debt deduction from our German subsidiary of approximately $1.7 million in our 2003 U.S. federal income tax return which we discovered in May 2007 as part of an Internal Revenue Service audit. The deduction increased the amount of the U.S. NOL carryforward as of December 31, 2003. During 2004 and 2005, we utilized this NOL carryforward to reduce taxable income and also recognized the financial statement benefit through a reduction in its tax provision for those two years. In accordance with SEC Staff Accounting Bulletin (SAB) No. 99 and SAB No. 108, we assessed the materiality of this error on our financial statements for the years ended December 31, 2004, 2005 and 2006 using both the roll-over method and iron-curtain method as defined in SAB No. 108. We concluded the effect of this error was not material to our financial statements for the years ended December 31, 2004, 2005 and 2006 and, as such, these financial statements are not materially misstated. We also concluded that providing for the correction of the error in 2007 would not have a material effect on our financial statements for the year ended December 31, 2007

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SIX MONTHS ENDED JUNE 30, 2007 AND 2006

     The following tables contains selected income statement information, which serves as the basis of the discussion of our results of operations for the six months ended June 30, 2007 and 2006, respectively (in thousands, except for percentages):

	Six Months Ended
	June 30,
	2007					2006
			As a % of					As a % of
			Total					Total			$			%
	Amount		Revenues			Amount		Revenues			Change			Change
Revenues	$	56,209		100	%	$	35,270		100	%	$	20,939			59	%
Cost of revenues		20,990		37			15,573		44			5,417			35
Gross profit		35,219		63			19,697		56			15,522			79
Operating expenses
Sales and marketing		19,137		34			11,607		33			7,530			65
Research and development		3,490		6			2,248		6			1,242			55
General and administrative		5,228		9			4,177		12			1,051			25
Total operating expenses		27,855		49			18,032		51			9,823			54
Income from operations		7,634		14			1,665		5			5,969			358
Interest income, net		1,101		2			1,383		4			(282	)		(20	)
Other income, net		84		—			406		1			(322	)		(79	)
Income before provision for income taxes and minority interest		8,549		16			3,454		10			5,095			148
Provision for income taxes		3,720		7			1,351		4			2,369			175
Minority interest in net income of subsidiary		—		—			36		—			(36	)		(100	)
Net income	$	4,829		9	%	$	2,067		6	%	$	2,762			134	%

Revenues

     Revenues in the six months ended June 30, 2007 exceeded revenues in the six months ended June 30, 2006 by $20.9 million, or 59%. The increase in revenues was attributable to a number of factors (in thousands, except for percentages)

	Six Months Ended
	June 30,				$			%
	2007		2006		Change			Change
Product sales in North America	$	30,954	$	18,131	$	12,823			71	%
Product sales outside North America		18,621		11,928		6,693			56
Original equipment manufacturer sales and revenue sharing		551		575		(24	)		(4	)
Parts, accessories and service sales		6,083		4,636		1,447			31
Total Revenues	$	56,209	$	35,270	$	20,939			59	%

• 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 26 additional direct sales employees between December 31, 2005 and June 30, 2007.

• Revenues from sales of products outside of North America increased mainly due to an increase in sales in Europe of $4.5 million, or 58%, and an increase in sales in Asia Pacific of $2.3 million, or 98%, 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.

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• 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

	Six Months Ended
	June 30,						$		%
	2007			2006			Change		Change
Cost of revenues (in thousands)	$	20,990		$	15,573		$	5,417		35	%
Cost of revenues (as a percentage of total revenues)		37	%		44	%

     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. The increase in gross margin is due to higher average selling prices of our products due to a favorable change in product mix as well as increased direct sales and lower product costs as a result of streamlining our manufacturing approach offset by royalties incurred on products sold, which we began incurring in October 2006. . We derived all of our North American product revenues from direct sales.

Sales and Marketing

	Six Months Ended
	June 30,						$		%
	2007			2006			Change		Change
Sales and marketing (in thousands)	$	19,137		$	11,607		$	7,530		65	%
Sales and marketing (as a percentage of total revenues)		34	%		33	%

     Sales and marketing expenses increased primarily due to an increase of $4.0 million in personnel costs and travel expenses associated with the expansion of our North American direct sales organization and $0.8 million in personnel costs and travel expenses associated with our international subsidiaries. Promotional costs increased $2.2 million, primarily due to our increased number of clinical workshops, trade shows and promotional efforts as well as costs associated with our rebranding initiative. Sales and marketing expenses also increased due to an increase in stock-based compensation of approximately $0.5 million.

Research and Development

	Six Months Ended
	June 30,						$		%
	2007			2006			Change		Change
Research and development (in thousands)	$	3,490		$	2,248		$	1,242		55	%
Research and development (as a percentage of total revenues)		6	%		6	%

     The increase in research and development expenses is primarily due to an increase in stock-based compensation of $0.9 million.

General and Administrative

	Six Months Ended
	June 30,						$		%
	2007			2006			Change		Change
General and administrative (in thousands)	$	5,228		$	4,177		$	1,051		25	%
General and administrative (as a percentage of total revenues)		9	%		12	%

     General and administrative expenses increased primarily due to an increase in stock-based compensation of $0.6 million, an increase of $0.2 million in our international subsidiaries administrative expenses, an increase of $0.1 million in bank charges.

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Interest Income, net and Other Income, net

	Six Months Ended
	June 30,				$			%
	2007		2006		Change			Change
Interest income, net (in thousands)	$	1,101	$	1,383	$	(282	)		(20	)%
Other income, net (in thousands)	$	84	$	406	$	(322	)		(79	)%

     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 2007 compared to the foreign currency remeasurement gains in 2006.

Provision for Income Taxes

	Six Months Ended
	June 30,						$		%
	2007			2006			Change		Change
Provision for income taxes (in thousands)	$	3,720		$	1,351		$	2,369		175	%
Provision as a % of income before provision for income taxes and minority interest		44	%		39	%

     The increase in our provision for income taxes is primarily attributable to the $5.1 million increase in our income before provision for income taxes and minority interest from $3.4 million in 2006 to $8.5 million in 2007. The increase in our provision as a percentage of income before provision for income taxes is due to a provision for income taxes of $702,000 recorded during the three months ended June 30, 2007 for an erroneously claimed intercompany bad-debt deduction from our German subsidiary of approximately $1.7 million in our 2003 U.S. federal income tax return which we discovered in May 2007 as part of an Internal Revenue Service audit. The deduction increased the amount of the U.S. NOL carryforward as of December 31, 2003. During 2004 and 2005, we utilized this NOL carryforward to reduce taxable income and also recognized the financial statement benefit through a reduction in its tax provision for those two years. In accordance with SEC Staff Accounting Bulletin (SAB) No. 99 and SAB No. 108, we assessed the materiality of this error on our financial statements for the years ended December 31, 2004, 2005 and 2006 using both the roll-over method and iron-curtain method as defined in SAB No. 108. We concluded the effect of this error was not material to our financial statements for the years ended December 31, 2004, 2005 and 2006 and, as such, these financial statements are not materially misstated. We also concluded that providing for the correction of the error in 2007 would not have a material effect on our financial statements for the year ended December 31, 2007.

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 June 30, 2007, our cash, cash equivalents and marketable securities were $71.4 million compared to $57.2 million as of December 31, 2006. Our cash and cash equivalents of $23.1 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 $48.3 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.

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     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 $10.4 million for the six months ended June 30, 2007. This resulted primarily from net income for the period of $4.8 million, increased by approximately $4.2 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 $1.3 million principally related to a increase in accrued expenses and deferred revenue of $3.4 million and $1.7 million, respectively, a decrease in prepaid expenses and other current assets of $1.6 million and an increase in amounts due to related party of $1.3 million, offset by an increase in inventory for anticipated future sales and an increase in accounts receivable. Net cash used in investing activities was $6.9 million for the six months ended June 30, 2007, which consisted primarily of the net purchase of $4.9 million of marketable securities and $2.0 million used for fixed asset purchases. Net cash provided by financing activities during the six months ended June 30, 2007 was $6.1 million, principally relating to proceeds from option exercises and tax benefits related to stock options.

     Net cash used in operating activities was $1.4 million for the six months ended June 30, 2006. This resulted primarily from net income for the period of $2.1 million, increased by approximately $1.8 million in depreciation and stock-based compensation expense and decreased by approximately $1.0 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 $4.3 million principally related to an increase in inventory for anticipated future sales. Net cash used in investing activities was $56.3 million for the six months ended June 30, 2006, which consisted primarily of the net purchase of $55.3 million of marketable securities and $1.0 million used for fixed asset purchases. Net cash provided in financing activities during the six months ended June 30, 2006 was $0.1 million, principally relating to proceeds from exercises of stock options.

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 SFAS 159 are to be applied prospectively as of January 1, 2008; however early adoption is permitted, subject to certain restrictions, as defined. SFAS 159 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 and corporate obligations. Each security matures by July 1, 2008. These available-for-sale securities are subject to interest rate risk and will decrease 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 significantly affected by any sudden change in market interest rates on our securities portfolio. The following table provides information about our investment portfolio. For investment

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securities, the table presents principal cash flows (in thousands) and weighted-average interest rates by expected maturity dates.

	Fair Value
	at June 30,
	2007			FY 2007			FY 2008
Investments (at fair value)	$	48,161		$	45,366		$	2,795
Weighted-average interest rate		4.42	%		4.35	%		5.46	%

Foreign Currency Exchange.A significant portion of our operations is conducted in countries other than the United States. Revenues from our international operations that were recorded in U.S. dollars represented approximately 46% of our total international revenues during the six months ended June 30, 2007. Substantially all of the remaining 54% 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 June 30, 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 June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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 alleged fraud, negligent misrepresentation and other causes of action in connection with our relationship with Sona.. In May 2007, the amended complaint was dismissed in its entirety.

     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.

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Item 1A. Risk Factors

     Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below in addition to the other information included in this quarterly report. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall.

     We have not made any material changes to the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2006.

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 SEC 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 June 30, 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 4. Submission of Matters to a Vote of Security Holders

     We held our 2007 Annual Meeting of Stockholders on May 16, 2007. At the 2007 Annual Meeting, our stockholders elected all of the director nominees, approved an amendment to our 2005 Stock Incentive Plan to increase by 450,000 the number of shares of class A common stock reserved for issuance under our 2005 Stock Incentive Plan and ratified the selection of Ernst & Young LLP as our independent registered public accounting firm for 2007.

     Holders of our class A and class B common stock, voting together as a single class, elected Paul F. Kelleher to serve as our class II classified director until our 2010 annual meeting of stockholders and until his successor is elected and qualified. Holders of our class B common stock, voting as a separate class, elected Ettore V. Biagioni, Andrea Cangioli, Leonardo Masotti and George J. Vojta to serve as our class B directors until our 2008 annual meeting and until their successors are elected and qualified. In addition to the directors listed above who were elected at the 2007 Annual Meeting, the terms as directors of Michael R. Davin and Thomas H. Robinson continued after the 2007 Annual Meeting.

     The matters acted upon at the 2007 Annual Meeting, and the voting tabulation for each matter, are as follows:

Proposal 1: To elect one Class II for the next three years (voted on by holders of class A common stock and class B common stock, voting together as a single class):

Nominee	Votes For		Votes Withheld
Paul F. Kelleher		10,446,505		170,374

Proposal 2: To elect four class B directors for the next year (voted on by the holders of class B common stock, voting as a separate class):

Nominee	Votes For		Votes Withheld
Ettore V. Biagioni		3,938,628		0
Andrea Cangioli		3,938,628		0
George J. Vojta		3,938,628		0
Leonardo Masotti		3,938,628		0

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Proposal 3: To amend our 2005 Stock Incentive Plan to increase the number of shares available for grant by 450,000 to 1,288,369 (voted on by holders of class A common stock and class B common stock, voting together as a single class):

Votes For	Votes Against		Abstain
5,404,538		2,646,960		4,275

Proposal 4: To ratify the selection of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2007 (voted on by holders of class A common stock and class B common stock, voting together as a single class):

Votes For	Votes Against		Abstain
10,572,586		38,321		0

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Item 6. 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

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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: August 8, 2007	By:	/s/ Michael R. Davin
		Michael R. Davin
		Chairman, President, Chief Executive Officer
Date: August 8, 2007	By:	/s/ Timothy W. Baker
		Timothy W. Baker
		Executive Vice President, Chief Financial Officer and Treasurer

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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

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