|UNITED STATES
                                    SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

                                                               FORM 10-Q
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ý | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
         For the Quarter Ended September 30, 2009
|- | -----------------------------------------------------------------------------------------------------------------------------------------

|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: 0-22340






PALOMAR MEDICAL TECHNOLOGIES, INC.
|------------------------------------------------------------------------

|A Delaware Corporation | I.R.S Employer Identification No. 04-3128178
|---------------------- | --------------------------------------------

|82 Cambridge Street, Burlington, Massachusetts 01803
Registrant's telephone number, including area code: (781) 993-2300
Securities registered pursuant to Section 12(b) of the Act:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Title of each class
Common Stock, $0.01 par value | Name of each exchange on which registered
NASDAQ -Global Select Market
|------------------------------------------------- | ----------------------------------------------------------------------
|Preferred Stock Purchase Rights                  

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

|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.
  YesýNo
o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
  YesoNo
o




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

|Large accelerated filer o  Accelerated filer  ý   Non-accelerated filer  o  Smaller reporting company  o
(Do not check if a smaller                 reporting company)


Indicate by check mark if the registrant is a shell company, in Rule 12b(2) of the Exchange
Act.  Yeso    No   ý


The number of shares outstanding of the registrant's common stock as of the close of business on
November 2, 2009 was 18,067,989.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|Palomar Medical
Technologies, Inc. and Subsidiaries

Table of Contents
|----------------------------------------------------------------------

|                               |                                                                                                                                    |  | Page No.
|------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------- |  | --------
|PART I - Financial Information |                                                                                                                                    |  |         
|                               |                                                                                                                                    |  |         
|                               |                                                                                                                                    |  |         
|Item 1.                        | Financial Statements                                                                                                               |  |         
|                               | Unaudited Condensed Consolidated Balance Sheets as of
         September 30, 2009 and December 31, 2008                            |  | 3       
|                               | Unaudited Condensed Consolidated Statements of Operations for the periods ended
         September 30, 2009 and September 30, 2008 |  | 4       
|                               | Unaudited Condensed Consolidated Statements of Cash Flows for the periods ended
         September 30, 2009 and September 30, 2008 |  | 5       
|                               | Notes to Unaudited Condensed Consolidated Financial Statements                                                                     |  | 6       
|Item 2.                        | Management's Discussion and Analysis of Financial Condition and the
              Results of Operations                            |  | 19      
|Item 3.                        | Quantitative and Qualitative Disclosures About Market Risk                                                                         |  | 28      
|Item 4.                        | Controls and Procedures                                                                                                            |  | 29      
|                               |                                                                                                                                    |  |         
|PART II - Other Information    |                                                                                                                                    |  |         
|                               |                                                                                                                                    |  |         
|Item 1.                        | Legal Proceedings                                                                                                                  |  | 29      
|Item 1A.                       | Risk Factors                                                                                                                       |  | 32      
|Item 2.                        | Changes in Securities, Use of Proceeds and Issuer Purchases of Securities                                                          |  | 45      
|Item 3.                        | Defaults Upon Senior Securities                                                                                                    |  | 45      
|Item 4.                        | Submission of Matters to a Vote of Security Holders                                                                                |  | 45      
|Item 5.                        | Other Information                                                                                                                  |  | 45      
|Item 6.                        | Exhibits                                                                                                                           |  | 45      
|SIGNATURES                     |                                                                                                                                    |  | 46      

|
|

|Palomar Medical
Technologies, Inc. and Subsidiaries Condensed Consolidated
Balance Sheets (Unaudited)
|-----------------------------------------------------------------------------------------------------

|                                                                   | September 30,
2009 | December 31,
2008 |   |             |  
|------------------------------------------------------------------ | ------------------ | ----------------- | - | ----------- | -
|Assets                                                             |                    |                   |   |             |  
|Current assets                                                     |                    |                  
|Cash and cash equivalents                                          |                    |                   | $ | 109,359,977 |  
|Accounts receivable, net                                           |                    |                   |   | 5,499,647   |  
|Inventories                                                        |                    |                   |   | 12,454,618  |  
|Deferred tax assets                                                |                    |                   |   | 4,365,479   |  
|Other current assets                                               |                    |                   |   | 1,721,407   |  
|                                                                   |                    |                  
|Total current assets                                               |                    |                   |   | 133,401,128 |  
|                                                                   |                    |                  
|Investments, at fair value                                         |                    |                   |   | 4,124,313   |  
|                                                                   |                    |                  
|Property and equipment, net                                        |                    |                   |   | 29,531,908  |  
|                                                                   |                    |                  
|Deferred tax assets                                                |                    |                   |   | 1,356,021   |  
|                                                                   |                    |                  
|Other assets                                                       |                    |                   |   | 6,111       |  
|                                                                   |                    |                  
|Total assets                                                       |                    |                   | $ | 168,419,481 |  
|                                                                   |                    |                  
|Liabilities and Stockholders' Equity                               |                    |                  
|Current liabilities                                                |                    |                  
|Note payable                                                       |                    |                   | $ | --          |  
|Accounts payable                                                   |                    |                   |   | 6,674,096   |  
|Accrued liabilities                                                |                    |                   |   | 8,013,887   |  
|Deferred revenue                                                   |                    |                   |   | 4,115,936   |  
|                                                                   |                    |                  
|Total current liabilities                                          |                    |                   |   | 18,803,919  |  
|                                                                   |                    |                  
|Accrued income taxes                                               |                    |                   |   | 2,830,699   |  
|                                                                   |                    |                  
|Total liabilities                                                  |                    |                   | $ | 21,634,618  |  
|                                                                   |                    |                  
|Commitments and contingencies (Note 14)                            |                    |                  
|Stockholders' equity                                               |                    |                  
|Preferred stock, $0.01 par value-                                  |                    |                  
|Authorized - 1,500,000 shares                                      |                    |                  
|Issued -  none                                                     |                    |                   |   | --          |  
|Common stock, $0.01 par value-                                     |                    |                  
|Authorized - 45,000,000 shares                                     |                    |                  
|Issued - 18,479,345 shares                                         |                    |                   |   | 184,794     |  
|Additional paid-in capital                                         |                    |                   |   | 206,759,047 |  
|Accumulated other comprehensive loss                               |                    |                   |   | (283,628    | )
|Accumulated deficit                                                |                    |                   |   | (54,502,132 | )
|Treasury stock, at cost - 411,356 and 413,255 shares, respectively |                    |                   |   | (5,373,218  | )
|                                                                   |                    |                  
|Total stockholders' equity                                         |                    |                   | $ | 146,784,863 |  
|                                                                   |                    |                  
|Total liabilities and stockholders equity                         |                    |                   | $ | 168,419,481 |  
|                                                                   |                    |                  

|The
accompanying notes to condensed consolidated financial statements.

3
|-------------------------------------------------------------------------

|Palomar Medical
Technologies, Inc. and Subsidiaries Condensed Consolidated
Statements of Operations (Unaudited)
|---------------------------------------------------------------------------------------------------------------

|                                                  | Three Months Ended
September 30, | Nine Months Ended
September 30, |   |           
|------------------------------------------------- | -------------------------------- | ------------------------------- | - | ----------
|
|Revenues                                          |                                  |                                 |   |           
|Product revenues                                  |                                  |                                 | $ | 11,229,156
|Royalty revenues                                  |                                  |                                 |   | 1,264,022 
|Funded product development revenues               |                                  |                                 |   | 806,482   
|Other revenues                                    |                                  |                                 |   | 1,250,000 
|                                                  |                                  |                                 |   |           
|Total revenues                                    |                                  |                                 |   | 14,549,660
|                                                  |                                  |                                 |   |           
|Costs and expenses                                |                                  |                                
|Cost of product revenues                          |                                  |                                 |   | 4,775,259 
|Cost of royalty revenues                          |                                  |                                 |   | 505,609   
|Research and development                          |                                  |                                 |   | 3,305,311 
|Selling and marketing                             |                                  |                                 |   | 4,062,930 
|General and administrative                        |                                  |                                 |   | 2,451,496 
|                                                  |                                  |                                 |   |           
|Total costs and expenses                          |                                  |                                 |   | 15,100,605
|                                                  |                                  |                                 |   |           
|(Loss) income from operations                     |                                  |                                 |   | (550,945  
|Interest income                                   |                                  |                                 |   | 218,169   
|Other income (expense)                            |                                  |                                 |   | 156,941   
|                                                  |                                  |                                 |   |           
|(Loss) income before income taxes                 |                                  |                                 |   | (175,835  
|Provision for (benefit from) income taxes         |                                  |                                 |   | 120,752   
|                                                  |                                  |                                 |   |           
|Net (loss) income                                 |                                  |                                 | $ | (296,587  
|                                                  |                                  |                                 |   |           
|Net (loss) income per share                       |                                  |                                
|Basic                                             |                                  |                                 | $ | (0.02     
|                                                  |                                  |                                 |   |           
|Diluted                                           |                                  |                                 | $ | (0.02     
|                                                  |                                  |                                 |   |           
|Weighted average number of shares outstanding     |                                  |                                
|Basic                                             |                                  |                                 |   | 18,065,655
|                                                  |                                  |                                 |   |           
|Diluted                                           |                                  |                                 |   | 18,065,655
|                                                  |                                  |                                 |   |           
|Comprehensive (loss) income:                      |                                  |                                
|Net (loss) income                                 |                                  |                                 | $ | (296,587  
|Unrealized (loss) gain from marketable securities |                                  |                                 |   | (24,138   
|net of taxes (benefit) of $14,279, $(43,736)      |                                  |                                
|$(119,834) and $80,553, respectively              |                                  |                                
|Foreign currency translation adjustment           |                                  |                                 |   | (24,690   
|                                                  |                                  |                                 |   |           
|Comprehensive (loss) income                       |                                  |                                 | $ | (345,415  
|                                                  |                                  |                                 |   |           

|See accompanying notes to condensed
consolidated financial statements.

4








Palomar Medical
Technologies, Inc. and Subsidiaries Condensed Consolidated
Statements of Cash Flows (Unaudited)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                  | Nine Months Ended
 September 30, | 
|--------------------------------------------------------------------------------- | -------------------------------- | 
|
|Operating activities                                                              |                                  | 
|Net (loss) income                                                                 |                                  | 
|Adjustments to reconcile net (loss) income to net cash from operating activities: |                                  | 
|Depreciation and amortization                                                     |                                  | 
|Stock-based compensation expense                                                  |                                  | 
|Provision for bad debt                                                            |                                  | 
|Inventory write-off                                                               |                                  | 
|Change in deferred tax asset                                                      |                                  | 
|Tax benefit from the exercise of stock options                                    |                                  | 
|Other non-cash items                                                              |                                  | 
|Changes in assets and liabilities:                                                |                                  | 
|Accounts receivable                                                               |                                  | 
|Inventories                                                                       |                                  | 
|Other current assets                                                              |                                  | 
|Other assets                                                                      |                                  | 
|Accounts payable                                                                  |                                  | 
|Accrued liabilities                                                               |                                  | 
|Accrued income taxes                                                              |                                  | 
|Deferred revenue                                                                  |                                  | 
|                                                                                  |                                  | 
|Net cash from operating activities                                                |                                  | 
|                                                                                  |                                  | 
|Investing activities                                                              |                                  | 
|Capital expenditures                                                              |                                  | 
|Purchases of investments                                                          |                                  | 
|Proceeds from sale of investments                                                 |                                  | 
|                                                                                  |                                  | 
|Net cash (used in) from investing activities                                      |                                  | 
|                                                                                  |                                  | 
|Financing activities                                                              |                                  | 
|Proceeds from the exercise of stock options and warrants                          |                                  | 
|Tax benefit from the exercise of stock options                                    |                                  | 
|Costs incurred related to issuance of common stock                                |                                  | 
|Costs incurred related to purchase of stock for treasury                          |                                  | 
|Proceeds from borrowings on credit facility                                       |                                  | 
|Payments on credit facility                                                       |                                  | 
|                                                                                  |                                  | 
|Net cash used in financing activities                                             |                                  | 
|                                                                                  |                                  | 
|                                                                                  |                                  | 
|Effect of exchange rate changes on cash and cash equivalents                      |                                  | 
|                                                                                  |                                  | 
|Net (decrease) increase in cash and cash equivalents                              |                                  | 
|Cash and cash equivalents, beginning of the period                                |                                  | 
|                                                                                  |                                  | 
|Cash and cash equivalents, end of the period                                      |                                  | 
|                                                                                  |                                  | 
|Supplemental disclosure of cash flow information                                  |                                  | 
|Cash paid for income taxes                                                        |                                  | 
|                                                                                  |                                  | 
|Supplemental noncash investing activities                                         |                                  | 
|Unrealized gain on marketable securities, net of taxes                            |                                  | 
|                                                                                  |                                  | 
|                                                                                  |                                  | 

|See accompanying notes to condensed
consolidated financial statements.

5





Palomar Medical
Technologies, Inc. and Subsidiaries Notes to Condensed
Consolidated Financial Statements (Unaudited)


Note 1 -    Basis of presentation



The
accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim
information. The consolidated balance sheet at December 31, 2008 has been derived from the
audited balance sheet at that date; however, the accompanying financial statements do not
include all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The results of operations
for the interim periods shown in this report are not necessarily indicative of expected
results for any future interim period or for the entire fiscal year. We believe that the
quarterly information presented includes all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation in accordance with accounting principles
generally accepted in the United States. The accompanying condensed consolidated financial
statements and notes should be read in conjunction with our Form 10-K for the year ended
December 31, 2008.


In
2009, we reclassified certain balances within current assets. To be consistent with the
2009 presentation, we reclassified certain 2008 balances within current assets in the
accompanying Condensed Consolidated Balance Sheets. The reclassifications had no impact on
previously reported results of operations or cash flow related to operating activities.


We
are required to evaluate events occurring after September 30, 2009, the end of our
third quarter, for recognition and disclosure in the unaudited condensed consolidated
financial statements for the three and nine months ended September 30, 2009. Events
are evaluated based on whether they represent information existing as of
September 30, 2009, which require recognition in the unaudited condensed consolidated
financial statements or new events occurring after September 30, 2009, which do not
require recognition, but require disclosure if the event is significant to the unaudited
condensed consolidated financial statements. We evaluated events occurring subsequent to
September 30, 2009 through November 5, 2009, the date of issuance of these financial
statements. In Note 2, we disclose the stock option exchange and restricted
stock award grant approved by the Board of Directors in October 2009. In Note 10, we
disclose the termination of our Joint Development and License Agreement with Johnson &
Johnson Consumer Companies, Inc.


Note 2 
Stock-based compensation


Our
net loss increased by approximately $0.7 million and $1.9 million for the three and nine
months ended September 30, 2009, respectively, as a result of stock-based compensation
expense. Our net income decreased by $0.8 million and $3.3 million for the three and nine
months ended September 30, 2008, as a result of stock-based compensation expense. The
compensation expense for the three and nine months ended September 30, 2009 increased our
net loss per share by $0.04 and $0.10. The compensation expense for the three and nine
months ended September 30, 2008 decreased our basic and diluted earnings per share by
$0.04 and $0.18, respectively. As of September 30, 2009, there was $6.0 million of
unrecognized compensation expense related to non-vested share awards. The expense is
expected to be recognized over a weighted-average period of 2.1 years.



6


Stock
Options


During
the three and nine months ended September 30, 2009, no options were granted.


The
following table summarizes our stock option activity since December 31, 2008:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | Number of
Shares | Exercise Price  | Weighted
Average
Exercise
Price | Weighted
Average
Remaining
Contractual
Term
(in Years) | Aggregate
Intrinsic
Value
|------------------------------- | ---------------- | --------------- | ------------------------------- | ------------------------------------------------------ | -------------------------
|Outstanding, December 31, 2008  | 3,228,299        | $0.90 - $26.00  | $     15.81                     | 6.88                                                   | $ 2,208,789              
|                                |                  |                 |                                 |                                                        |                          
|                                |                  |                 |                                 |                                                        |                          
|Granted                         | --               | --              | --                              |                                                        |                          
|Exercised                       | (36,899)         | $1.97 - $  8.11 | 3.18                            |                                                        |                          
|Canceled                        | (12,875)         | $13.31 - $16.53 | $     13.56                    
|                                |                  |                 |                                 |                                                        |                          
|Outstanding, September 30, 2009 | 3,178,525        | $0.90 - $26.00  | $     15.96                     | 6.20                                                   | $6,627,629               
|                                |                  |                 |                                 |                                                        |                          
|Exercisable, September 30, 2009 | 2,784,776        | $0.90 - $26.00  | $     16.34                     | 5.89                                                   | $5,485,756               
|                                |                  |                 |                                 |                                                        |                          
|                               

|The total
intrinsic value for stock options exercised during the nine months ended September 30,
2009 and 2008 was $0.3 million and $1.5 million, respectively.


The
following table summarizes information about stock options outstanding as of September 30,
2009:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Options Outstanding | Options Exercisable |            |        |           |       
|------------------- | ------------------- | ---------- | ------ | --------- | ------
|
|$0.90   - $10.72    | 208,367             | 2.35 years | $ 2.41 | 208,367   | $ 2.41
|13.31   -    13.31  | 1,282,500           | 8.41 years | 13.31  | 888,751   | 13.31 
|13.66   -   16.53   | 1,033,158           | 4.60 years | 16.49  | 1,033,158 | 16.49 
|23.61   -   26.00   | 654,500             | 5.60 years | 24.64  | 654,500   | 24.64 
|                    |                     |            |        |           |       
|$0.90   - $26.00    | 3,178,525           | 6.20 years | $15.96 | 2,784,776 | $16.34
|                    |                     |            |        |           |       

|In October 2009, our Board of Directors reviewed our outstanding equity compensation arrangements and
determined to provide our management, employees and directors with appropriate incentives to achieve our
business and financial goals while at the same time minimizing the accounting costs of these incentives
and reducing the overhang caused by stock options that are significantly underwater.  As a result of
this review and determination, in October 2009, our Board approved a stock option exchange program for
some of our significantly underwater options.  As part of this program, during the fourth quarter of
2009 we expect to provide certain employees, officers and directors who were previously granted stock
options for the purchase of a total of 650,500 shares of our common stock with exercise prices of $24.63
and $26.00 per share with the opportunity to amend these options to (i) reduce the number of shares that
are the subject of these options based on a conversion ratio which will not create (or will minimize to
the maximum extent possible) any incremental stock-based compensation expense on the date of amendment
(the Amendment Date), (ii) reduce the exercise price to an amount equal to the closing price of our
common stock on The Nasdaq Global Select Market on the Amendment Date and (iii) extend the expiration
date until 10 years from the Amendment Date. In addition, certain participants in this program will be
granted a number of fully vested shares of restricted common stock under our 2004 Stock Incentive Plan
equal to the difference between the number of shares of common stock that was the subject of the stock
option initially granted under the 2004 Stock Incentive Plan and the number of shares evidenced by the
option following the amendment.  We estimate we will incur a one-time stock-based compensation charge of
between $4 million and $5 million in the fourth quarter of 2009 as a result of these restricted stock
awards.


Stock-Settled
Stock Appreciation Rights


The
granted stock-settled stock appreciation rights (SARs) are awards that allow the recipient
to receive an amount of our common stock equal to the appreciation (if any) in the fair
market value of our common stock on the date of exercise over the initial SAR valuation
set on the date of grant per share of common stock for the number of shares vested. Since
2007, stock-settled SARs were granted and the conversion price was set at 50 percent of
the fair market value of our common stock on the date of grant, and the holders
right to receive shares of common stock under these grants occurs automatically on the
vesting date. The SARs become exercisable over a four-year period with one-third vesting
on the second, third, and fourth anniversaries of the date of grant. The related
compensation expense is being recognized over the four-year period on a straight-line
basis. During the three and nine months ended September 30, 2009, there were 0 and 1,000
stock-settled SARs granted, respectively.






7


On
August 10, 2009, 143,184 SARs which were granted on August 10, 2007 vested. As the fair
market value of our common stock on August 10, 2009 was less than the SARs
conversion price, these SARs expired without any benefit to the grantees.


The
following table summarizes our stock-settled stock appreciation rights activity since
December 31, 2008:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | Number of
Shares | Weighted
Average
Conversion
Price | Weighted
Average
Remaining
Contractual
Term
(in Years) | Aggregate
Intrinsic Value
|------------------------------- | ---------------- | --------------------------------- | ------------------------------------------------------ | -------------------------
|Outstanding, December 31, 2008  | 797,500          | $     11.61                       | 2.17                                                   | $1,240,814               
|                                |                  |                                   |                                                        |                          
|                                |                  |                                   |                                                        |                          
|Granted                         | 1,000            | 5.60                             
|Converted                       | --               | --                                |                                                        |                          
|Canceled                        | (186,784)        | $     13.75                      
|                                |                  |                                   |                                                        |                          
|Outstanding, September 30, 2009 | 611,716          | $     10.95                       | 1.67                                                   | $3,220,114               
|                                |                  |                                   |                                                        |                          
|Vested, September 30, 2009      | --               | --                                | --                                                     | --                       
|                                |                  |                                   |                                                        |                          

|SARs Outstanding |         |            |       
|---------------- | ------- | ---------- | ------
|
|$5.44 - $7.97    | 325,400 | 1.88 years | $ 7.91
|14.40 - 14.40    | 286,316 | 1.36 years | 14.40 
|                 |         |            |       
|$5.44 - $14.40   | 611,716 | 1.67 years | $10.95
|                 |         |            |       

|Warrants


The
following table summarizes our warrant activity since December 31, 2008:
|---------------------------------------------------------------------------------------

|                                | Number of
Shares | Exercise Price | Weighted
Average
Exercise
Price | Weighted
Average
Remaining
Contractual
Term | Aggregate
Intrinsic Value
|------------------------------- | ---------------- | -------------- | ------------------------------- | ------------------------------------------- | -------------------------
|Outstanding, December 31, 2008  | 10,000           | $     2.81     | $2.81                           | 1.43                                        | $87,175                  
|Granted                         | --               | --             | --                             
|Exercised                       | --               | --             | --                             
|Canceled                        | --               | --             | --                             
|                                |                  |                |                                 |                                             |                          
|Outstanding, September 30, 2009 | 10,000           | $     2.81     | $2.81                           | 0.68                                        | $133,975                 
|                                |                  |                |                                 |                                             |                          
|Exercisable, September 30, 2009 | 10,000           | $     2.81     | $2.81                           | 0.68                                        | $133,975                 
|                                |                  |                |                                 |                                             |                          

|The total
intrinsic value for warrants exercised for the nine months ended September 30, 2009 and
2008 were $0 and $815,000, respectively.



8


Note 3  Inventories


Inventories
are valued at the lower of cost (first-in, first-out method) or market, and include
material, labor and manufacturing overhead. At September 30, 2009 and December 31, 2008,
inventories consisted of the following:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                | September 30,
2009 | December 31,
2008
|--------------- | ------------------ | -----------------
|Raw materials   | $  4,887,576       | $  7,757,417     
|                |                    |                  
|Work in process | 1,625,027          | 1,517,400        
|Finished goods  | 5,942,015          | 6,770,908        
|                |                    |                  
|Total           | $12,454,618        | $16,045,725      
|                |                    |                  

|Note 4  Property
and equipment


Property
and equipment are recorded at cost. Repairs and maintenance costs are expensed as
incurred. Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of property and equipment. Land and construction in progress
assets are not depreciated. At September 30, 2009 and December 31, 2008, property and
equipment consisted of the following:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | September 30, 2009 | December 31,2008 | Estimated
useful life                            
|------------------------ | ------------------ | ---------------- | -------------------------------------------------
|Land                     | $   10,680,000     | $   10,680,000   |                                                  
|Machinery and equipment  | 2,100,331          | 2,100,331        | 3-8 years                                        
|Furniture and fixtures   | 3,321,171          | 3,248,093        | 5 years                                          
|Leasehold improvements   | 537,648            | 537,648          | Shorter of estimated useful life or term of lease
|Construction in progress | 18,188,464         | 2,485,864        |                                                  
|                         |                   
|                         | 34,827,614         | 19,051,936       |                                                  
|Accumulated depreciation | (5,295,706)        | (4,826,539)      |                                                  
|                         |                   
|Total                    | $   29,531,908     | $   14,225,397   |                                                  
|                         |                   

|On
November 19, 2008, we purchased land for $10.7 million on which we are building our new
operational facility. Construction of the building is expected to be completed during the
first quarter of 2010. We anticipate that capital expenditures related to the building for
2009 will be approximately $24 million. During the three and nine months ended September
30, 2009, we had $6.3 million and $15.7 million, respectively, of capital expenditures
related to the building. The total cost of the building (exclusive of land) is expected to
be approximately $25 million. We are financing this project by using cash on hand.


Note 5  Warranty
costs


We
typically offer a one year warranty on our base systems. Warranty coverage provided is for
labor and parts necessary to repair the systems during the warranty period. We account for
the estimated warranty cost of the standard warranty coverage as a charge to cost of
revenue when revenue is recognized. The estimated warranty cost is based on units sold,
historical product performance and the cost per repair. We assess the adequacy of the
warranty provision and we may adjust this provision if necessary.



9


The
following table provides the detail of the change in our product warranty accrual, which
is a component of accrued liabilities on the Condensed Consolidated Balance Sheets as of
September 30, 2009 and December 31, 2008:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                   |  |  | September 30,
2009 | December 31,
2008 |   |   |            |  
|-------------------------------------------------- |  |  | ------------------ | ----------------- | - | - | ---------- | -
|Warranty accrual, beginning of year                |  |  | $                  | 856,158           |   | $ | 1,051,432  |  
|Charges to cost and expenses relating to new sales |  |  |                    | 952,768           |   |   | 1,822,196  |  
|Costs of product warranty claims                   |  |  |                    | (1,255,584        | ) |   | (2,017,470 | )
|                                                   |  | 
|Warranty accrual, end of period                    |  |  | $                  | 553,342           |   | $ | 856,158    |  
|                                                   |  | 
|                                                   |  | 

|Note 6  Fair Value
of Financial Instruments


In
September 2006, the FASB issued new guidance on fair value measurements.  This
guidance defines fair value, establishes a framework for measuring fair value and expands
disclosure of fair value measurements.  The guidance applies under other accounting
pronouncements that require or permit fair value measurements and accordingly, does not
require any new fair value measurements.  This guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and we adopted on
January 1, 2008.  In February 2008, the FASB issued an update to the fair value
measurement guidance. This guidance permits the delayed application of the fair value
measurement guidance for all non-recurring fair value measurements of non-financial assets
and non-financial liabilities until fiscal years beginning after November 15, 2008. The
adoption of this guidance had no impact on the Companys consolidated financial
statements.



We
performed an analysis of our investments held at September 30, 2009 to determine the
significance and character of all inputs to their fair value determination. The standard
requires additional disclosures about the inputs used to develop the measurements and the
effect of certain measurements on changes in fair value for each reporting period.


The
FASBs fair value measurement guidance establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into the
following three broad categories.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Level 1  Inputs are unadjusted, quoted prices in active markets for identical assets
or liabilities at the measurement date.
| | - | -----------------------------------------------------------------------------------------------------------------------------

| | o | Level 2  Inputs (other than quoted prices included in Level 1) are either directly
or indirectly observable for the asset or liability through correlation with market data
at the measurement date and for the duration of the instruments anticipated life.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Level 3  Inputs reflect managements best estimate of what market participants
would use in pricing the asset or liability at the measurement date. Consideration is
given to the risk inherent in the valuation technique and the risk inherent in the inputs
to the model.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Fair Value on a Recurring
Basis


Assets
and liabilities measured at fair value on a recurring basis are categorized in the tables
below based upon the lowest level of significant input to the valuations. The following
table presents our assets measured at fair value on a recurring basis as of September 30,
2009 and December 31, 2008.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Assets(In thousands)              | Fair Value as of September 30, 2009 |           |        |       
|--------------------------------- | ----------------------------------- | --------- | ------ | ------
|
|Auction-rate preferred securities | $    --                             | $      -- | $2,622 | $2,622
|Auction-rate municipal securities | --                                  | --        | 1,502  | 1,502 
|                                  |                                     |           |        |       
|Total                             | $    --                             | $      -- | $4,124 | $4,124
|                                  |                                     |           |        |       
|                                  |                                     |           |        |       

|10
|--

|Assets(In thousands)              | Fair Value as of December 31, 2008 |         |        |       
|--------------------------------- | ---------------------------------- | ------- | ------ | ------
|
|Auction-rate preferred securities | $      --                          | $    -- | $3,166 | $3,166
|Auction-rate municipal securities | --                                 | --      | 1,321  | 1,321 
|                                  |                                    |         |        |       
|Total                             | $      --                          | $    -- | $4,487 | $4,487
|                                  |                                    |         |        |       

|At
September 30, 2009, the amortized cost basis of the auction-rate preferred securities and
auction-rate municipal securities were $2.9 million and $1.6 million, respectively. At
December 31, 2008, the amortized cost basis of the auction-rate preferred securities and
auction-rate municipal securities were $3.5 million and $1.6 million, respectively. As
described in more detail below, all of our auction-rate securities have unrealized
temporary losses in accumulated other comprehensive income. We have no
other-than-temporary impairments.


There
is no maturity date of the auction-rate preferred securities while the maturity date for
our auction-rate municipal securities is in December 2045.


Level 3 Gains and Losses


The
table presented below summarizes the change in balance sheet carrying values associated
with Level 3 financial instruments for the nine months ended September 30, 2009.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(In thousands)                    | Auction-rate
preferred securities | Auction-rate
municipal securities | Total
|--------------------------------- | --------------------------------- | --------------------------------- | -----
|Balance at December 31, 2008      |                                   |                                   | $    
|Net payments, purchases and sales |                                   |                                   |      
|Net transfers in/(out)            |                                   |                                   |      
|Gains/(losses)                    |                                   |                                  
|Realized                          |                                   |                                   |      
|Unrealized                        |                                   |                                   |      
|                                  |                                   |                                   |      
|Balance at September 30, 2009     |                                   |                                   | $    
|                                  |                                   |                                   |      

|All
of the above auction-rate securities (ARS) have been in a continuous
unrealized loss position for 12 months or longer. We continue to receive regular dividends
from each of our ARS at current market rates.


Historically,
the ARS market was an active and liquid market where we could purchase and sell our ARS on
a regular basis through auctions. As such, we classified our ARS as Level 1 investments in
accordance with the FASBs guidance at December 31, 2007. Subsequent to December 31,
2007, several of our ARS failed at auction due to a decline in liquidity in the ARS and
other capital markets. We will not be able to access our investments in ARS until future
auctions are successful, ARS are called for redemption by the issuers, or until sold in a
secondary market. As approximately $4.1 million of our investments in ARS currently lack
short-term liquidity, we have classified these investments as non-current investments as
of September 30, 2009.


The fair value of our holdings of ARS at September 30, 2009 was $4.1 million.  To value our
ARS, we determined the present value of the ARS at the balance sheet date by discounting the estimated
future cash flows based on a fair value rate of interest and an expected time horizon to liquidity.  We
also evaluated the credit rating of the issuer and found them all to be investment grade securities.
There was no change in our valuation method during the three months ended September 30, 2009 as compared
to prior reporting periods.  Our valuation analysis showed that our ARS have no credit risk.  The
impairment is due to liquidity risk.  Additionally, as of September 30, 2009, we do not intend to sell
the ARS, it is not more likely than not that we will be required to sell the ARS before recovery of
their amortized cost bases, which may be at maturity, and we expect to recover the full amortized cost
basis of these securities.  As a result of our valuation analysis, our investment strategy, reoccurring
dividend stream from these investments, and our strong cash and cash equivalents position, we have
determined that the fair value of our ARS was temporarily impaired as of September 30, 2009.  For the
three and nine months ended September 30, 2009, we marked to market our ARS and recorded an unrealized
loss of $24,000 and an unrealized gain of $143,000, respectively, net of taxes in accumulated other
comprehensive income in stockholders equity to reflect the cumulative temporary impairment of
approximately $200,000, net of taxes, on our ARS as of September 30, 2009.




11


We
continue to monitor the market for ARS and consider its impact, if any, on the fair value
of our investments. If current market conditions deteriorate further, we may be required
to record additional unrealized losses in accumulated other comprehensive (loss) income.
If the credit rating of the security issuers deteriorates, the anticipated recovery in
market values does not occur, or we stop receiving dividends, we may be required to adjust
the carrying value of these investments through impairment charges in our Consolidated
Statements of Operations.


Note 7  Geographic
information


North
America product revenue was $7.1 million and $12.0 million for the three months ended
September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009
and 2008, North America product revenue was $20.9 million and $37.8 million, respectively.
International product revenue outside North America, consisting of revenue from our
Australian subsidiary, distributors and our sales shipped directly to customers was $4.2
million and $7.2 million for the three months ended September 30, 2009 and 2008,
respectively, while international product revenue for the nine months ended September 30,
2009 and 2008 was $13.9 million and $18.3 million, respectively. The following table
represents the percentage of product revenue by geographic region for the three and nine
months ended September 30, 2009 and 2008:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | Three Months Ended
September 30, | Nine Months Ended
September 30, |        |       
|------------------------- | -------------------------------- | ------------------------------- | ------ | ------
|
|North America             | 62.9%                            | 62.6%                           | 60.1%  | 67.4% 
|Europe                    | 17.0%                            | 18.4%                           | 17.7%  | 15.1% 
|South and Central America | 9.9%                             | 10.1%                           | 7.8%   | 8.6%  
|Asia/Pacific Rim          | 3.2%                             | 3.9%                            | 5.4%   | 4.7%  
|Australia                 | 4.2%                             | 1.7%                            | 5.2%   | 1.2%  
|Middle East               | 2.8%                             | 3.3%                            | 3.8%   | 3.0%  
|                          |                                  |                                 |        |       
|Total                     | 100.0%                           | 100.0%                          | 100.0% | 100.0%
|                          |                                  |                                 |        |       

|Note 8  Net (loss)
income per common share


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



12


A
reconciliation of basic and diluted shares for the three and nine months ended September
30, 2009 and 2008, is as follows:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                | Three Months Ended
September 30, | Nine Months Ended
September 30, |            |           
|----------------------------------------------- | -------------------------------- | ------------------------------- | ---------- | ----------
|
|Basic weighted average number of shares         |                                  |                                 |            |           
|outstanding                                     | 18,065,655                       | 18,091,419                      | 18,058,246 | 18,175,772
|Potential common shares pursuant to stock      
|options, stock appreciation rights and warrants | --                               | 198,576                         | --         | 274,692   
|                                                |                                  |                                 |            |           
|Diluted weighted average number of shares       |                                  |                                 |            |           
|outstanding                                     | 18,065,655                       | 18,289,995                      | 18,058,246 | 18,450,464
|                                                |                                  |                                 |            |           

|For
the three months ended September 30, 2009 and 2008, approximately 2.3 million and 4.1
million, respectively, weighted average options, stock-settled SARs, and warrants to
purchase shares of our common stock were excluded from the computation of diluted earnings
per share because the effect of including the options would have been antidilutive.


Note 9  Development and
License Agreement with The Gillette Company and License Agreement with The Procter &
Gamble Company (and its wholly owned subsidiary The Gillette Company)


Effective
as of February 14, 2003, we entered into a Development and License Agreement (the
Agreement) with Gillette to complete the development and commercialize a
home-use, light-based hair removal device for women. In October 2005, The Procter &
Gamble Company (P&G) (NYSE: PG) completed its acquisition of Gillette.
Under the Agreement, Procter & Gamble, as the acquiring party, assumed all of
Gillettes rights and obligations. The agreement provided for up to $7 million in
support of research and development to be paid by Gillette over approximately 30 months.
Effective as of June 28, 2004, we completed the initial phase of the Agreement and both
parties decided to move onto the next phase. Accompanying this decision, we amended the
Agreement, whereby, Gillette provided $2.1 million in additional development funding to
further technical innovations over a 9-month extension of the development phase, which was
completed on August 31, 2006 (the Development Phase).


On
September 29, 2006, in response to a first decision point in the Agreement, Gillette
decided to continue with the project. On December 8, 2006, over-the-counter clearance was
obtained from the United States Food and Drug Administration for the device and, per the
Agreement, Gillette was obligated to make a development completion payment to us of $2.5
million, which was paid on December 26, 2006. The $2.5 million payment was recorded as
revenue over a 12 month period, as we were obligated to perform additional services to
Gillette during that period in consideration for this payment.


Gillette
was to conduct approximately 12 months of commercial assessment tests with respect to the
device. Based on the commercial assessment tests, Gillette was to decide by January 7,
2008 whether or not to continue with the project (the Launch Decision). On
February 21, 2007, we announced an amendment to our agreement with Gillette to include the
development and commercialization of an additional home-use, light-based hair removal
device for women, and we also announced that we had executed an amended and restated joint
development agreement to incorporate other amendments, including several new amendments to
allow for more open collaboration through commercialization. With regard to the additional
home-use, light-based hair removal device for women, we completed certain development
activities in consultation with Gillette during an eleven month program. Gillette provided
us with $1.2 million and an additional $300,000 upon the completion of certain
deliverables which was recognized over an eleven month period as costs were incurred and
services were provided.


On
December 21, 2007, we announced an agreement with Gillette to extend the Launch Decision
until no later than February 29, 2008. During this extension period, we negotiated with
Gillette and its parent company P&G for a new agreement to replace the existing one.
On February 29, 2008, we entered into a License Agreement with P&G under which we
granted a non-exclusive license to certain patents and technology to commercialize
home-use, light-based hair removal devices for women. This License Agreement terminated
and replaced the prior Development and License Agreement.


13


For
the three months ended September 30, 2009 and 2008, we recognized $0 and $18,000 of funded
product development revenues from P&G and Gillette under the Development and License
Agreement and various other agreements. For the nine months ended September 30, 2009 and
2008, we recognized $0 and $216,000 of funded product development revenues from P&G
and Gillette, respectively, under the Development and License agreement and various other
agreements.


Under
the License Agreement, for each of the three months ended September 30, 2009 and 2008, we
recognized $1.25 million of other revenues from P&G, respectively. In each of the nine
months ended September 30, 2009 and 2008, we recognized $3.75 million of other revenues
from P&G. The $1.25 million payments are quarterly technology transfer payments
(TTP Quarterly Payment as defined in the License Agreement). TTP Quarterly
Payments will be made by P&G during the term of the License Agreement up to and
including the quarter in which P&G launches the first Licensed Product (as defined in
the License Agreement). Thereafter, TTP and royalty payments will be based on product
sales as set forth in the License Agreement. TTPs, including the TTP Quarterly Payments,
are non-creditable and non-refundable and there is no right of offset. As of September 30,
2009 and December 31, 2008, there were $0 and $1.25 million of advance payments received
from P&G for which services were not yet provided were included in deferred revenue,
under the License Agreement.


For
more information, please see the License Agreement filed as Exhibit 10.1 to our Current
Report on Form 8-K filed March 3, 2008, the Development and License Agreement and
subsequent amendments filed as Exhibit 10.1 to our Current Report on Form 8-K filed on
February 19, 2003, Exhibits 99.1, 99.2, and 99.3 to our Current Report on Form 8-K filed
on June 28, 2004, Exhibit 10.30 to our Annual Report on Form 10-K filed on March 6, 2006,
and Exhibits 10.1 and 10.2 to our Current Report on Form 8-K filed on February 21, 2007.


Note 10  Joint
Development and License Agreement with Johnson & Johnson Consumer Companies, Inc.


Effective
as of September 1, 2004, we entered into a Joint Development and License Agreement with
Johnson & Johnson Consumer Companies, Inc. to develop and commercialize home-use,
light-based devices in the fields of (i) reducing or reshaping body fat including
cellulite; (ii) reducing appearance of skin aging; and (iii) reducing or preventing acne.
Under the agreement, Johnson & Johnson funds our research and clinical studies during
an initial proof-of-principle phase. At the end of the proof-of-principle phase, Johnson
& Johnson will decide whether or not to continue with one or more of the devices in
one or more of the fields into a development phase. If Johnson & Johnson decides to
continue, Johnson & Johnson will be obligated to fund the development of the selected
devices.  If Johnson & Johnson decides not to continue, we may proceed in fields
not selected by Johnson & Johnson to develop and commercialize these and other devices
on our own or with a different party.


At
the end of the development phase, Johnson & Johnson will decide whether or not to
commercialize one or more of the devices in one or more fields. If Johnson & Johnson
decides to commercialize one or more of the devices, Johnson & Johnson will make
payments to us for each selected field. Upon commercial launch of the first device in each
selected field, Johnson & Johnson will make a payment to us, and for all devices sold
for use in each selected field, Johnson & Johnson shall pay us a percentage of sales
of such devices and certain topical compounds. If Johnson & Johnson decides not to
commercialize or fails to launch a device, we may proceed in fields not selected by
Johnson & Johnson to develop and commercialize these and other devices on our own or
with a different party.


On
August 22, 2007 and June 29, 2009, we signed amendments to our agreement with Johnson
& Johnson to provide for additional development funding for certain development
activities. Johnson & Johnson will provide us with quarterly payments for these
development activities. We will recognize this revenue as costs are incurred and services
are provided.


14


On
October 16, 2009, we announced the termination of our Joint Development and License
Agreement with Johnson & Johnson Consumer Companies, Inc. Despite having met all of
our deliverables under the agreement, Johnson & Johnson terminated the agreement
referencing the current unfavorable economic conditions as the reason for its decision.
With this decision, Johnson & Johnson avoids having to make a large commercialization
payment to us and avoids having to commit to the significant level of funding required to
successfully launch a new product into the consumer market. For more information, please
see our press release filed as an Exhibit 99.1 to our Current Report on Form 8-K filed
October 16, 2009.


For
the three months ended September 30, 2009 and 2008, we recognized approximately $806,000
and $937,000, respectively, of funded product development revenues from Johnson &
Johnson. For the nine months ended September 30, 2009 and 2008, we recognized
approximately $1.6 million and $1.7 million, respectively, of funded product development
revenues from Johnson & Johnson. As of September 30, 2009 and December 31, 2008,
$199,000 and $726,000, respectively, of advance payments received from Johnson &
Johnson for which services were not yet provided were included in deferred revenue.


For
more information, please see the Joint Development and License Agreement and amendments
filed as Exhibit 99.1 to our Current Report on Form 8-K filed on September 7, 2004,
Exhibit 10.45 to our Quarterly Report on Form 10-Q filed on May 8, 2007, Exhibits 10.47
and 10.48 to our Quarterly Report on Form 10-Q filed on November 2, 2007, and Exhibit
10.71 to this Quarterly Report on Form 10-Q filed on August 5, 2009.


Note 11  Notes
Payable


In
December 2008, we secured access to a revolving note through December 17, 2013. Through
December 16, 2010, we have access to $30 million. The credit limit is subsequently reduced
to $26 million, $22 million, and $18 million on December 17, 2010, December 17, 2011, and
December 17, 2012, respectively. Outstanding balances on the revolving note bear interest
at a rate equal to the sum of the LIBOR Advantage rate plus 0.75% per annum. At September
30, 2009 and December 31, 2008, we had outstanding debt of $0 million and $6 million,
respectively. The average interest rate at December 31, 2008 was 1.22%. The interest
expense was capitalized into Construction in Progress which is a component of Property and
Equipment on the consolidated balance sheets and was immaterial for the three and nine
months ended September 30, 2009. Any outstanding debt is due on December 17, 2013. On
January 2, 2009, we repaid the $6 million borrowed as of December 31, 2008. On July 1,
2009, we repaid the $12 million outstanding as of June 30, 2009. As of September 30, 2009,
we had no debt outstanding.


Our
revolving note requires that we maintain certain financial covenants. In order to be in
compliance with the covenants, unencumbered cash and marketable securities less
outstanding debt must be greater than the credit limit. For all periods in which we had
outstanding debt, we were in compliance with the financial covenants. If we were to
default on our debt, the building would be used as collateral.


Note 12  Income
Taxes


We
provide for income taxes under the liability method in accordance with the FASBs
guidance on accounting for income taxes. Under this guidance, we can only recognize a
deferred tax asset for future benefit of our tax loss, temporary differences and tax
credit carry forwards to the extent that it is more likely than not that these assets will
be realized. In 2008 and 2009, we either expect to, or have incurred operating losses in
foreign jurisdictions. We believe that it is more likely than not that the associated tax
asset will expire prior to utilization. Therefore, in 2008 and 2009, we established a full
valuation allowance on this deferred tax asset.


Each
quarter we assess the likelihood that we will be able to recover our deferred tax assets.
We consider available evidence, both positive and negative, including historical levels of
income, expectations and risks associated with estimates of future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for the
valuation allowance. Although we have determined that a valuation allowance is not
required with respect to our remaining net short-term and long-term deferred tax assets
totaling $5.7 million at September 30, 2009, their recovery is dependent on achieving
future operating income. Failure to achieve future operating income targets or negative
changes to expected trends may change the assessment regarding the recoverability of the
net deferred tax assets and such change could result in a valuation allowance being
recorded against some or all of the deferred tax assets. Any increase in a valuation
allowance would result in additional income tax expense and could have a significant
impact on our earnings in future periods.


15


Additionally,
under the FASBs stock-based compensation guidance, we decreased our deferred tax
assets by $0.9 million in the quarter ended September 30, 2009 due to the expiration of
stock appreciation rights. The adjustment did not impact income tax expense as it was
realized through a decrease to stockholders equity.


At
September 30, 2009, we have $2.8 million of net unrecognized tax benefits, all of which
would affect our effective tax rate if recognized.


We
establish reserves for uncertain tax positions based on managements assessment of
exposure associated with tax deductions, permanent tax differences and tax credits. The
tax reserves are analyzed periodically and adjustments are made, as events occur to
warrant adjustment to the reserve.


We
recognize interest and penalties related to uncertain tax positions in income tax expense.
As of September 30, 2009, we had approximately $36,000 of accrued interest and penalties
related to uncertain tax positions.


The
tax years 2006-2008 remain open to examination by the major taxing jurisdictions to which
we are subject. We file income tax returns in the U.S. federal jurisdiction, and
various state and foreign jurisdictions.


Note 13  Stock
Repurchase Program


On
August 13, 2007, our Board of Directors approved a stock repurchase program under which
our management is authorized to repurchase up to one million shares of our common stock.
The timing and actual number of shares purchased will depend on a variety of factors such
as price, corporate and regulatory requirements, alternative investment opportunities and
other market conditions. Stock repurchases under this program, if any, will be made using
our cash resources, and may be commenced or suspended at any time or from time to time at
managements discretion without prior notice.


The
following table shows our stock repurchase activity since June 30, 2009:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Period                                       | Total
number of
shares
purchased | Average
price paid
per share | Total number of
shares purchased
as part of
publicly
announced program | Maximum
number of
shares that
may yet be
purchased
under
program
|-------------------------------------------- | -------------------------------- | ---------------------------- | ---------------------------------------------------------------------- | ----------------------------------------------------------------
|July 1, 2009 through July 31, 2009           | -                                | -                            | -                                                                      | 324,500                                                         
|August 1, 2009 through August 31, 2009       | -                                | -                            | -                                                                      | 324,500                                                         
|September 1, 2009 through September 30, 2009 | -                                | -                            | -                                                                      | 324,500                                                         
|                                             |                                  |                              |                                                                        |                                                                 
|Total                                        | -                                | -                            | -                                                                      | 324,500                                                         
|                                             |                                  |                              |                                                                        |                                                                 

|Note 14 
Contingencies


Candela Corporation,
Massachusetts Litigation


On
August 9, 2006, we commenced an action for patent infringement against Candela Corporation
in the United States District Court for the District of Massachusetts seeking both
monetary damages and injunctive relief. The complaint alleges Candelas GentleYAG and
GentleLASE systems, which use laser technology for hair removal willfully infringe U.S.
Patent No. 5,735,844 (the '844 patent), which is exclusively licensed to us by
the Massachusetts General Hospital. Candela answered the complaint denying that its
products infringe valid claims of the asserted patent and filing a counterclaim seeking a
declaratory judgment that the asserted patent and U.S. Patent No. 5,595,568 (the
'568 patent) are invalid and not infringed. We filed a reply denying the
material allegations of the counterclaims.

16


We
filed an amended complaint on February 16, 2007 to add the Massachusetts General Hospital
as a plaintiff. In addition, we further alleged that Candelas GentleMAX system
willfully infringes the 844 patent and that Candelas Light Station system
willfully infringes both the 844 and 568 patents. On February 16, 2007,
Candela filed an amended answer to our complaint adding allegations of inequitable
conduct, double patenting and violation of Massachusetts General Laws Chapter 93A. On
February 28, 2007, we filed a response to Candelas amended complaint pointing out
many weaknesses in Candelas allegations. A claim construction hearing, sometimes
called a Markman Hearing, was held August 2, 2007, and we received what we
consider to be a favorable Markman ruling on November 9, 2007.


On
November 17, 2008, the Judge stayed the lawsuit pending the outcome of reexamination
procedures requested by a third party on both the 844 and 568 patents in the
United States Patent and Trademark Office (the Patent Office). On December 9,
2008, Candela also filed requests for reexamination of both patents. Generally, a
reexamination proceeding is one which re-opens patent prosecution to ensure that the
claims in an issued patent are valid over prior art references. On January 16, 2009, we
filed a preliminary amendment to the 844 patent adding new claims 33-59 which depend
from claim 32 and a preliminary amendment to the 568 patent adding new claims 23 and
24 which depend from claim 1. On June 9, 2009, the Patent Office issued an office action
confirming the validity of all claims of the 844 patent except claims 12-14.
Rejecting Candelas and the other companys arguments to the contrary, the
Patent Office confirmed that claims 1-3, 6-8, 11, 17-20, 27, 28, 30, 32 of the 844
patent are valid and patentable. The Patent Office also confirmed new claims 33-59 as
valid and patentable. The Patent Office rejected only independent claim 12 and related
dependent claims 13-14 of the 844 patent as unpatentable. We cancelled claims 12-14
from the 844 patent in order to expedite the reexamination proceeding. Claims 4, 5,
9, 10, 15, 16, 21-26, 29 and 31 are not under reexamination. Consequently, all currently
pending claims are valid. On July 13, 2009, the Patent Office issued a Notice of Intent to
Issue Ex Parte Reexamination Certificate for the 844 patent which will close the
reexamination proceeding on the 844 patent.


On
June 19, 2009, we filed a motion to lift the stay and reopen the lawsuit. Because Candela
has discontinued products which infringe the 568 patent, we dropped our claims of
infringement of the 568 patent from the lawsuit and we agreed to a covenant not to
sue Candela for past infringement under the 568 patent. On July 13, 2009, Candela
filed their opposition to our motion to lift the stay, and on July 17, 2009, we filed our
response to their opposition. We are waiting for the Judge to rule on our motion.


On
August 10, 2006, Candela Corporation commenced an action for patent infringement against
us in the United States District Court for the District of Massachusetts seeking both
monetary damages and injunctive relief. The complaint alleged that our StarLux System with
the LuxV handpiece willfully infringes U.S. Patent No. 6,743,222 which is directed to acne
treatment, that our QYAG5 System willfully infringes U.S. Patent No. 5,312,395 which is
directed to treatment of pigmented lesions, and that our StarLux System with the LuxG
handpiece willfully infringes U.S. Patent No. 6,659,999 which is directed to wrinkle
treatment. On October 25, 2006, Candela filed an amended complaint which did not include
U.S. Patent No. 6,659,999. Consequently, Candela no longer alleges in this lawsuit that
the StarLux System with LuxG handpiece infringes its patents. With regard to the two
remaining patents, Candela is seeking to enjoin us from selling these products in the
United States if we are found to infringe the patents, and to obtain compensatory and
treble damages, reasonable costs and attorneys fees, and other relief as the court
deems just and proper. On October 30, 2006, we answered the complaint denying that our
products infringe the asserted patents and filing counterclaims seeking declaratory
judgments that the asserted patents are invalid and not infringed. In addition, with
regard to U.S. Patent No. 5,312,395, we filed a counterclaim of inequitable conduct.

17


In
February 2008, we filed a request for reexamination and then an amended request for
reexamination of Candelas 222 patent with the United States Patent and
Trademark Office (Patent Office). In our request, we argued that
Candelas 222 patent is unpatentable over our own United States Patent No.
6,605,080 alone or in combination with other prior art. About the same time, we filed a
motion to stay all proceedings in this action related to the 222 patent pending
resolution of the amended request for reexamination of the 222 patent. In March
2008, the Patent Office granted our request for reexamination of the 222 patent. On
June 11, 2008, the Court ordered the parties to report back to the Court after the Patent
Office makes its decision in the reexamination of the 222 patent, after which a
claim construction hearing (i.e., a Markman Hearing) will be scheduled for both the
222 and 395 patents. On June 12, 2008, the parties informed the Court that the
total time the reexamination will remain pending is not known. No trial date has yet been
set. We are defending the action vigorously and believe that we have meritorious defenses
of non-infringement, invalidity and inequitable conduct. However, litigation is
unpredictable and we may not prevail in successfully defending or asserting our position.
If we do not prevail, we may be ordered to pay substantial damages for past sales and an
ongoing royalty for future sales of products found to infringe in the United States. We
could also be ordered to stop selling any products in the United States that are found to
infringe.


Alma Lasers, Inc.,
Delaware Litigation


On
September 11, 2008, Alma Lasers, Inc. filed a complaint requesting a declaratory judgment
that our fractional patent, U.S. Patent No. 6,997,923, is not infringed by Almas
products and is invalid over prior art. Alma served this lawsuit on us on November 6,
2008, and on November 21, 2008, we filed an answer which denied Almas allegations
that the patent is invalid and not infringed. We also filed a counterclaim accusing
Almas Pixel C0(2) Omnifit Fractional C0(2) Handpiece and Pixel
C0(2)Fractional C0(2) Skin Resurfacing System of infringing the
patent. On December 16, 2008, upon the request of both parties, a mediation conference was
scheduled for June 30, 2009 before Magistrate Judge Mary Pat Thynge. On December 18, 2008,
upon the request of both parties, the Judge presiding over the lawsuit, stayed the lawsuit
and later closed the lawsuit pending the outcome of the mediation. Due to unforeseen
circumstances, the mediation scheduled for June 30, 2009 was postponed until October 13,
2009. Following our request, Magistrate Judge Mary Pat Thynge cancelled the mediation on
October 6, 2009. By letter dated October 13, 2009, we asked Judge Farnan to re-open the
case.


Syneron, Inc.,
Massachusetts Litigation


On
November 14, 2008, we commenced an action for patent infringement against Syneron, Inc. in
the United States District Court for the District of Massachusetts seeking both monetary
damages and injunctive relief. The complaint alleges Synerons eLight, eMax, eLaser,
Aurora DS, Polaris DS, Comet and Galaxy Systems, which use light-based technology for hair
removal, willfully infringe U.S. Patent Nos. 5,595,568 and 5,735,844, which are
exclusively licensed to us by the Massachusetts General Hospital. In March 2009, we served
Syneron with this suit. On April 30, 2009, the parties filed a stipulation to stay the
lawsuit pending the outcome of the reexaminations of U.S. Patent Nos. 5,595,568 and
5,735,844.


On
June 9, 2009, the Patent Office issued an office action confirming the validity of all
claims of the 844 patent except claims 12-14. The Patent Office confirmed that
claims 1-3, 6-8, 11, 17-20, 27, 28, 30, 32 of the 844 patent are valid and
patentable. The Patent Office also confirmed new claims 33-59 as valid and patentable. The
Patent Office rejected only independent claim 12 and related dependent claims 13-14 of the
844 patent as unpatentable. We cancelled claims 12-14 from the 844 patent in
order to expedite the reexamination proceeding. Claims 4, 5, 9, 10, 15, 16, 21-26, 29 and
31 are not under reexamination. Consequently, all currently pending claims are valid. On
July 13, 2009, the Patent Office issued a Notice of Intent to Issue Ex Parte Reexamination
Certificate for the 844 patent which will close the reexamination proceeding on the
844 patent.


On
August 14, 2009, the Patent Office issued a Notice of Intent to Issue Ex Parte
Reexamination Certificate for the 568 patent which will close the reexamination
proceeding on the 568 patent. This notice confirmed the validity and patentability
of all the claims of the 568 patent including new claims 23 and 24.

18


On
September 23, 2009, we filed a motion to lift the stay and reopen the lawsuit. On October
6, 2009, Syneron filed their opposition to our motion to lift the stay, and on October 9,
2009, we filed our response to their opposition. We are waiting for the Judge to rule on
our motion.


Tria Beauty, Inc.,
Massachusetts Litigation


On
June 24, 2009, we commenced an action for patent infringement against Tria Beauty, Inc.
(previously named Spectragenics, Inc.), in the United States District Court for the
District of Massachusetts seeking both monetary damages and injunctive relief. The
complaint alleged that the Tria System, which uses light-based technology for hair
removal, willfully infringes U.S. Patent No. 5,735,844, which is exclusively licensed to
us by the Massachusetts General Hospital. Tria answered the complaint denying that its
products infringe valid claims of the asserted patent and filing a counterclaim seeking a
declaratory judgment that the asserted patent is not infringed, is invalid and not
enforceable. We filed a reply denying the material allegations of the counterclaims. On
September 21, 2009, following successful re-examination of U.S. Patent No. 5,595,568 (the
568 patent), we filed a motion to amend our complaint to add a claim for willful
infringement of the 568 patent, which is also exclusively licensed to us by the
Massachusetts General Hospital. Our motion also included adding the Massachusetts General
Hospital as a plaintiff in the lawsuit. Tria did not oppose the motion and the Judge
granted the motion on October 8, 2009.



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


Managements
Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is
designed to provide a reader of our financial statements with a narrative from the
perspective of management. Our MD&A is presented in the following sections:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | Forward-looking statements
| | - |  | --------------------------

| | o |  | Critical accounting policies
| | - |  | ----------------------------

| | o |  | Overview
| | - |  | --------

| | o |  | Results of operations
| | - |  | ---------------------

| | o |  | Liquidity and capital resources
| | - |  | -------------------------------

| | o |  | Off-balance sheet arrangements
| | - |  | ------------------------------

| | o |  | Contractual obligations
| | - |  | -----------------------

|Forward-looking
statements


The
condensed consolidated financial statements of Palomar Medical Technologies, Inc. in this
document present the Companys balance sheet, statement of operations, and statement
of cash flows, and should be read in conjunction with the following discussion and
analysis. References to we, us, our,
Company, and Palomar mean Palomar Medical Technologies, Inc. and
its subsidiaries. This discussion includes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. When used in filings with the
SEC, in our press releases, investor presentations, and in oral statements made by or with
the approval of one of our executive officers, the words or phrases like
expects, anticipates, intends, likely will
result, estimates, projects, or variations of such words and
similar expressions are intended to identify such forward-looking statements. These
forward-looking statements are not guarantees of future performance and are subject to
risks, uncertainties and assumptions, including, among other things, information set forth
in Item 1A. Risk Factors in our Form 10-K for the year ended December 31, 2008 that was
filed with the SEC on March 5, 2009 and in this Form 10-Q. In making these statements, we
are not undertaking to address or update these factors in future filings or communications
regarding our business or results. In light of these risks, uncertainties and assumptions,
the forward-looking events discussed in this document might not occur. There may also be
other risks that we are unable to predict at this time. Any of these risks and
uncertainties may cause actual results to differ materially from the results discussed in
the forward-looking statements.

19


Critical accounting policies


The
discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, bad debts, inventories, investments,
warranty obligations, contingencies and income taxes. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. A
discussion of our critical accounting policies and the related judgments and estimates
affecting the preparation of our consolidated financial statements is included in the
Annual Report on our Form 10-K fiscal year 2008. There have been no material changes to
our critical accounting policies as of September 30, 2009.


Recent Accounting
Pronouncements


In
December 2007, the FASB ratified guidance on accounting for collaborative arrangements.
This guidance focuses on defining a collaborative arrangement as well as the accounting
for transactions between participants in a collaborative arrangement and between the
participants in the arrangement and third parties. The EITF concluded that both types of
transactions should be reported in each participants respective income statement.
This guidance is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years and should be
applied retrospectively to all prior periods presented for all collaborative arrangements
existing as of the effective date.  We adopted this guidance on January 1, 2009. The
adoption of this guidance has not materially impacted our consolidated financial
statements nor do we currently expect a material impact on our future consolidated
financial statements.


In
December 2007, the FASB issued new accounting guidance on business combinations. The new
guidance retains the fundamental requirements of previous guidance, but requires the
recognition of all assets acquired and liabilities assumed in a business combination at
their fair values as of the acquisition date. It also requires the recognition of assets
acquired and liabilities assumed arising from contractual contingencies at their
acquisition date fair values. Additionally, the new guidance supersedes previous guidance
which required research and development assets acquired in a business combination that had
no alternative future use to be measured at their fair values and expensed at the
acquisition date. The new guidance now requires that purchased research and development be
recognized as an intangible asset. We adopted the new guidance on January 1, 2009. As we
had no acquisitions in the three and nine months ended September 30, 2009, the adoption
had no impact on our consolidated financial statements.


In
December 2007, the FASB issued new accounting guidance on noncontrolling interests in
consolidated financial statements. This guidance clarifies the classification of
noncontrolling interests in consolidated statements of financial position and the
accounting for, and reporting of, transactions between the reporting entity and holders of
such noncontrolling interests. Under this guidance, noncontrolling interests are
considered equity and should be reported as an element of consolidated equity. Net income
will encompass the total income of all consolidated subsidiaries, and there will be
separate disclosure on the face of the statement of operations of the attribution of that
income between the controlling and noncontrolling interests; increases and decreases in
the noncontrolling ownership interest amount will be accounted for as equity transactions.
This new guidance is effective for the first annual reporting period beginning on or after
December 15, 2008, and earlier application is prohibited. The guidance is required to
be adopted prospectively, except for reclassifying noncontrolling interests to equity,
separate from the parents shareholders equity, in the consolidated balance
sheets and recasting consolidated net income to include net income attributable to both
the controlling and noncontrolling interests, both of which are required to be adopted
retrospectively. We adopted the new guidance on January 1, 2009. As our subsidiaries are
100% owned, the adoption had no impact on our consolidated financial statements.


In
April 2009, the FASB issued new guidance on interim disclosures about the fair value of
financial instruments. This guidance is effective for interim and annual periods ending
after June 15, 2009. The staff position requires fair value disclosures of financial
instruments on a quarterly basis, as well as new disclosures regarding the methodology and
significant assumptions underlying the fair value measures and any changes to the
methodology and assumptions during the reporting period. We have adopted this guidance and
included the disclosures in our consolidated financial statements.


In
April 2009, the FASB issued new guidance on the recognition and presentation of
other-than-temporary impairments. This guidance is effective for interim and annual
periods ending after June 15, 2009. The new guidance incorporates impairment guidance for
debt securities from various sources of authoritative literature and clarifies the
interaction of the factors that should be considered when determining whether a debt
security is other-than-temporarily impaired. The adoption of this guidance did not
materially impact our consolidated financial statements.


In
April 2009, the FASB issued new guidance on the determination of fair value when the
volume and level of activity for the asset or liability have significantly decreased and
how to identify transactions that are not orderly. This guidance is effective for interim
and annual periods ending after June 15, 2009. The guidance provides additional guidance
for estimating fair value in accordance with the FASBs previous fair value
measurement guidance when the volume and level of activity for the asset or liability have
significantly decreased. It also includes guidance on identifying circumstances that
indicate if a transaction is not orderly (i.e., a forced liquidation or distressed sale).
The adoption of this guidance did not materially impact our consolidated financial
statements.

20


In
May 2009, the FASB issued new guidance on subsequent events which provides guidance
on events that occur after the balance sheet date but prior to the issuance of the
financial statements. The guidance distinguishes events requiring recognition in the
financial statements and those that may require disclosure in the financial statements.
Furthermore, the guidance requires disclosure of the date through which subsequent events
were evaluated. This guidance is effective for interim and annual periods after
June 15, 2009. We have adopted this guidance and have evaluated subsequent events
through November 5, 2009.


In
June 2009, the FASB issued new accounting guidance entitled, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
 a replacement of FASB Statement No. 162 (ASC), which
identifies the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental entities
that are presented in conformity with GAAP. This new guidance is effective for financial
statements issued for interim and annual periods ending after September 15, 2009. The
adoption of this guidance has changed how we reference various elements of GAAP when
preparing our financial statement disclosures, but did not have an impact on our financial
position, results of operations or cash flows.



In September 2009, the FASB issued new accounting guidance entitled, Multiple-Deliverable
Revenue Arrangements a consensus of the FASB Emerging Issues Task Force. It updates the existing
multiple-element revenue arrangements guidance in Emerging Issues Task Forces guidance entitled,
Revenue Arrangements with Multiple Deliverables. The revised guidance primarily provides two significant
changes: 1) eliminates the need for objective and reliable evidence of the fair value for the
undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2)
eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also
expands the disclosure requirements for revenue recognition. The update will be effective for the first
annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that
the revised guidance is retroactively applied to the beginning of the year of adoption. We are currently
assessing the future impact of this new accounting update to our consolidated financial statements.







21


Overview


We
are engaged in research, development, manufacturing and distribution of proprietary
light-based systems for medical and cosmetic treatments. Since our inception, we have been
able to develop a differentiated product mix of light-based systems for various treatments
through our own research and development as well as with our partnerships throughout the
world. We are continually developing and testing new indications and technologies to
further the advancement in light-based treatments.


We
generate our revenues through the sales of our products, royalties derived from sales by
our licensees, and funded product development programs from other companies. Our total
revenues for the three and nine month periods ended September 30, 2009, decreased by 40%
and 37%, respectively, as compared to the same periods in 2008. The global economic
downturn continues to negatively affect our business and the aesthetic device industry as
a whole.


At
September 30, 2009, our balance sheet includes $109.4 million in cash and cash equivalents
and no debt. During the three and nine months ended September 30, 2009, we had $3.6
million and $7.8 million, respectively, of positive cash flow from operations.



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 and nine months ended
September 30, 2009 and 2008, respectively (in thousands, except for percentages):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | Three Months Ended September 30, |  |   |        |   | 
|----------------------------------- | -------------------------------- |  | - | ------ | - | 
|
|
|Revenues                            |                                  |  |   |        |   | 
|Product revenues                    |                                  |  | $ | 11,229 |   | 
|Royalty revenues                    |                                  |  |   | 1,264  |   | 
|Funded product development revenues |                                  |  |   | 806    |   | 
|Other revenues                      |                                  |  |   | 1,250  |   | 
|                                    |                                  |  |   |        |   | 
|Total revenues                      |                                  |  |   | 14,549 |   | 
|                                    |                                  |  |   |        |   | 
|                                    |                                  |  |   |        |   | 
|Cost and expenses                   |                                  | 
|Cost of product revenues            |                                  |  |   | 4,775  |   | 
|Cost of royalty revenues            |                                  |  |   | 506    |   | 
|Research and development            |                                  |  |   | 3,305  |   | 
|Selling and marketing               |                                  |  |   | 4,063  |   | 
|General and administrative          |                                  |  |   | 2,451  |   | 
|                                    |                                  |  |   |        |   | 
|Total cost and expenses             |                                  |  |   | 15,100 |   | 
|                                    |                                  |  |   |        |   | 
|                                    |                                  |  |   |        |   | 
|(Loss) income from operations       |                                  |  |   | (551   | ) | 
|                                    |                                  |  |   |        |   | 
|Interest income                     |                                  |  |   | 218    |   | 
|Other income (expense)              |                                  |  |   | 157    |   | 
|                                    |                                  |  |   |        |   | 
|                                    |                                  |  |   |        |   | 
|(Loss) income before income taxes   |                                  |  |   | (176   | ) | 
|                                    |                                  |  |   |        |   | 
|Provision for income taxes          |                                  |  |   | 121    |   | 
|                                    |                                  |  |   |        |   | 
|Net (loss) income                   |                                  |  | $ | (297   | ) | 
|                                    |                                  |  |   |        |   | 

|22
|--

|                                          | Nine Months Ended September 30, |  |   |        |   | 
|----------------------------------------- | ------------------------------- |  | - | ------ | - | 
|
|
|Revenues                                  |                                 |  |   |        |   | 
|Product revenues                          |                                 |  | $ | 34,824 |   | 
|Royalty revenues                          |                                 |  |   | 4,032  |   | 
|Funded product development revenues       |                                 |  |   | 1,636  |   | 
|Other revenues                            |                                 |  |   | 3,750  |   | 
|                                          |                                 |  |   |        |   | 
|Total revenues                            |                                 |  |   | 44,242 |   | 
|                                          |                                 |  |   |        |   | 
|Cost and expenses                         |                                 | 
|Cost of product revenues                  |                                 |  |   | 15,267 |   | 
|Cost of royalty revenues                  |                                 |  |   | 1,613  |   | 
|Research and development                  |                                 |  |   | 10,125 |   | 
|Selling and marketing                     |                                 |  |   | 13,465 |   | 
|General and administrative                |                                 |  |   | 7,566  |   | 
|                                          |                                 |  |   |        |   | 
|Total cost and expenses                   |                                 |  |   | 48,036 |   | 
|                                          |                                 |  |   |        |   | 
|Loss from operations                      |                                 |  |   | (3,794 | ) | 
|                                          |                                 |  |   |        |   | 
|Interest income                           |                                 |  |   | 552    |   | 
|Other income (loss)                       |                                 |  |   | 507    |   | 
|                                          |                                 |  |   |        |   | 
|(Loss) income before income taxes         |                                 |  |   | (2,735 | ) | 
|                                          |                                 |  |   |        |   | 
|(Benefit from) provision for income taxes |                                 |  |   | (780   | ) | 
|                                          |                                 |  |   |        |   | 
|Net (loss) income                         |                                 |  | $ | (1,955 | ) | 
|                                          |                                 |  |   |        |   | 
|                                          |                                 |  |   |        |   | 

|Product
revenues. Product revenues for the three and nine months ended September
30, 2009 decreased by approximately $8.0 million and $21.3 million, respectively, as
compared to the same periods in 2008 due primarily from the global economic slowdown, a
decrease in consumer confidence and additional tightening of available credit from lending
facilities for our customers. For the three and nine months ended September 30, 2009,
customer service revenue increased by 5% in both periods as compared to the same periods
in 2008. Sales of the StarLux Laser and Pulsed Light Systems, including a base unit and
multiple, optional handpieces and the Aspire body sculpting system were the leading
contributors to our product revenues for the three and nine months ended September 30,
2009 and 2008.


International
product revenue, consisting of revenue from our Australian subsidiary as well as from
distributors in Europe, Asia, the Pacific Rim, and South and Central America and our sales
shipped directly to international customers, was 37% and 40%, respectively, of total
product revenue for the three and nine months ended September 30, 2009 in comparison to
37% and 33%, respectively, for the same periods in 2008.


Royalty
revenues. Royalty revenues decreased for the three and nine months ended
September 30, 2009 in comparison to the same periods in 2008. For the three months ended
September 30, 2009, the decrease is attributed to lower on-going royalty payments from our
licensees. For the nine months ended September 30, 2009, the decrease is attributed to
lower on-going royalty payments from our licensees and the recognition in 2008 of $682,000
in back-owed royalties from a patent settlement agreement with Alma Lasers, Ltd. executed
in 2007 as this amount was determinable based on the completion of an audit by an
independent accounting firm during the first quarter of 2008.


Funded
product development revenues. Funded product development revenues decreased
for the three and nine months ended September 30, 2009, in comparison to the same periods
in 2008. Funded product development revenues were generated from the development
agreements with Johnson & Johnson Consumer Companies, Inc. and Procter & Gamble
(and its wholly owned subsidiary The Gillette Company).
23


For
the three months ended September 30, 2009 and 2008, we recognized $0 and $18,000 of funded
product development revenues from Procter & Gamble (and its wholly owned subsidiary
The Gillette Company). For the nine months ended September 30, 2009 and 2008, we
recognized $0 and $216,000, respectively, of funded product development revenues from
Procter & Gamble (and its wholly owned subsidiary The Gillette Company). The decrease
in funded product development revenue from Procter & Gamble is the result of the
termination of the Development and License Agreement with Gillette in the first quarter of
2008.


For
the three months ended September 30, 2009 and 2008, we recognized $806,000 and $937,000 of
funded product development revenues from Johnson & Johnson.  The funded product
development revenues from Johnson & Johnson in the three and nine months ended
September 30, 2009 and 2008 are provided for in several agreement amendments with Johnson
& Johnson to provide for additional development funding for certain development
activities and a study to test consumer perception of a home-use product which was
completed in the third quarter of 2008. These payments will be recognized as revenue
as costs are incurred and services are provided.  As of September 30, 2009 and
December 31, 2008, $199,000 and $726,000, respectively, of advance payments received from
Johnson & Johnson for which services were not yet provided were included in deferred
revenue.  On October 16, 2009, we announced the termination of our Joint Development
and License Agreement with Johnson & Johnson Consumer Companies, Inc. Despite having
met all of our deliverables under the agreement, Johnson & Johnson terminated the
agreement referencing the current unfavorable economic conditions as the reason for its
decision. With this decision, Johnson & Johnson avoids having to make a large
commercialization payment and avoids having to commit to the significant level of funding
required to successfully launch a new product into the consumer market.


Other
revenues. For the three months ended September 30, 2009 and 2008, we
recognized $1.25 million each period of other revenues, consisting of quarterly payments
relating to a License Agreement with The Procter & Gamble Company (see Note 9). For
the nine months ended September 30, 2009 and 2008, we recognized $3.75 million and $4.0
million, respectively, of other revenues, consisting primarily of quarterly payments
relating to a License Agreement with The Procter & Gamble Company. Other revenues for
the nine months ended September 30, 2008, also include the recognition of the remaining
portion of trade dress infringement fees associated with the Alma Lasers, Ltd. settlement
agreement of $250,000. As of September 30, 2009 and December 31, 2008, $0 and $1.25
million, respectively, of advance payments received from Procter & Gamble for which
services were not yet provided were included in deferred revenue.


Cost of product revenues. For the three months ended September 30, 2009 and
2008, the cost of product revenues as a percentage of total revenues was 33% and 28%,
respectively. For the nine months ended September 30, 2009 and 2008, the cost of product
revenues as a percentage of total revenues was 34% and 28%, respectively. The increase is
due to lower product sales volume which resulted in lower overhead absorption and a shift
in product sales to outside North America between the nine months ended September 30, 2009
and 2008, where we sell the majority of our products at fixed transfer prices to our distributors.


Cost
of royalty revenues. The cost of royalty revenues
decreased for the three and nine months ended September 30, 2009 in comparison to the same
periods in 2008. For the three months ended September 30, 2009, the decrease is attributed
to lower on-going royalty payments from our licensees. For the nine months ended September
30, 2009, the decrease is attributed to lower on-going royalty payments from our licensees
and the recognition in 2008 of $682,000 in back-owed royalties from a patent settlement
agreement with Alma Lasers, Ltd. executed in 2007 as this amount was determinable based on
the completion of an audit by an independent accounting firm during the first quarter of
2008. As a percentage of royalty revenues, the cost of royalty revenues was consistent at
40% in accordance with our license agreement with Massachusetts General Hospital in
comparison to the same periods in 2008.


Research
and development expense. Research and development expense is a direct
result of our spending related to our continued commitment of introducing new technology
as well as enhancing our current family of products.




24


Expenses
relating to the Johnson & Johnson Joint Development and License Agreement (see Note
10) decreased during the three and nine months ended September 30, 2009 by $0.3 million
and $1.0 million, respectively, as compared to the same periods in 2008. The decrease for
the three months ended September 30, 2009 was mainly due to decreases of $122,000 for
clinical expenses, $89,000 for payroll and payroll related expenses, $73,000 for general
overhead expenses, and $35,000 for material costs. The decrease for the nine months ended
September 30, 2009 was mainly due to decreases of $497,000 for payroll and payroll related
expenses, $469,000 for material costs, offset by increases of $12,000 for clinical
expenses and $10,000 for general overhead expenses.


Expenses
for internal research and development projects relating to the introduction of new
products, enhancements made to the current family of products, and research and
development overhead decreased by $0.6 million and $3.1 million for the three and nine
months ended September 30, 2009 as compared to the same periods in 2008. The main drivers
of the decrease in the three and nine months ended September 30, 2009 as compared to the
same periods in 2008 are lower stock-based compensation expense and an overall reduction
of expenses during the global economic slowdown.


Selling
and marketing expense. For the three months ended September 30, 2009,
selling and marketing expense decreased by $1.9 million over the comparable period in
2008. For the three months ended September 30, 2009, factors driving the decrease in
selling and marketing expense were decreases of $1.0 million from commission expense,
$562,000 from payroll and payroll related expenses, and $239,000 from general overhead
expenses as compared to the same period in 2008. For the nine months ended September 30,
2009, selling and marketing expense decreased by $4.9 million over the comparable period
in 2008. For the nine months ended September 30, 2009, factors driving the decrease in
selling and marketing expense were decreases of $2.2 million from commission expense, $1.4
million from general overhead expenses, and $1.4 million from payroll and payroll related
expenses as compared to the same period in 2008. The majority of these decreases in
selling and marketing expenses directly correlate with the decreases we have experienced
in our product revenues as well as our intention to reduce expenses during this difficult
economic period. Expenses related to our foreign subsidiaries totaled approximately $0.4
million in each of the three months ended September 30, 2009 and 2008 and $0.9 million and
$0.7 million, respectively, in the nine months ended September 30, 2009 and 2008.


General
and administrative expense. For the three months
ended September 30, 2009, general and administrative expenses decreased by $3.5 million
over the comparable period in 2008. For the quarter ended September 30, 2009, factors
driving the decrease in general and administrative expense were decreases of $3.8 million
from legal expenses mainly related to patent litigation, $576,000 in general overhead
expenses, and a decrease in bad debt expense of $159,000, offset by an increase of $1.1
million from incentive compensation as compared to the same period in 2008. For the nine
months ended September 30, 2009, general and administrative expenses decreased by $9.7
million over the comparable period in 2008. For the quarter ended September 30, 2009,
factors driving the decrease in general and administrative expense were decreases of $9.9
million from legal expenses mainly related to patent litigation, $1.5 million from payroll
and payroll related expenses which consists mainly of a decrease in stock-based
compensation expense, $1.1 million in general overhead expenses, and a decrease in bad
debt expense of $442,000, offset by an increase of $3.0 million from incentive
compensation as compared to the same period in 2008.


Interest
income.Interest income decreased for the three and
nine months ended September 30, 2009 over the comparable periods in 2008 due to lower
cash, cash equivalents, and investments balances mainly due to the construction of our new
operational facility, lower interest rates and a more conservative investment strategy.
For the nine months ended September 30, 2009 and 2008, we received $0 and $52,000 of
interest, respectively, on back-owed royalty revenues related to the new patent license
agreement with Alma Lasers, Ltd.


Other
income. Other income for the three and nine months ended September 30, 2009
and 2008, includes the foreign exchange gain (loss) resulting from transactions in
currencies other than the U.S. dollar.




25


Provision
for (benefit from) income taxes.  We file income tax returns in
the U.S. federal jurisdiction, and various state and foreign jurisdictions. Effective
January 1, 2007, the Company adopted FIN No. 48, Accounting for Uncertainty in
Income Taxes. Our effective benefit tax rate for the nine months ended September 30,
2009 and 2008 was 29% and 35%, respectively.  We booked an adjustment in the third quarter 2009 which decreased our research credits. This resulted in
an increase to tax expense and decreased our effective tax benefit for the period ended September 30,
2009.


Liquidity and capital
resources


The
following table sets forth, for the periods indicated, a year over year comparison of key
components of our liquidity and capital resources (in thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                | Nine months ended
 September 30, | Change |   |        
|----------------------------------------------- | -------------------------------- | ------ | - | -------
|
|Cash flows from operating activities            |                                  |        | $ | 7,782  
|Cash flows (used in) from investing activities  |                                  |        |   | (15,151
|Cash flows used in financing activities         |                                  |        |   | (5,877 
|Capital expenditures, including construction in |                                  |       
|progress                                        |                                  |        | $ | 15,776 

|Additionally,
our cash, investments, accounts receivable, inventories, working capital, and notes
payable are shown below for the periods indicated (in thousands).
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       | September 30, | December 31, | Change |        
|-------------------------------------- | ------------- | ------------ | ------ | -------
|
|Cash and cash equivalents              |               |              | $      | 109,360
|Accounts receivable, net               |               |              |        | 5,500  
|Inventories, net                       |               |              |        | 12,455 
|Working capital                        |               |              |        | 114,597
|Non-current investments, at fair value |               |              |        | 4,124  
|Notes payable                          |               |              |        | --     

|We believe that our current cash balances and expected future cash flows will be sufficient to meet our
anticipated cash needs for working capital, capital expenditures and other activities for at least the
next twelve months. As of September 30, 2009, we had no debt outstanding.  The $6.0 million of
short-term debt outstanding on December 31, 2008 was repaid during 2009.


At
September 30, 2009, we held $4.1 million in auction-rate securities (ARS). The ARS we
invest in are high quality securities, none of which are mortgage-backed. At December 31,
2007, because of the short-term nature of our investment in these securities, they were
classified as available-for-sale and included in short-term investments on our
consolidated balance sheets. Subsequent to December 31, 2007, our securities failed at
auction due to a decline in liquidity in the ARS and other capital markets. We will not be
able to access our investments in ARS until future auctions are successful, ARS are called
for redemption by the issuers, or until sold in a secondary market. As our investments in
ARS currently lack short-term liquidity, we have reclassified these investments as
non-current as of September 30, 2009. In the nine months ended September 30, 2009, we sold
$625,000 of the ARS held at December 31, 2008.


We
have determined that the fair value of our ARS was temporarily impaired as of September
30, 2009. For the three and nine months ended September 30, 2009, we marked to market our
ARS and recorded an unrealized loss of $24,000 and an unrealized gain of $143,000, respectively, net of taxes in accumulated other comprehensive (loss) income in
stockholders equity to reflect the temporary impairment of our ARS. The recovery of
these investments is based upon market factors which are not within our control. As of
September 30, 2009, we do not intend to sell the ARS and it is not more likely than not
that we will be required to sell the ARS before recovery of their amortized cost bases,
which may be at maturity.


26


Cash flows from operating activities for the nine months ended September 30, 2009, increased
compared to the same period in 2008. This increase in operating activity cash flows reflects a decrease
in working capital requirements, offset by a decrease in profitability, a decrease in tax benefit from
the exercise of stock options, and a decrease in stock compensation expense in the first nine months of
2009, compared to the same period in 2008.  Cash flows related to investing activities decreased for the
nine months ended September 30, 2009, compared to the same period in 2008. These amounts primarily
reflect cash used for purchases of property and equipment, purchases of investments, offset by proceeds
from the sale of investments.  Cash flows used in financing activities increased for the nine month
period ended September 30, 2009, compared to the same period in 2008. This increase was primarily due to
an increase in net payments on outstanding credit facilities and a decrease in tax benefits from stock
option exercises, offset by a decrease in the purchase of treasury shares.


In
December 2008, we secured access to a revolving note through December 17, 2013. Through
December 16, 2010, we have access to $30 million. The credit limit is subsequently reduced
to $26 million, $22 million, and $18 million on December 17, 2010, December 17, 2011, and
December 17, 2012, respectively. Outstanding balances on the revolving note bear interest
at a rate equal to the sum of the LIBOR Advantage rate plus 0.75% per annum. At September
30, 2009 and December 31, 2008, we had outstanding debt of $0 and $6 million. The average
interest rate at December 30, 2008 was 1.22%. The interest expense was capitalized into
Construction in Progress which is a component of Property and Equipment on the
consolidated balance sheets and was immaterial for the three and nine months ended
September 30, 2009. Any outstanding debt is due on December 17, 2013. On January 2, 2009,
we repaid the $6 million borrowed as of December 31, 2008. On July 1, 2009, we repaid the
$12 million outstanding as of June 30, 2009. As of September 30, 2009, we had no debt
outstanding.




Our
revolving note requires that we maintain certain financial covenants. In order to be in
compliance with the covenants, unencumbered cash and marketable securities less
outstanding debt must be greater than the credit limit. For all periods in which we had
outstanding debt, we were in compliance with the financial covenants. If we were to
default on our debt, the building would be used as collateral.


Excluding
the construction of our new operational facility, as discussed below, we anticipate that
capital expenditures relating to machinery and equipment, furniture and fixtures, and
leasehold improvements for the remainder of 2009 will total approximately $200,000. We
expect to finance these expenditures with cash on hand.


On
November 19, 2008, we purchased land for $10.7 million on which we are building our new
operational facility. Construction of the building is expected to be completed during the
first quarter of 2010. We anticipate that capital expenditures related to the building for
2009 will be approximately $24 million. During the three and nine months ended September
30, 2009, we had $6.3 million and $15.7 million of capital expenditures related to the
building. The total cost of the building (exclusive of land) is expected to cost
approximately $25 million. We are financing this project by using cash on hand and drawing
down on our line of credit.


On
August 13, 2007, our Board of Directors approved a stock repurchase program under which
our management is authorized to repurchase up to one million shares of our common stock.
The timing and actual number of shares purchased will depend on a variety of factors such
as price, corporate and regulatory requirements, alternative investment opportunities and
other market conditions. Stock repurchases under this program, if any, will be made using
our cash resources, and may be commenced or suspended at any time or from time to time at
managements discretion without prior notice. During the nine months ended September
30, 2009, we used $258,000 to purchase 35,000 shares of our common stock at an average
price of $7.39.





27


Off-balance sheet
arrangements


We
do not participate in transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as variable
interest or special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. As of September 30, 2009, we were not involved in any unconsolidated
transactions.


Contractual obligations


We
are a party to three patent license agreements with Massachusetts General Hospital whereby
we are obligated to pay royalties to Massachusetts General Hospital for sales of certain
products as well as a percentage of royalties received from third parties. Royalty expense
for the three and nine months ended September 30, 2009 totaled approximately $0.6 million
and $1.9 million, respectively.


For
more information, please see the Amended and Restated License Agreement (MGH Case Nos.
783, 912, 2100), the License Agreement (MGH Case No. 2057) and the License Agreement (MGH
Case No. 1316) filed as Exhibits 10.1, 10.2, and 10.3 to our Current Report on Form 8-K
filed on March 20, 2008.


We
have obligations related to the adoption of FIN 48. Further information about changes in
these obligations can be found in Note 12.


We
are obligated to make future payments under various contracts, including non-cancelable
inventory purchase commitments and our operating lease relating to our Burlington,
Massachusetts manufacturing, research and development and administrative offices.


On
July 30, 2007, we signed an amendment to our Burlington, Massachusetts lease to add an
additional 13,600 square feet. The lease for this facility was to expire in August 2009.
However, we have renegotiated a 12 month lease extension, expiring in August 2010, at an
increase over our current rate to coordinate the timing between construction of our new
facility and the expiration of our current facility lease. Rent expense, including these
lease amendments, will be approximately $1.5 million in 2009.


On
November 19, 2008, we purchased land for $10.7 million on which we are building our new
operational facility. For more information, please see the Purchase and Sale Agreement
filed as Exhibit 10.1 to our Current Report on Form 8-K filed on September 16, 2008.


The
following table summarizes our estimated contractual cash obligations as of September 30,
2009, excluding construction in progress related to our new building, royalty and
employment obligations because they are variable and/or subject to uncertain timing (in
thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   | Payments due by period |        |             |               |             
|---------------------------------- | ---------------------- | ------ | ----------- | ------------- | ------------
|
|Operating leases                   | $1,491                 | $1,491 | $        -- | $          -- | $         --
|Purchase commitments               | 3,499                  | 3,499  | --          | --            | --          
|                                   |                        |        |             |               |             
|Total contractual cash obligations | $4,990                 | $4,990 | $      --   | $          -- | $         --
|                                   |                        |        |             |               |             

|Item 3.  Quantitative and qualitative disclosures about market risk






Market
risk is the potential loss arising from adverse changes in market rates and prices, such
as foreign currency exchange rates, interest rates and a decline in the stock market. The
current turbulence in the U.S. and global financial markets has caused a decline in stock
values across all industries. We are exposed to market risks related to changes in
interest rates and foreign currency exchange rates.




28


Our
investment portfolio of cash equivalents, corporate preferred securities, and municipal
debt securities is subject to interest rate fluctuations, but we believe this risk is
immaterial because of the historically short-term nature of these investments. At
September 30, 2009, we held $4.1 million in auction-rate securities (ARS). The ARS we
invest in are high quality securities, none of which are mortgage-backed. At December 31,
2007, because of the short-term nature of our investment in these securities, they were
classified as available-for-sale and included in short-term investments on our
consolidated balance sheets. Subsequent to December 31, 2007, our securities failed at
auction due to a decline in liquidity in the ARS and other capital markets. We will not be
able to access our investments in ARS until future auctions are successful, ARS are called
for redemption by the issuers, or until sold in a secondary market. As our investments in
ARS currently lack short-term liquidity, we have reclassified these investments as
non-current as of September 30, 2009. In the nine months ended September 30, 2009, we sold
$625,000 of the ARS held at December 31, 2008. The recovery of the remaining $4.1 million
ARS held is based upon market factors which are not within our control.


Our
international subsidiaries in The Netherlands and Australia conduct business in both local
and foreign currencies and therefore, we are exposed to foreign currency exchange risk
resulting from fluctuations in foreign currencies. This risk could adversely impact our
results and financial condition. We have not entered into any foreign currency exchange
and option contracts to reduce our exposure to foreign currency exchange risk and the
corresponding variability in operating results as a result of fluctuations in foreign
currency exchange rates.


Item 4. Controls and
procedures


Under
the direction of the principal executive officer and principal financial officer, we have
evaluated the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2009. Based on that
evaluation, we have concluded that our disclosure controls and procedures were effective.


The
Companys management, including the CEO and CFO, does not expect that our disclosure
controls or internal controls over financial reporting will prevent all errors and all
fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control systems objectives will be met.
Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within
the Company have been detected. These inherent limitations include the realities that
judgments in decision making can be faulty and that individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The design of
any system of controls is based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance
with policies or procedures. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.


There
were no significant changes in our internal controls over financial reporting or in other
factors that could significantly affect these controls during the quarter ended September
30, 2009, including any corrective actions with regard to significant deficiencies and
material weaknesses.


PART II  Other
information


Item
1.    Legal proceedings


Candela Corporation,
Massachusetts Litigation


On
August 9, 2006, we commenced an action for patent infringement against Candela Corporation
in the United States District Court for the District of Massachusetts seeking both
monetary damages and injunctive relief. The complaint alleges Candelas GentleYAG and
GentleLASE systems, which use laser technology for hair removal willfully infringe U.S.
Patent No. 5,735,844 (the '844 patent), which is exclusively licensed to us by
the Massachusetts General Hospital. Candela answered the complaint denying that its
products infringe valid claims of the asserted patent and filing a counterclaim seeking a
declaratory judgment that the asserted patent and U.S. Patent No. 5,595,568 (the
'568 patent) are invalid and not infringed. We filed a reply denying the
material allegations of the counterclaims.




29


We
filed an amended complaint on February 16, 2007 to add the Massachusetts General Hospital
as a plaintiff. In addition, we further alleged that Candelas GentleMAX system
willfully infringes the 844 patent and that Candelas Light Station system
willfully infringes both the 844 and 568 patents. On February 16, 2007,
Candela filed an amended answer to our complaint adding allegations of inequitable
conduct, double patenting and violation of Massachusetts General Laws Chapter 93A. On
February 28, 2007, we filed a response to Candelas amended complaint pointing out
many weaknesses in Candelas allegations. A claim construction hearing, sometimes
called a Markman Hearing, was held August 2, 2007, and we received what we
consider to be a favorable Markman ruling on November 9, 2007.


On
November 17, 2008, the Judge stayed the lawsuit pending the outcome of reexamination
procedures requested by a third party on both the 844 and 568 patents in the
United States Patent and Trademark Office (the Patent Office). On December 9,
2008, Candela also filed requests for reexamination of both patents. Generally, a
reexamination proceeding is one which re-opens patent prosecution to ensure that the
claims in an issued patent are valid over prior art references. On January 16, 2009, we
filed a preliminary amendment to the 844 patent adding new claims 33-59 which depend
from claim 32 and a preliminary amendment to the 568 patent adding new claims 23 and
24 which depend from claim 1. On June 9, 2009, the Patent Office issued an office action
confirming the validity of all claims of the 844 patent except claims 12-14.
Rejecting Candelas and the other companys arguments to the contrary, the
Patent Office confirmed that claims 1-3, 6-8, 11, 17-20, 27, 28, 30, 32 of the 844
patent are valid and patentable. The Patent Office also confirmed new claims 33-59 as
valid and patentable. The Patent Office rejected only independent claim 12 and related
dependent claims 13-14 of the 844 patent as unpatentable. We cancelled claims 12-14
from the 844 patent in order to expedite the reexamination proceeding. Claims 4, 5,
9, 10, 15, 16, 21-26, 29 and 31 are not under reexamination. Consequently, all currently
pending claims are valid. On July 13, 2009, the Patent Office issued a Notice of Intent to
Issue Ex Parte Reexamination Certificate for the 844 patent which will close the
reexamination proceeding on the 844 patent.


On
June 19, 2009, we filed a motion to lift the stay and reopen the lawsuit. Because Candela
has discontinued products which infringe the 568 patent, we dropped our claims of
infringement of the 568 patent from the lawsuit and we agreed to a covenant not to
sue Candela for past infringement under the 568 patent. On July 13, 2009, Candela
filed their opposition to our motion to lift the stay, and on July 17, 2009, we filed our
response to their opposition. We are waiting for the Judge to rule on our motion.


On
August 10, 2006, Candela Corporation commenced an action for patent infringement against
us in the United States District Court for the District of Massachusetts seeking both
monetary damages and injunctive relief. The complaint alleged that our StarLux System with
the LuxV handpiece willfully infringes U.S. Patent No. 6,743,222 which is directed to acne
treatment, that our QYAG5 System willfully infringes U.S. Patent No. 5,312,395 which is
directed to treatment of pigmented lesions, and that our StarLux System with the LuxG
handpiece willfully infringes U.S. Patent No. 6,659,999 which is directed to wrinkle
treatment. On October 25, 2006, Candela filed an amended complaint which did not include
U.S. Patent No. 6,659,999. Consequently, Candela no longer alleges in this lawsuit that
the StarLux System with LuxG handpiece infringes its patents. With regard to the two
remaining patents, Candela is seeking to enjoin us from selling these products in the
United States if we are found to infringe the patents, and to obtain compensatory and
treble damages, reasonable costs and attorneys fees, and other relief as the court
deems just and proper. On October 30, 2006, we answered the complaint denying that our
products infringe the asserted patents and filing counterclaims seeking declaratory
judgments that the asserted patents are invalid and not infringed. In addition, with
regard to U.S. Patent No. 5,312,395, we filed a counterclaim of inequitable conduct.





30


In
February 2008, we filed a request for reexamination and then an amended request for
reexamination of Candelas 222 patent with the United States Patent and
Trademark Office (Patent Office). In our request, we argued that
Candelas 222 patent is unpatentable over our own United States Patent No.
6,605,080 alone or in combination with other prior art. About the same time, we filed a
motion to stay all proceedings in this action related to the 222 patent pending
resolution of the amended request for reexamination of the 222 patent. In March
2008, the Patent Office granted our request for reexamination of the 222 patent. On
June 11, 2008, the Court ordered the parties to report back to the Court after the Patent
Office makes its decision in the reexamination of the 222 patent, after which a
claim construction hearing (i.e., a Markman Hearing) will be scheduled for both the
222 and 395 patents. On June 12, 2008, the parties informed the Court that the
total time the reexamination will remain pending is not known. No trial date has yet been
set. We are defending the action vigorously and believe that we have meritorious defenses
of non-infringement, invalidity and inequitable conduct. However, litigation is
unpredictable and we may not prevail in successfully defending or asserting our position.
If we do not prevail, we may be ordered to pay substantial damages for past sales and an
ongoing royalty for future sales of products found to infringe in the United States. We
could also be ordered to stop selling any products in the United States that are found to
infringe.


Alma Lasers, Inc.,
Delaware Litigation


On
September 11, 2008, Alma Lasers, Inc. filed a complaint requesting a declaratory judgment
that our fractional patent, U.S. Patent No. 6,997,923, is not infringed by Almas
products and is invalid over prior art. Alma served this lawsuit on us on November 6,
2008, and on November 21, 2008, we filed an answer which denied Almas allegations
that the patent is invalid and not infringed. We also filed a counterclaim accusing
Almas Pixel C0(2) Omnifit Fractional C0(2) Handpiece and Pixel
C0(2)Fractional C0(2) Skin Resurfacing System of infringing the
patent. On December 16, 2008, upon the request of both parties, a mediation conference was
scheduled for June 30, 2009 before Magistrate Judge Mary Pat Thynge. On December 18, 2008,
upon the request of both parties, the Judge presiding over the lawsuit, stayed the lawsuit
and later closed the lawsuit pending the outcome of the mediation. Due to unforeseen
circumstances, the mediation scheduled for June 30, 2009 was postponed until October 13,
2009. Following our request, Magistrate Judge Mary Pat Thynge cancelled the mediation on
October 6, 2009. By letter dated October 13, 2009, we asked Judge Farnan to re-open the
case.


Syneron, Inc.,
Massachusetts Litigation


On
November 14, 2008, we commenced an action for patent infringement against Syneron, Inc. in
the United States District Court for the District of Massachusetts seeking both monetary
damages and injunctive relief. The complaint alleges Synerons eLight, eMax, eLaser,
Aurora DS, Polaris DS, Comet and Galaxy Systems, which use light-based technology for hair
removal, willfully infringe U.S. Patent Nos. 5,595,568 and 5,735,844, which are
exclusively licensed to us by the Massachusetts General Hospital. In March 2009, we served
Syneron with this suit. On April 30, 2009, the parties filed a stipulation to stay the
lawsuit pending the outcome of the reexaminations of U.S. Patent Nos. 5,595,568 and
5,735,844.


On
June 9, 2009, the Patent Office issued an office action confirming the validity of all
claims of the 844 patent except claims 12-14. The Patent Office confirmed that
claims 1-3, 6-8, 11, 17-20, 27, 28, 30, 32 of the 844 patent are valid and
patentable. The Patent Office also confirmed new claims 33-59 as valid and patentable. The
Patent Office rejected only independent claim 12 and related dependent claims 13-14 of the
844 patent as unpatentable. We cancelled claims 12-14 from the 844 patent in
order to expedite the reexamination proceeding. Claims 4, 5, 9, 10, 15, 16, 21-26, 29 and
31 are not under reexamination. Consequently, all currently pending claims are valid. On
July 13, 2009, the Patent Office issued a Notice of Intent to Issue Ex Parte Reexamination
Certificate for the 844 patent which will close the reexamination proceeding on the
844 patent.


On
August 14, 2009, the Patent Office issued a Notice of Intent to Issue Ex Parte
Reexamination Certificate for the 568 patent which will close the reexamination
proceeding on the 568 patent. This notice confirmed the validity and patentability
of all the claims of the 568 patent including new claims 23 and 24.


On
September 23, 2009, we filed a motion to lift the stay and reopen the lawsuit. On October
6, 2009, Syneron filed their opposition to our motion to lift the stay, and on October 9,
2009, we filed our response to their opposition. We are waiting for the Judge to rule on
our motion.


31


Tria Beauty, Inc.,
Massachusetts Litigation


On
June 24, 2009, we commenced an action for patent infringement against Tria Beauty, Inc.
(previously named Spectragenics, Inc.), in the United States District Court for the
District of Massachusetts seeking both monetary damages and injunctive relief. The
complaint alleged that the Tria System, which uses light-based technology for hair
removal, willfully infringes U.S. Patent No. 5,735,844, which is exclusively licensed to
us by the Massachusetts General Hospital. Tria answered the complaint denying that its
products infringe valid claims of the asserted patent and filing a counterclaim seeking a
declaratory judgment that the asserted patent is not infringed, is invalid and not
enforceable. We filed a reply denying the material allegations of the counterclaims. On
September 21, 2009, following successful re-examination of U.S. Patent No. 5,595,568 (the
568 patent), we filed a motion to amend our complaint to add a claim for willful
infringement of the 568 patent, which is also exclusively licensed to us by the
Massachusetts General Hospital. Our motion also included adding the Massachusetts General
Hospital as a plaintiff in the lawsuit. Tria did not oppose the motion and the Judge
granted the motion on October 8, 2009.


Item
1A.    Risk Factors


This
report contains forward-looking statements that involve risks and uncertainties, such as
statements of our objectives, expectations and intentions. The risk factors made in this
report should be read as applicable to all forward-looking statements wherever they appear
in this report. Our actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those discussed below,
as well as those discussed elsewhere in this report.


Recent disruptions in the global
economy, the financial markets, and currency markets, as well as government responses to
these disruptions, have adversely impacted our business and results of operations.


Recent
distress in the financial markets has had an adverse impact on the availability of credit
and liquidity resources. Certain preferred lessors are exiting from our industry or
declaring bankruptcy. Prior to selling to a new customer, we require proof of financing.
Many of our customers or potential customers are facing issues gaining access to
sufficient credit, which is resulting in an impairment of their ability to make timely
payments to us or to get financing at all. Lack of availability of consumer credit, a
decrease in consumer confidence, and the general economic downturn is adversely impacting
the market in which we operate. These factors are causing some customers to postpone
buying decisions until economic conditions improve. As a result of recent fluctuations in
currency markets and the strong dollar relative to many other major currencies, our
products priced in United States dollars have been more expensive relative to products of
our foreign competitors, which has resulted in lower sales. In addition, the non-dollar
denominated earnings of our foreign operations has been lower when reported by us in US
dollars. A slowdown in economic activity caused by the recession has reduced worldwide
demand for our products.


Our new Aspire System with
SlimLipo handpiece requires the use of consumable treatment tips and fiber delivery
assemblies. In the future, we may derive substantial revenue from sales of those
consumable components. These products were recently introduced and could fail to generate
significant revenue or achieve market acceptance.


In
April 2008, we launched the Aspire body sculpting system and SlimLipo handpiece. Shipments
began in the third quarter of 2008. The SlimLipo handpiece is our first minimally invasive
product and provides laser-assisted lipolysis. The SlimLipo handpiece requires the use of
consumable, single-use treatment tips and a limited-use fiber delivery assembly. In the
future, we could receive substantial revenue from sales of the Aspire system with SlimLipo
handpiece as well as the consumable components. Our future success will depend on a number
of factors, including our ability to increase and maintain sales of the Aspire system with
SlimLipo handpiece as well as the consumable components. Several competing systems also
require the use of consumable components, while others do not or their consumable
components allow for more usage before needing to be replaced. Competing against such
systems may be more difficult.


32


If third parties are able to
supply our customers with consumable treatment tips and fiber delivery assemblies for the
Aspire system with SlimLipo handpiece, our business could be adversely impacted.


To
ensure the proper operation of our products, our consumable treatment tips and fiber
delivery assemblies are protected by an encryption technology that is designed to
authenticate that the tips are supplied by us or by a supplier authorized by us. It is
possible that a third party may be able to find methods of circumventing our encryption
technology and other technological requirements which ensure that only authorized tips are
used with the Aspire system with SlimLipo handpiece. If a third party is able to supply
consumable treatment tips and fibers to our customers, this could lead to a reduction in
the safety or efficacy of treatments performed with the Aspire system and SlimLipo
handpiece as we cannot control the quality or operation of such third party products. This
could lead to an increase in product liability lawsuits, damage the Aspire brand, and
result in loss of confidence in our products. In addition, such third party supply of
consumable treatment tips and fibers to our customers could result in a reduction in the
rate of sales and price of consumable treatment tips and fiber delivery assemblies.


We have limited experience
manufacturing the Aspire system, SlimLipo handpiece and consumable treatment tips and
fiber laser assemblies in commercial quantities, which could adversely impact our
business.


We
began manufacturing our Aspire system, SlimLipo handpiece and consumable treatment tips
and fiber delivery assemblies during the second half of 2008. Because we have only limited
experience in manufacturing in commercial quantities, we may encounter unforeseen
situations that would result in delays or shortfalls. We face significant challenges and
risk in manufacturing the Aspire laser system, SlimLipo handpiece and consumable treatment
tips and fibers, including that production processes may have to change to accommodate any
significant future expansion of our manufacturing operations and growth; key components
are currently provided by a single supplier or limited number of suppliers, and we do not
maintain large inventory levels of these components; and we have limited experience
manufacturing the Aspire system, SlimLipo handpiece and consumable treatment tips and
fiber delivery assemblies in compliance with FDAs Quality System Regulation. If we
are unable to keep up with or generate demand for the Aspire system, SlimLipo handpiece
and consumable components, our revenue could be impaired, market acceptance for the Aspire
system, SlimLipo handpiece and consumable components could be adversely affected and our
customers might instead purchase competitors products.


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 light-based (both lasers and lamps) 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. We compete in the development, manufacture, marketing, sales
and servicing of light-based devices with numerous other companies, some of which have
substantially greater direct worldwide sales capabilities. Our products also face
competition from medical treatments and products, prescription drugs and cosmetic topicals
and procedures, such as electrolysis and waxing.


We may not be successful in
commercializing home-use, light-based devices on our own or with third parties. Managing
the development and launch of home-use, light-based devices on our own or with third
parties diverts the attention of key technical personnel and management from the
professional business.   If we are unsuccessful, it could have a material
adverse impact on our business and our stock price could fall.


One
of our goals is to commercialize home-use, light-based devices on our own, and our future
growth is largely dependent on our ability to do so. In the future, we could receive
substantial revenue from sales of home-use, light-based devices as well as any consumable
components sold for use therewith. Our success will depend on a number of factors,
including our ability to successfully launch home-use, light-based devices, the timing of
such commercial launches and the market acceptance of such consumer products. Our ability
may be adversely affected by difficulties or delays in bringing home-use, light-based
devices to market, the inability to obtain or enforce intellectual property protection,
and market acceptance of our new products. Many of our competitors have publicly announced
their intent to enter the consumer market. Competing against such systems may be
difficult. Significant resources and the attention of key technical personnel and
management have been and will likely continue to be directed to the development and
commercialization of home-use devices.  There are no guarantees that any of our
home-use products will prove to be commercially successful. If we are not successful, our
business could be adversely impacted and the price of our common stock could fall.


33


Our
past Development and License Agreement with The Gillette Company (now a wholly owned
subsidiary of Procter & Gamble Company) was replaced by a non-exclusive License
Agreement with Procter & Gamble in February 2008. During the term of the agreement,
Procter & Gamble has the ability to choose not to continue and may terminate the
non-exclusive License Agreement. If Procter & Gamble should terminate their
non-exclusive License Agreement with us, we will not receive certain payments, including
the TTP Quarterly Payments of $1.25 million, and the price of our common stock could fall
significantly. If Procter & Gamble continues through commercialization of such
devices, Procter & Gamble are to pay us a percentage of net sales of such devices.
Certain of these percentages of net sales are only owed if the devices are covered by
valid patents.  There can be no assurance that valid patents will cover the devices
in any or all countries, in which the devices will be manufactured, used or sold. In
addition, a certain portion of the proceeds received on such sales may be owed to
Massachusetts General Hospital.  This could have a material adverse effect on our
business, results of operations and financial condition.


We
cannot be sure that Procter & Gamble/Gillette or any future third party development
partner will agree with our interpretation of the terms of the agreements, that the
agreements will provide us with marketable products in the future or that we will receive
payments for any of the products developed under the agreements.



Our products are
subject to numerous medical device regulations. Compliance is expensive and
time-consuming. Without necessary clearances, we may be unable to sell products and
compete effectively.


All
of our current products are light-based devices, which are subject to FDA regulations for
clinical testing, manufacturing, labeling, sale, distribution and promotion. Before a new
product or a new use of or claim for an existing product can be marketed in the United
States, we must obtain clearance from the FDA. In the event that we do not obtain FDA
clearances, our ability to market products in the United States and revenue derived
therefrom may be adversely affected.  The types of medical devices that we seek to
market in the U.S. generally must receive either 510(k) clearance or PMA
approval in advance from the FDA pursuant to the Federal Food, Drug, and Cosmetic
Act. The FDAs 510(k) clearance process can be expensive and usually takes from three
to twelve months, but it can last longer. The process of obtaining PMA approval is much
more costly and uncertain and generally takes from one to three years or even longer from
the time the pre-market approval application is submitted to the FDA until an approval is
obtained.


In
order to obtain pre-market 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:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | o |  | patients may not comply with trial protocols;
| | - |  | ---------------------------------------------

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

|34
|--

| | o |  | 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | o |  | 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | governmental regulations may change
or administrative actions may occur that cause delays; and
| | - |  | ----------------------------------------------------------------------------------------------

| | o |  | 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 pre-market approval of new
products, new intended uses or modifications to existing products. Our clearances can be
revoked if safety or effectiveness problems develop.


To
date, the FDA has deemed our products eligible for the 510(k) clearance process. We
believe that our products in development will receive similar treatment. However, we
cannot be sure that the FDA will not impose the more burdensome PMA approval process upon
one or more of our future products, nor can we be sure that 510(k) clearance or PMA
approval will ever be obtained for any product we propose to market, and our failure to do
so could adversely affect our ability to sell our products.


We
often seek FDA clearance for additional indications for use. Clinical trials in support of
such clearances for additional indications may be costly and time-consuming. In the event
that we do not obtain additional FDA clearances, our ability to market products in the
United States and revenue derived therefrom may be adversely affected. Medical devices may
be marketed only for the indications for which they are approved or cleared, and if we are
found to be marketing our products for off-label, or non-approved, uses we might be
subject to FDA enforcement action or have other resulting liability.


Our
products are subject to similar regulations in many international markets. Complying with
these regulations is necessary for our strategy of expanding the markets for sales of our
products into these countries. Compliance with the regulatory clearance process in any
country is expensive and time consuming.  Regulatory clearances may necessitate
clinical testing, limitations on the number of sales and limitations on the type of end
user, among other things.  In certain instances, these constraints can delay planned
shipment schedules as design and engineering modifications are made in response to
regulatory concerns and requests.  We may not be able to obtain clearances in each
country in a timely fashion or at all, and our failure to do so could adversely affect our
ability to sell our products in those countries.


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 we must maintain records of other
corrections or removals. The FDA closely regulates promotion and advertising and our
promotional and advertising activities could come under scrutiny. 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.


35


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:
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| | o |  | letters, warning letters, fines,
injunctions, consent decrees and civil penalties;
| | - |  | ----------------------------------------------------------------------------------

| | o |  | repair, replacement, refunds, recall
or seizure of our products; o operating restrictions or partial suspension or total
shutdown of production;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | refusing or delaying our requests for 510(k) clearance or
pre-market approval of new products or new intended uses; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------

| | o |  | criminal prosecution.
| | - |  | ---------------------

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


We have modified some of our
products and sold them under prior 510(k) clearances. The FDA could retroactively decide
the modifications required new 510(k) clearances and require us to cease marketing and/or
recall the modified products.


Any
modification to one of our 510(k) 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. We may be required to submit pre-clinical and clinical
data depending on the nature of the changes. We may not be able to obtain additional
510(k) clearances or pre-market 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 into the market in a timely manner, which in turn would harm our revenue and
operating results. We have modified some of our marketed devices, but we believe that new
510(k) clearances are not required. We cannot be certain that the FDA would agree with any
of our decisions not to seek 510(k) clearance. If the FDA requires us to seek 510(k)
clearance for any modification, we also may be required to cease marketing and/or recall
the modified device until we obtain a new 510(k) clearance.


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 may also be subject to state
regulations.   State regulations, and changes to state regulations, may prevent
sales to particular end users or may restrict use of the products to particular end users
or under particular supervision which may decrease revenues or prevent growth of revenues.


Our
products may also be subject to state regulations.   Federal regulation allows
our products to be sold to and used by licensed practitioners as determined on a
state-by-state basis which complicates monitoring compliance. As a result, in some states
non-physicians may purchase and operate our products. In most states, it is within a
physicians discretion to determine whom they can supervise in the operation of our
products and the level of supervision. However, some states have specific regulations as
to appropriate supervision and who may be supervised. A state could disagree with our
decision to sell to a particular type of end user or change regulations to prevent sales
to particular types of end users or change regulations as to supervision requirements. In
several states, applicable regulations are in flux.  Thus, state regulations and
changes to state regulations may decrease revenues or prevent growth of revenues.


36


Because we do not require training
for all 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 state law. 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. Our products come with an
operators manual. 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.


Achieving complete compliance with
FDA regulations is difficult, and if we fail to comply, we could be subject to FDA
enforcement action or our business could suffer.


We
are subject to inspection and market surveillance by the FDA to determine compliance with
regulatory requirements. The FDAs regulatory scheme is complex, especially the
Quality System Regulation, which requires manufacturers to follow elaborate design,
testing, control, documentation, and other quality assurance procedures. Because some of
our products involve the use of lasers, those 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 Quality System Regulation and laser performance standards through periodic unannounced
inspections. We have been, and anticipate in the future being, subject to such
inspections. The complexity of the Quality System Regulation makes complete compliance
difficult to achieve. Also, the determination as to whether a Quality System Regulation
violation has occurred is often subjective. If the FDA finds that we have failed to comply
with the Quality System Regulation or other applicable requirements or failed to take
satisfactory corrective action in response to an adverse Quality System Regulation
inspection or comply with applicable laser performance standards, the agency can institute
a wide variety of enforcement actions, including a public warning letter or other stronger
remedies, such as fines, injunctions, criminal and civil penalties, recall or seizure of
our products, operating  restrictions, partial suspension, or total shutdown of our
production, refusing to permit the import or export of our products, delaying or refusing
our requests for 510(k) clearance or PMA approval of new products, withdrawing product
approvals already granted or criminal prosecution, any of which could cause our business
and operating results to suffer.


We purchased land and began
construction of a new operational facility during the fourth quarter of 2008. We are in
the process of coordinating the transition from the current facility to the new facility.
During this process, our operations may be disrupted during the move to our new facility
and our business and operating results could be harmed.


In
the fourth quarter of 2008, we closed on the purchase of land for $10.7 million and
entered into a construction management agreement for construction of a new operational
facility on that land at a guaranteed maximum price of $23.5 million. We began
construction in the fourth quarter of 2008. The lease for this facility was to expire in
August 2009. However, we have negotiated a 12 month lease extension, expiring in August
2010, at an increase over our current rate to coordinate the timing between the
construction of our new facility and the expiration of our current facility lease. During
this time, we may incur many issues which would negatively affect our business and
operating results, including:
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| | o |  | higher rental expenses after the
lease on our current operational facility expires;
| | - |  | -----------------------------------------------------------------------------------

| | o |  | permitting difficulties for our new
operational facility;
| | - |  | ---------------------------------------------------------

| | o |  | construction cost overruns; and
| | - |  | -------------------------------

| | o |  | disruption of operations during
the move from our current facility to our new operational  facility.
| | - |  | ----------------------------------------------------------------------------------------------------

|37


Our effective income tax
rate may vary significantly.


Unanticipated
changes in our tax rates could affect our future results of operations. Our future
effective tax rates could be unfavorably affected by changing interpretations of existing
tax laws or regulations, changes in estimates of prior years items, changes in our
deferred tax assets and related valuation allowances, future levels of research and
development spending, stock option grants, deductions for employee stock option exercises
being different than what we projected, and changes in overall levels of income before
taxes.


We may not be able to
realize our deferred tax assets.


Although
we have generated a profit in recent years, we incurred losses during 2008 and the first
nine months of 2009. We have a history of losses. If we do not achieve a certain amount of
profitability in the near future, it may be more likely than not that we will not be able
to realize some or all of our deferred tax assets. If we are unable to realize some or all of
our deferred tax assets, we could have a significant charge to our statement of operations
which would affect our profitability.


Failure to manage our
relationships with third party researchers effectively may limit our access to new
technology, increase the cost of licensing new technology, and divert management attention
from our core business.


We
are dependent upon third-party researchers over whom we do not have absolute control to
satisfactorily conduct and complete research on our behalf.  We are also dependent
upon third-party researchers to grant us licensing terms, which may or may not be
favorable, for products and technology they may develop. We provide research funding,
light technology and optics know-how in return for licensing rights with respect to
specific dermatologic and cosmetic applications and patents. In return for certain
exclusive license rights, we are subject to due diligence obligations in order to maintain
such exclusivity.  Our success will be dependent upon the results of research with
our partners and meeting due diligence obligations. We cannot be sure that third-party
researchers will agree with our interpretation of the terms of our agreements, that we
will meet our due diligence obligations, or that such research agreements will provide us
with marketable products in the future or that any of the products developed under these
agreements will be profitable for us.


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
continue to increase. We believe, and our growth expectations assume, that we and other
companies selling light-based (lasers and lamps) 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.


38


If there is not sufficient
consumer 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 client. As a result, the decision to undergo a
procedure that utilizes our products may be influenced by a number of factors, including:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | consumer awareness of and demand for procedures and treatments;
| | - |  | ---------------------------------------------------------------

| | o |  | the cost, safety and effectiveness of the procedure and of alternative treatments;
| | - |  | ----------------------------------------------------------------------------------

| | o |  | the success of our and our customers' sales and marketing efforts to purchasers of these
                  procedures; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------

| | o |  | consumer confidence, which may be affected by short-term or long-term economic and other
                  conditions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------

|If
there is not sufficient demand for the procedures performed with our products, a weakening
in the economy, or other factors, practitioner demand for our products may be reduced or
buying decisions postponed, which would adversely affect our operating results.


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


We
have experienced rapid change in the scope of our operations and the industry in which we
operate. This change has placed significant demands on our management, as well as our
financial and operational resources. If we do not effectively manage the changing market
and its effect on our business, 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 change, we will need to continue to:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | implement appropriate operational,
financial and management controls, systems and procedures;
| | - |  | ---------------------------------------------------------------------------------------------

| | o |  | change our manufacturing
capacity and scale of production;
| | - |  | ----------------------------------------------------------

| | o |  | change our sales, marketing and distribution
infrastructure and capabilities; and
| | - |  | ---------------------------------------------------------------------------------

| | o |  | provide adequate training and supervision to
maintain high quality standards.
| | - |  | -----------------------------------------------------------------------------

|Failure to receive shipments of
critical components could reduce revenues and reduced reliability of critical components
could increase expenses.


We develop light-based systems that incorporate third-party components and we purchase
some of these components from small, specialized vendors that are not well capitalized. We
do not have long-term contracts with some of these third parties for the supply of parts.
A disruption in the delivery of these key components, 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 or testing services could prevent us
from manufacturing products and result in a decrease in revenue.  We depend on an
acceptable level of reliability for purchased components.  Reliability below
expectations for key components could have an adverse affect on inventory and inventory
reserves. Any extended interruption in our supplies of third-party components could
materially harm our business.


We forecast sales to determine
requirements for components and materials used in our products and if our forecasts are
incorrect, we may experience either delays in shipments or increased inventory costs.


39


To
manage our manufacturing operations with our suppliers, we forecast anticipated product
orders and material requirements to predict our inventory needs and enter into purchase
orders on the basis of these requirements. Our limited historical experience may not
provide us with enough data to accurately predict future demand. If our business expands,
our demand for components and materials would increase and our suppliers may be unable to
meet our demand. If we overestimate our component and material requirements, we will have
excess inventories, which would increase our expenses. If we underestimate our component
and material requirements, we may have inadequate inventories, which could interrupt,
delay, or prevent delivery of our products to our customers.


Our proprietary technology has
only limited protections which may not prevent competitors from copying our new
developments.  This may impair our ability to compete effectively.  We may
expend significant resources enforcing our intellectual property rights to prevent such
copying, and our intellectual property could be determined to be not infringed, invalid or
unenforceable.


Our
business could be materially and adversely affected if we are not able to adequately
protect our intellectual property rights. We rely on a combination of patent, copyright,
trademark and trade secret laws, licenses and confidentiality agreements to protect our
proprietary rights. We own and license a variety of patents and patent applications in the
United States and corresponding patents and patent applications in many foreign
jurisdictions. 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.


We
have granted certain patent licenses to several competitors, and in return for those
license grants, we receive a significant ongoing royalty revenue stream.  A few of
these competitors entered into license agreements only after we sued them for patent
infringement.  We are currently enforcing certain of our patents against Candela
Corporation, Syneron, Inc., Tria Beauty, Inc. and Alma Lasers, Ltd. and intend to enforce
against other competitors in the future.  We do not know how successful we will be in
asserting our patents against Candela, Syneron, Tria, Alma or other suspected infringers.


Whether
or not we are successful in the pending lawsuits, litigation consumes substantial amounts
of our financial resources and diverts managements attention away from our core
business. Public announcements concerning this litigation that are unfavorable to us may
in the future result in significant declines in our stock price. An adverse ruling or
judgment in this matter could result in a loss of our significant ongoing royalty revenue
stream and could also have a material adverse effect on license agreements with other
companies both of which could have a material adverse effect on our business and results
of operation and cause our stock price to decline significantly.  (For more
information about our patent litigation, see Part II, Item 1 Legal Proceedings.)


In
addition to patented technology, we rely upon unpatented proprietary technology, processes
and know-how. We generally enter into agreements with our employees and third parties with
whom we work, including but not limited to consultants and vendors, to restrict access to,
and distribution of, our proprietary information and define our intellectual property
ownership rights. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our technology, proprietary
information and know-how and we may not have adequate remedies for any such breach.
Monitoring unauthorized use of our technology is difficult and we cannot be certain that
the steps we have taken will prevent unauthorized use of our technology, particularly in
foreign countries where the laws may not protect our proprietary rights as fully as in the
United States. If competitors are able to use our technology, our ability to compete
effectively could be harmed and the value of our technology and products could be
adversely affected.  Costly and time consuming lawsuits may be necessary to enforce
and defend patents issued or licensed exclusively to us, to protect our trade secrets
and/or know-how or to determine the enforceability, scope and validity of others
intellectual property rights. Such lawsuits may result in patents issued or licensed
exclusively to us to be found invalid and unenforceable.  In addition, our trade
secrets may otherwise become known or our competitors also may independently develop
technologies that are substantially equivalent or superior to our technology and which do
not infringe our patents.


40


Claims by others that our products
infringe their patents or other intellectual property rights could prevent us from
manufacturing and selling some of our products or require us to pay royalties or incur
substantial costs from litigation or development of non-infringing technology.


In recent years, there has been significant litigation in the United States involving
patents and other intellectual property rights.  The light-based cosmetic and
dermatology industry in particular is characterized by a large number of patents and
related litigation regarding patents and other intellectual property rights. Because our
resources are limited and patent applications are maintained in secrecy for a period of
time, we can conduct only limited searches to determine whether our technology infringes
any patents or patent applications. Any claims for patent infringement, regardless of
merit, could be time-consuming, result in costly litigation and diversion of technical and
management personnel, cause shipment delays, require us to develop non-infringing
technology or to enter into royalty or licensing agreements. 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. Although patent and
intellectual property disputes in the light-based industry have often been settled through
licensing or similar arrangements, costs associated with such arrangements may be
substantial and often require the payment of ongoing royalties, which could have a
negative impact on gross margins. There can be no assurance that necessary licenses would
be available to us on satisfactory terms, or that we could redesign our products or
processes to avoid infringement, if necessary. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses could
prevent us from manufacturing and selling some of our products. This could have a material
adverse effect on our business, results of operations and financial condition.


Candela
Corporation has one pending patent infringement lawsuit against us. (For more information
about our patent litigation, see Part II, Item 1 Legal Proceedings.) Litigation with
Candela is expected to be expensive and protracted, and our intellectual property position
may be weakened as a result of an adverse ruling or judgment. Whether or not we are
successful in the pending lawsuit, litigation consumes substantial amounts of our
financial resources and diverts managements attention away from our core business.
Public announcements concerning this litigation that are unfavorable to us may in the
future result in significant declines in our stock price. An adverse ruling or judgment in
this matter could cause our stock price to decline significantly.


We may not be able to successfully
collect licensing royalties.


Material portions of our revenues consist of royalties from sub-licensing patents licensed
to us on an exclusive basis by Massachusetts General Hospital. If we are unable to collect
our licensing royalties, our revenues will decline.


Quarterly revenue or operating results could cause the price of our common stock to fall.


Our quarterly revenue and operating results are difficult to predict and may swing sharply
from quarter to quarter.  If our quarterly revenue or operating results fall
below the expectations of investors or public market analysts, the price of our common
stock could fall substantially. Our quarterly revenue is difficult to forecast for many
reasons, some of which are outside of our control.  For example, many factors are
related to market supply and demand, including potential increases in the level and
intensity of price competition between our competitors and us, potential decrease in
demand for our products and possible delays in market acceptance of our new
products.  Other factors are related to our customers and include changes in or
extensions of our customers budgeting and purchasing cycles and changes in the
timing of product sales in anticipation of new product introductions or enhancements by us
or our competitors.   Factors related to our operations may also cause quarterly
revenue or operating results to fall below expectations, including our effectiveness in
our manufacturing process, unsatisfactory performance of our distribution channels,
service providers, or customer support organizations, and timing of any acquisitions and
related costs.


The expense and potential
unavailability of liability insurance coverage for our customers could adversely affect
our ability to sell our products and our financial condition.


41


Some
of our customers and prospective customers have had difficulty in procuring or maintaining
liability insurance to cover their operation and use of our products. Medical malpractice
carriers are withdrawing coverage in some states or substantially increasing premiums. If
this trend continues or worsens, our customers may discontinue using our products, and
potential customers may elect not to purchase laser and other light-based products.


We may be unable to attract and
retain key executives and research and development personnel that we need to succeed.


As a small company with approximately 200 employees, our success depends on the services
of key employees in executive and research and development positions. The loss of the
services of one or more of these employees could have a material adverse effect on our
business.  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.


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. Furthermore, in the event that any of our
products prove to be defectively designed and manufactured, we may be required to recall
and redesign such products. 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 face risks associated with
product warranties.


We
could incur substantial costs as a result of product failures for which we are responsible
under warranty obligations.


Because we derive a significant
amount of our revenue from international sales, we are susceptible to currency
fluctuations, long payment cycles, credit risks and other risks associated with conducting
business overseas.


We sell a significant amount of our products and services outside the United States. 
International product revenue consists of sales from our Australian subsidiary,
distributors in Japan, Europe, Asia, the Pacific Rim, and South and Central America and
sales shipped directly to international locations from the United States. We expect that
international sales will continue to be significant.  As a result, a major part of
our revenues and operating results could be adversely affected by risks associated with
international sales, including but not limited to political and economic instability and
difficulties in managing our foreign operations.  In particular, longer payment
cycles common in foreign markets, credit risk and delays in obtaining necessary import or
foreign certification or regulatory approvals for products may occur.  In addition,
significant fluctuations in the exchange rates between the U.S. dollar and foreign
currencies could cause us to lower our prices and thus reduce our profitability, or could
cause prospective customers to push out orders to later dates because of the increased
relative cost of our products in the aftermath of a currency devaluation or currency
fluctuation.



42


We are subject to fluctuations in
the exchange rate of the U.S. dollar and foreign currencies.


We
do not actively hedge our exposure to currency rate fluctuations. While we transact
business primarily in U.S. dollars, and a significant proportion of our revenue is
denominated in U.S. dollars, a portion of our costs and revenue is denominated in other
currencies, such as the Euro and Australian dollar. As a result, changes in the exchange
rates of these currencies to the U.S. dollar will affect our net income.


To successfully grow our
international presence, we must address many issues with which we have little or no
experience. We may not be able to properly manage our foreign subsidiaries which may have
an adverse effect on our business and operating results.


We
have two international subsidiaries which are located in The Netherlands and Australia. In
managing foreign operations, we must address many issues with which we have little or no
experience which exposes our business to additional risk. Our foreign operations redirect
managements time from other operating issues. We may not be successful in operating
our foreign subsidiaries. If we are unsuccessful in managing our foreign subsidiaries, the
foreign subsidiaries could be unprofitable and negatively impact our resources and
financial position.


We may not be able to sustain or
increase profitability and we may seek additional financing to grow the business.


Although we have generated a profit in recent years, we incurred losses during 2008 and
the first nine months of 2009. We have a history of losses. We may not be able to regain,
sustain or increase profitability on a quarterly or annual basis due to many factors
including lower demand for our products by practitioners, including practitioners
postponing their buying decisions due to the weakening economy, the tightening of the
credit market, and other factors. If our operating results fall below the expectations of
investors or public market analysts, the price of our common stock could decline.


We
may determine, depending upon the opportunities available, to seek additional debt or
equity financing to fund the costs of expansion.  Additionally, if we incur
indebtedness to fund increased levels of accounts receivable, finance the acquisition of
capital equipment, or if we issue debt securities in connection with any acquisition we
will be subject to risks associated with incurring substantial additional indebtedness.


The liquidity and market value of
our investments may decrease.


As
of September 30, 2009, we held approximately $4.1 million of auction-rate securities.
Recently, there have been disruptions in the market for auction-rate securities related to
liquidity which has caused substantially all auctions to fail. All of our securities held
as of September 30, 2009 failed in their last auction. We will not be able to access our
investments in ARS until future auctions are successful, ARS are called for redemption by
the issuers, or until we sell the securities in a secondary market. In the event that we
are unable to sell the underlying securities at or above par, these securities may not
provide us a liquid source of cash in the future. At September 30, 2009, due to the
uncertainty and illiquidity in this market, we have classified our auction-rate securities
as non-current assets and have recorded a cumulative unrealized loss of $0.2 million, net
of taxes in accumulated other comprehensive (loss) income. The recovery of these
investments is based upon market factors which are not within our control. As of September
30, 2009, we do not intend to sell the ARS and it is not more likely than not that we will
be required to sell the ARS before recovery of their amortized cost bases, which may be at
maturity.


Our common stock could be further
diluted by the conversion of outstanding options, warrants, and stock appreciation rights.


In
the past, we have issued and still have outstanding convertible securities in the form of
options, warrants and stock appreciation rights.  We may continue to issue options,
warrants, stock appreciation rights, and other equity rights as compensation for services
and incentive compensation for our employees, directors and consultants or others who
provide services to us. We have a substantial number of shares of common stock reserved
for issuance upon the conversion and exercise of these securities. Such a conversion would
dilute our stockholders and could adversely affect the market price of our common stock.


43


Our charter documents, Delaware
law and our shareholder rights plan may discourage potential takeover attempts.


Our Second Restated Certificate of Incorporation and our By-laws contain provisions that
could discourage takeover attempts or make more difficult the acquisition of a substantial
block of our common stock. Our By-laws require a stockholder to provide to our Secretary
advance notice of director nominations and business to be brought by such stockholder
before any annual or special meeting of stockholders, as well as certain information
regarding such nomination and/or business, the stockholder and others known to support
such proposal and any material interest they may have in the proposed business. They also
provide that a special meeting of stockholders may be called only by the affirmative vote
of a majority of the board of directors. These provisions could delay any stockholder
actions that are favored by the holders of a majority of our outstanding stock until the
next stockholders meeting. In addition, the board of directors is authorized to
issue shares of our common stock and preferred stock that, if issued, could dilute and
adversely affect various rights of the holders of common stock and, in addition, could be
used to discourage an unsolicited attempt to acquire control of us.


We
are also subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits us from engaging in a business combination
with an interested stockholder for a period of three years after the date of
the transaction in which the person becomes an interested stockholder, unless the business
combination is approved in a prescribed manner. The application of Section 203 may limit
the ability of stockholders to approve a transaction that they may deem to be in their
best interests. These provisions of our Second Restated Certificate of Incorporation,
By-laws and the Delaware General Corporation Law could deter certain takeovers or tender
offers or could delay or prevent certain changes in control or our management, including
transactions in which stockholders might otherwise receive a premium for their shares over
the then current market price.


In
April 1999, we adopted a shareholder rights agreement or poison pill. This is
intended to protect shareholders from unfair or coercive takeover practices. On October
28, 2008, we amended and restated the April 1999 shareholder rights agreement to (i)
extend the expiration date to October 28, 2018, (ii) increase the purchase price to
$200.00, (iii) amend the definition of Acquiring Person to exclude a
Person qualified to file Schedule 13G as provided in the definition, (iv)
amend the recitals to take account of the Recapitalization that occurred May
7, 1999, and (v) make any other additional changes deemed necessary. For more information,
please see the Amended and Restated Rights Agreement dated October 28, 2008 filed as an
exhibit to our Current Report on Form 8-K filed October 31, 2008.


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. 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.


Our stock price may be
volatile.


Our
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 common stock may be influenced by many factors,
including:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | acceptance and success of new
products or technologies;
| | - |  | -------------------------------------------------------

| | o |  | the success of competitive products or technologies;
| | - |  | ----------------------------------------------------

| | o |  | regulatory developments in the United States and foreign countries;
| | - |  | -------------------------------------------------------------------

| | o |  | developments or
disputes concerning patents or other foreign countries;
| | - |  | -----------------------------------------------------------------------

| | o |  | the recruitment or departure of
key personnel;
| | - |  | ----------------------------------------------

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

| | o |  | market conditions in our industry and issuance of new or changed securities analyst's reports
                  or recommendations; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

| | o |  | general economic, industry and market conditions.
| | - |  | -------------------------------------------------

|44



Item 2.  Changes in securities, use of proceeds and issuer purchases of securities
|----------------------------------------------------------------------------------------

|Period                                       | Total
number of
shares
purchased | Average
price paid
per share | Total number of
shares purchased
as part of
publicly
announced
program * | Maximum number
of shares that
may yet be
purchased
under program *
|-------------------------------------------- | -------------------------------- | ---------------------------- | ------------------------------------------------------------------------ | ------------------------------------------------------------------
|July 1, 2009 through July 31, 2009           | --                               | --                           | --                                                                       | 324,500                                                           
|August 1, 2009 through August 31, 2009       | --                               | --                           | --                                                                       | 324,500                                                           
|September 1, 2009 through September 30, 2009 | --                               | --                           | --                                                                       | 324,500                                                           
|                                             |                                  |                              |                                                                          |                                                                   
|Total                                        | --                               | --                           | --                                                                       | 324,500                                                           
|                                             |                                  |                              |                                                                          |                                                                   

|*On August 13, 2007, our Board of Directors approved a stock repurchase program under
which our management is authorized to repurchase up to one million shares of our common
stock. The timing and actual number of shares purchased will depend on a variety of
factors such as price, corporate and regulatory requirements, alternative investment
opportunities and other market conditions. Stock repurchases under this program, if any,
will be made using our cash resources, and may be commenced or suspended at any time or
from time to time at managements discretion without prior notice.


Item 3. Defaults upon
senior securities


None.


Item 4.  Submission of matters to a vote of security holders


None.


Item 5. Other information


None.


Item 6. Exhibits
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.72 | Amendment to the Palomar Medical Technologies, Inc. 2007 Stock Incentive Plan
| | ----- | -----------------------------------------------------------------------------

| | 31.1 | Certification of Joseph P. Caruso, President and Chief Executive Officer of the Company, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 31.2 | Certification of Paul S. Weiner, Vice President and Chief Financial Officer of the Company, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 32 | Certification of Joseph P. Caruso, President and Chief Executive Officer of the Company, pursuant to 18
United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 32 | Certification of Joseph P. Caruso, President and Chief Executive Officer of the Company, pursuant to 18
United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|45




Signatures


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

| |  | Palomar Medical
Technologies, Inc.(Registrant)
| |  | ----------------------------------------------

|                        |                                                                                                     
|----------------------- | ----------------------------------------------------------------------------------------------------
|Date:  November 5, 2009 | By:/s/ Joseph P. Caruso
      Joseph P. Caruso
      President, Chief Executive Officer and Director
|                        |                                                                                                     

|                        |                                                                                            
|----------------------- | -------------------------------------------------------------------------------------------
|Date:  November 5, 2009 | By:/s/ Paul S. Weiner
      Paul S. Weiner
      Vice President and Chief Financial Officer
|                        |                                                                                            

|46
|--