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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended September 30, 2007



| ̈ | 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: 001-33123



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THERMAGE, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 68-0373593                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

25881 Industrial Boulevard, Hayward, California 94545

(Address of principal executive offices) (Zip Code)

(510) 782-2286

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes x    No ̈

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

Large
accelerated Filer ̈Accelerated filer ̈Non-accelerated filer x

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

As of
October 31, 2007, 23,446,637 shares of the registrants common stock were outstanding.



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THERMAGE, INC.

INDEX



|        |  |                                                                                                    |  |     
|------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                    |  | Page
|        |  |                                                                                                   
|PART I  |  | FINANCIAL INFORMATION                                                                              |  | 3   
|        |  |                                                                                                   
|ITEM 1  |  | CONDENSED FINANCIAL STATEMENTS (unaudited)                                                         |  | 3   
|        |  |                                                                                                   
|        |  | Condensed Balance Sheets as of September 30, 2007 and December 31, 2006                            |  | 3   
|        |  |                                                                                                   
|        |  | Condensed Statements of Operations for the three and nine months ended September 30, 2007 and 2006 |  | 4   
|        |  |                                                                                                   
|        |  | Condensed Statements of Cash Flows for the nine months ended September 30, 2007 and 2006           |  | 5   
|        |  |                                                                                                   
|        |  | Notes to Condensed Financial Statements                                                            |  | 6   
|        |  |                                                                                                   
|ITEM 2  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS              |  | 12  
|        |  |                                                                                                   
|ITEM 3  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                         |  | 17  
|        |  |                                                                                                   
|ITEM 4T |  | CONTROLS AND PROCEDURES                                                                            |  | 17  
|        |  |                                                                                                   
|PART II |  | OTHER INFORMATION                                                                                  |  | 17  
|        |  |                                                                                                   
|ITEM 1  |  | LEGAL PROCEEDINGS                                                                                  |  | 17  
|        |  |                                                                                                   
|ITEM 1A |  | RISK FACTORS                                                                                       |  | 18  
|        |  |                                                                                                   
|ITEM 2  |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                        |  | 30  
|        |  |                                                                                                   
|ITEM 3  |  | DEFAULTS UPON SENIOR SECURITIES                                                                    |  | 30  
|        |  |                                                                                                   
|ITEM 4  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                |  | 30  
|        |  |                                                                                                   
|ITEM 5  |  | OTHER INFORMATION                                                                                  |  | 30  
|        |  |                                                                                                   
|ITEM 6  |  | EXHIBITS                                                                                           |  | 31  
|        |  |                                                                                                   
|        |  | SIGNATURES                                                                                         |  | 32  

Thermage, ThermaCool, ThermaCool TC, and ThermaCool
NXT are registered trademarks in the United States and several other countries. ThermaTip is an unregistered trademark. All other trademarks, trade names and service marks appearing in this document are the property of their respective owners.



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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

Thermage, Inc.

CONDENSED BALANCE SHEETS

(in thousands of dollars, except share and per share data)

(Unaudited)



|                                                                                                                                                |  |                   |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                |  | September 30,2007 |         |   | December 31,2006 |  
|ASSETS                                                                                                                                          |  |                   |         |   |                  |   |         |  
|Current assets:                                                                                                                                 |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                       |  | $                 | 16,995  |   |                  | $ | 45,915  |  
|Marketable investments                                                                                                                          |  |                   | 32,915  |   |                  |   |        |  
|Accounts receivable, net                                                                                                                        |  |                   | 4,560   |   |                  |   | 3,285   |  
|Inventories, net                                                                                                                                |  |                   | 6,935   |   |                  |   | 5,219   |  
|Prepaid expenses and other current assets                                                                                                       |  |                   | 1,055   |   |                  |   | 1,717   |  
|                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                                                            |  |                   | 62,460  |   |                  |   | 56,136  |  
|Property and equipment, net                                                                                                                     |  |                   | 3,166   |   |                  |   | 3,638   |  
|Other assets                                                                                                                                    |  |                   | 232     |   |                  |   | 101     |  
|                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                                    |  | $                 | 65,858  |   |                  | $ | 59,875  |  
|                                                                                                                                                |  |                   |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                            |  |                   |         |   |                  |   |         |  
|Liabilities                                                                                                                                     |  |                   |         |   |                  |   |         |  
|Accounts payable                                                                                                                                |  | $                 | 1,319   |   |                  | $ | 1,398   |  
|Accrued liabilities                                                                                                                             |  |                   | 6,630   |   |                  |   | 7,372   |  
|Current portion of deferred revenue                                                                                                             |  |                   | 1,559   |   |                  |   | 1,151   |  
|Customer deposits                                                                                                                               |  |                   | 17      |   |                  |   | 62      |  
|                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                                       |  |                   | 9,525   |   |                  |   | 9,983   |  
|Deferred revenue, net of current portion                                                                                                        |  |                   | 736     |   |                  |   | 716     |  
|Other liabilities                                                                                                                               |  |                   | 100     |   |                  |   | 55      |  
|                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                               |  |                   | 10,361  |   |                  |   | 10,754  |  
|                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Contingencies (Note 6)                                                                                                                          |  |                   |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                           |  |                   |         |   |                  |   |         |  
|Preferred stock, $0.001 par value:                                                                                                              |  |                   |         |   |                  |   |         |  
|10,000,000 shares authorized none issued and outstanding                                                                                        |  |                   |        |   |                  |   |        |  
|Common stock, $0.001 par value:                                                                                                                 |  |                   |         |   |                  |   |         |  
|100,000,000 shares authorized 23,437,629 and 22,906,851 shares issued and outstanding at September 30, 2007 and December 31, 2006,
respectively |  |                   | 23      |   |                  |   | 23      |  
|Additional paid-in capital                                                                                                                      |  |                   | 97,963  |   |                  |   | 93,418  |  
|Deferred stock-based compensation                                                                                                               |  |                   | (5      | ) |                  |   | (6      | )
|Notes receivable from stockholders                                                                                                              |  |                   |        |   |                  |   | (125    | )
|Accumulated other comprehensive income                                                                                                          |  |                   | 15      |   |                  |   |        |  
|Accumulated deficit                                                                                                                             |  |                   | (42,499 | ) |                  |   | (44,189 | )
|                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                      |  |                   | 55,497  |   |                  |   | 49,121  |  
|                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                      |  | $                 | 65,858  |   |                  | $ | 59,875  |  
|                                                                                                                                                |  |                   |         |   |                  |   |         |  

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



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Thermage, Inc.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands of dollars, except share and per share data)

(Unaudited)



|                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | --------- | ---- |  | - | ---------- | - |  | - | --------- | -
|                                                                                            |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|                                                                                            |  | 2007                            |            |   | 2006                           |   |           | 2007 |  |   | 2006       |  
|Net revenue                                                                                 |  | $                               | 13,865     |   |                                | $ | 12,507    |      |  | $ | 46,519     |   |  | $ | 39,569    |  
|Cost of revenue                                                                             |  |                                 | 3,111      |   |                                |   | 3,493     |      |  |   | 12,081     |   |  |   | 11,172    |  
|                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Gross margin                                                                                |  |                                 | 10,754     |   |                                |   | 9,014     |      |  |   | 34,438     |   |  |   | 28,397    |  
|                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Operating expenses                                                                          |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Sales and marketing                                                                         |  |                                 | 6,016      |   |                                |   | 5,785     |      |  |   | 19,205     |   |  |   | 17,935    |  
|Research and development                                                                    |  |                                 | 2,282      |   |                                |   | 2,189     |      |  |   | 6,980      |   |  |   | 7,129     |  
|General and administrative                                                                  |  |                                 | 2,695      |   |                                |   | 2,688     |      |  |   | 8,162      |   |  |   | 7,345     |  
|                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Total operating expenses                                                                    |  |                                 | 10,993     |   |                                |   | 10,662    |      |  |   | 34,347     |   |  |   | 32,409    |  
|                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Income (loss) from operations                                                               |  |                                 | (239       | ) |                                |   | (1,648    | )    |  |   | 91         |   |  |   | (4,012    | )
|Interest and other income                                                                   |  |                                 | 662        |   |                                |   | 135       |      |  |   | 1,846      |   |  |   | 375       |  
|Interest, warrants and other expense                                                        |  |                                 |           |   |                                |   | (33       | )    |  |   |           |   |  |   | (1,661    | )
|                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Income (loss) before income taxes                                                           |  |                                 | 423        |   |                                |   | (1,546    | )    |  |   | 1,937      |   |  |   | (5,298    | )
|Provision for income taxes                                                                  |  |                                 |           |   |                                |   |          |      |  |   | (147       | ) |  |   |          |  
|                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Net income (loss)                                                                           |  | $                               | 423        |   |                                | $ | (1,546    | )    |  | $ | 1,790      |   |  | $ | (5,298    | )
|                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Net income (loss) per share:                                                                |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Basic                                                                                       |  | $                               | 0.02       |   |                                | $ | (0.36     | )    |  | $ | 0.08       |   |  | $ | (1.26     | )
|                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Diluted                                                                                     |  | $                               | 0.02       |   |                                | $ | (0.36     | )    |  | $ | 0.07       |   |  | $ | (1.26     | )
|                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Weighted average shares outstanding used in calculating net income (loss) per common share: |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Basic                                                                                       |  |                                 | 23,364,409 |   |                                |   | 4,317,069 |      |  |   | 23,151,949 |   |  |   | 4,196,954 |  
|                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Diluted                                                                                     |  |                                 | 24,882,614 |   |                                |   | 4,317,069 |      |  |   | 24,825,621 |   |  |   | 4,196,954 |  
|                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  

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



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Thermage, Inc.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands of dollars)

(Unaudited)



|                                                                                                   |  |                                |         |   |      |   |        |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------ | -
|                                                                                                   |  | Nine Months EndedSeptember 30, |        
|                                                                                                   |  | 2007                           |         |   | 2006 |  
|Cash flows provide by (used in) operating activities                                               |  |                                |         |   |      |   |        |  
|Net income (loss)                                                                                  |  | $                              | 1,790   |   |      | $ | (5,298 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                |         |   |      |   |        |  
|Depreciation and amortization                                                                      |  |                                | 1,068   |   |      |   | 1,598  |  
|Amortization of premium on marketable investments                                                  |  |                                | (51     | ) |      |   |       |  
|Interest receivable on stockholder notes                                                           |  |                                | 13      |   |      |   | 45     |  
|Amortization of warrants on notes payable                                                          |  |                                |        |   |      |   | 77     |  
|Changes in preferred stock warrant liability                                                       |  |                                |        |   |      |   | 1,075  |  
|Loss on disposal on property, plant and equipment                                                  |  |                                | 11      |   |      |   | 5      |  
|Stock-based compensation                                                                           |  |                                | 3,705   |   |      |   | 2,662  |  
|Allowance for doubtful accounts                                                                    |  |                                | (7      | ) |      |   | 2      |  
|Reserve for excess and obsolete inventory                                                          |  |                                | (61     | ) |      |   | 4      |  
|Change in assets and liabilities                                                                   |  |                                |         |   |      |   |        |  
|Accounts receivable                                                                                |  |                                | (1,268  | ) |      |   | (1,022 | )
|Inventories                                                                                        |  |                                | (2,047  | ) |      |   | (204   | )
|Prepaid expenses and other current assets                                                          |  |                                | 662     |   |      |   | 320    |  
|Other non-current assets                                                                           |  |                                | (131    | ) |      |   | 2      |  
|Accounts payable                                                                                   |  |                                | (79     | ) |      |   | (750   | )
|Accrued and other liabilities                                                                      |  |                                | (17     | ) |      |   | 1,119  |  
|Deferred revenue                                                                                   |  |                                | 428     |   |      |   | (66    | )
|Customer deposits                                                                                  |  |                                | (45     | ) |      |   | 46     |  
|Deferred rent                                                                                      |  |                                | (55     | ) |      |   | (37    | )
|                                                                                                   |  |                                |         |   |      |   |        |  
|Net cash provided by (used in) operating activities                                                |  |                                | 3,916   |   |      |   | (422   | )
|                                                                                                   |  |                                |         |   |      |   |        |  
|Cash flows used in investing activities                                                            |  |                                |         |   |      |   |        |  
|Acquisition of property and equipment                                                              |  |                                | (754    | ) |      |   | (456   | )
|Change in restricted cash                                                                          |  |                                |        |   |      |   | 107    |  
|Proceeds from sale of property and equipment                                                       |  |                                |        |   |      |   | 2      |  
|Purchase of marketable investments                                                                 |  |                                | (40,149 | ) |      |   |       |  
|Proceeds from sale of marketable investments                                                       |  |                                | 7,300   |   |      |   |       |  
|                                                                                                   |  |                                |         |   |      |   |        |  
|Net cash used in investing activities                                                              |  |                                | (33,603 | ) |      |   | (347   | )
|                                                                                                   |  |                                |         |   |      |   |        |  
|Cash flows from financing activities                                                               |  |                                |         |   |      |   |        |  
|Repayments on equipment leases                                                                     |  |                                |        |   |      |   | (4     | )
|Collection of notes receivable from stockholders                                                   |  |                                | 112     |   |      |   | 384    |  
|Proceeds from exercise of stock options                                                            |  |                                | 550     |   |      |   | 440    |  
|Proceeds from exercise of stock warrants                                                           |  |                                |        |   |      |   | 427    |  
|Proceeds from employee stock purchase plan                                                         |  |                                | 514     |   |      |   |       |  
|Payments of capitalized IPO related costs                                                          |  |                                | (409    | ) |      |   | (69    | )
|                                                                                                   |  |                                |         |   |      |   |        |  
|Net cash provided by financing activities                                                          |  |                                | 767     |   |      |   | 1,178  |  
|                                                                                                   |  |                                |         |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                               |  |                                | (28,920 | ) |      |   | 409    |  
|Cash and cash equivalents at beginning of period                                                   |  |                                | 45,915  |   |      |   | 10,121 |  
|                                                                                                   |  |                                |         |   |      |   |        |  
|Cash and cash equivalents at end of period                                                         |  | $                              | 16,995  |   |      | $ | 10,530 |  
|                                                                                                   |  |                                |         |   |      |   |        |  

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



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Thermage, Inc.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(in thousands of dollars, except share and per share amounts)

(Unaudited)

NOTE 1  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Thermage, Inc. (the Company) develops, manufactures, and markets radiofrequency-based equipment and disposable products for non-invasive
treatment of wrinkles. The Company was incorporated in California on January 11, 1996 and reincorporated in Delaware on September 10, 2001. The Company commercially launched its first products in October 2002. On November 9,
2006, the Company completed an initial public offering (IPO) of 6,000,000 shares of its common stock at $7.00 per share. Additionally, on December 4, 2006, the underwriters partially exercised their over-allotment option and
purchased 150,000 shares at $7.00 per share. The Company raised approximately $38.3 million, net of underwriting discounts, commissions and other offering costs. Upon the closing of the offering, all of the Companys outstanding shares of
redeemable convertible preferred stock converted on a one-to-one basis into 12,406,134 shares of common stock.

Basis of Presentation

The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements and,
in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Companys financial position as of the date of the interim balance sheet and results of operations and cash
flows for the interim periods. The condensed balance sheet at December 31, 2006 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The results for the three
months and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007 or for any other interim period or for any future year.

These unaudited interim condensed financial statements should be read in conjunction with the financial statements and notes for the year ended
December 31, 2006 included in the Companys Annual Report 10-K, as amended to date.

Cash and Cash Equivalents and
Marketable Investments

The Company considers all highly liquid investments, with an original maturity of three months or less at
the time of purchase, to be cash equivalents. Investments in debt securities are accounted for as available-for-sale securities held for use in current operations and are classified in current assets as Marketable
Investments. Available-for-sale securities with maturities greater than twelve months are classified as short term as they represent investments for cash that are intended for use in current operations. Marketable investments are carried at
fair value with unrealized gains and losses, net of related tax, that are not deemed to be other than temporary, reported in accumulated other comprehensive income (loss).

Comprehensive Income (loss)

Comprehensive income (loss) generally represents all changes in stockholders equity except those resulting from investments or contributions by stockholders. The Companys unrealized gain (loss) on marketable investments, net of
related taxes, represents the only component of comprehensive income (loss) that is excluded from net income (loss).

Adoption of FIN
48

On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized,
measured, and de-recognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim-period
guidance, among other provisions. At the adoption date of January 1, 2007, the Company had approximately $800 of unrecognized tax benefits, of which $100 would have affected the Companys effective tax rate if recognized. Accordingly, the
Company recognized a liability for income taxes associated with uncertain tax positions of $100, with a corresponding charge to beginning balance of accumulated deficit as of January 1, 2007. Additionally, the Company decreased the net deferred
tax asset and its associated valuation allowance by $700. The Company will expense interest and penalties, when they occur, related to unrecognized tax benefits as a component of income taxes. Interest and penalties are immaterial at the date of
adoption.



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##### Table of Contents

In May 2007, the FASB published FASB Staff Position No. FIN48-1, Definition of Settlement in FASB
Interpretation No. 48(FSP FIN 48-1). FSP FIN 48-1 is an amendment to FIN48. It clarifies how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax
benefits. The adoption of this FSP did not have an impact on the Companys results of operations or financial position.

The Company
is subject to taxation in the U.S. and in various states. Generally, with a few exceptions, the tax years 2003 to 2006 remain open to examination by the major taxing jurisdictions to which the Company is subject. The State of California has recently
completed an examination of the Companys California tax return for the years 2003 and 2004 with no proposed adjustments. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next
twelve months.

Significant Accounting Policies

The Companys significant accounting policies are disclosed in the Companys Annual Report on 10-K filed on March 30, 2007 as amended to date, and have not changed since December 31, 2006, with the
exception of adoption of FIN 48.

Segment Information

The Company operates in one business segment, which encompasses the developing, manufacturing and marketing of radiofrequency based equipment for the
aesthetics market. Management uses one measurement of profitability and does not segregate its business for internal reporting. All long-lived assets are maintained in the United States.

The following table summarizes net revenue by product:



|                                 |  |                                 |        |                                |   |        |  |      |        |  |   |       
|-------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                 |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                 |  | 2007                            |        | 2006                           |   | 2007   |  | 2006
|RF generators                    |  | $                               | 3,267  |                                | $ | 3,243  |  | $    | 12,673 |  | $ | 9,922 
|ThermaTips and other consumables |  |                                 | 10,199 |                                |   | 8,867  |  |      | 32,557 |  |   | 28,497
|                                 |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Net revenue from products        |  |                                 | 13,466 |                                |   | 12,110 |  |      | 45,230 |  |   | 38,419
|Services and other               |  |                                 | 399    |                                |   | 397    |  |      | 1,289  |  |   | 1,150 
|                                 |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Total net revenue                |  | $                               | 13,865 |                                | $ | 12,507 |  | $    | 46,519 |  | $ | 39,569
|                                 |  |                                 |        |                                |   |        |  |      |        |  |   |       

The following table summarizes net revenue by geographic region:



|                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|------------------ |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                   |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                   |  | 2007                            |        | 2006                           |   | 2007   |  | 2006
|United States      |  | $                               | 7,409  |                                | $ | 6,554  |  | $    | 24,389 |  | $ | 20,589
|Asia Pacific       |  |                                 | 2,987  |                                |   | 2,729  |  |      | 9,855  |  |   | 9,098 
|Europe/Middle East |  |                                 | 2,095  |                                |   | 1,459  |  |      | 7,684  |  |   | 5,192 
|Rest of the world  |  |                                 | 1,374  |                                |   | 1,765  |  |      | 4,591  |  |   | 4,690 
|                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Total net revenue  |  | $                               | 13,865 |                                | $ | 12,507 |  | $    | 46,519 |  | $ | 39,569
|                   |  |                                 |        |                                |   |        |  |      |        |  |   |       

NOTE 2  NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding
during the period as reduced by the weighted average unvested common shares subject to repurchase by the Company.



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##### Table of Contents

Diluted net income (loss) per share is computed by dividing the net income (loss) for the period
by the weighted average number of common and potential common shares outstanding during the period, if the effect of each class of potential common shares is dilutive. Potential common shares include common stock subject to repurchase rights,
incremental shares of common stock issuable upon the exercise of stock options and warrants and incremental shares of common stock issuable under employee stock purchase plans and restricted stock units. The dilutive effect of potential common
shares is reflected in diluted net income (loss) per share by application of the treasury stock method, which includes consideration of stock-based compensation required by Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment (revised 2004), or (SFAS 123(R)), and SFAS No. 128, Earnings Per Share.



|                                                                                |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | --------- | ---- |  | - | ---------- | - |  | - | --------- | -
|                                                                                |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|                                                                                |  | 2007                            |            |   | 2006                           |   |           | 2007 |  |   | 2006       |  
|Net income (loss) per share:                                                    |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Numerator                                                                       |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Net income (loss)                                                               |  | $                               | 423        |   |                                | $ | (1,546    | )    |  | $ | 1,790      |   |  | $ | (5,298    | )
|                                                                                |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Denominator                                                                     |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Weighted-average common shares outstanding                                      |  |                                 | 23,366,284 |   |                                |   | 4,333,007 |      |  |   | 23,155,699 |   |  |   | 4,229,767 |  
|Less: weighted-average unvested common shares subject to repurchase             |  |                                 | (1,875     | ) |                                |   | (15,938   | )    |  |   | (3,750     | ) |  |   | (32,813   | )
|                                                                                |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Denominator for basic net income (loss) per share                               |  |                                 | 23,364,409 |   |                                |   | 4,317,069 |      |  |   | 23,151,949 |   |  |   | 4,196,954 |  
|Dilutive potential common shares used in computing diluted net income per share |  |                                 | 1,518,205  |   |                                |   |          |      |  |   | 1,673,672  |   |  |   |          |  
|                                                                                |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Denominator for diluted net income (loss) per share                             |  |                                 | 24,882,614 |   |                                |   | 4,317,069 |      |  |   | 24,825,621 |   |  |   | 4,196,954 |  
|                                                                                |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Basic net income (loss) per share                                               |  | $                               | 0.02       |   |                                | $ | (0.36     | )    |  | $ | 0.08       |   |  | $ | (1.26     | )
|                                                                                |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  
|Diluted net income (loss) per share                                             |  | $                               | 0.02       |   |                                | $ | (0.36     | )    |  | $ | 0.07       |   |  | $ | (1.26     | )
|                                                                                |  |                                 |            |   |                                |   |           |      |  |   |            |   |  |   |           |  

The following outstanding options, common stock subject to repurchase, convertible preferred
stock, convertible preferred stock warrants and restricted stock units were excluded from the computation of diluted net income (loss) per common share for the periods presented because including them would have had an antidilutive effect:



|                                     |  |                                 |  |                                |  |           |  |           
|------------------------------------ |  | ------------------------------- |  | ------------------------------ |  | --------- |  | ----------
|                                     |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                                     |  | 2007                            |  | 2006                           |  | 2007      |  | 2006      
|Options to purchase common stock     |  | 1,329,024                       |  | 3,258,794                      |  | 1,378,451 |  | 3,258,794 
|Common stock subject to repurchase   |  |                                |  | 7,500                          |  |          |  | 7,500     
|Convertible preferred stock          |  |                                |  | 12,138,533                     |  |          |  | 12,138,533
|Convertible preferred stock warrants |  |                                |  | 520,783                        |  |          |  | 520,783   
|Restricted stock units               |  |                                |  |                               |  | 20,561    |  |          

NOTE 3  RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement clarifies the definition of fair value, establishes a
framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of
this statement will have on its results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities  including an amendment of FAS115(SFAS No.159). SFAS No. 159 allows companies to chose, at specified election dates, to measure eligible financial assets
and liabilities at fair value that are not otherwise required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS
No. 159 also establishes presentation and disclosure requirements. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and will be applied prospectively. The Company is currently evaluating the impact of
adopting SFAS No. 159 on its financial statements.



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##### Table of Contents

NOTE 4  BALANCE SHEET DETAIL

Cash, Cash Equivalent and Marketable Investments

The Company has classified all investments
with original maturity dates of 90 days or more as short term since it has the ability to redeem them within the year. Cash, cash equivalents and marketable investments consist of the following:



|                          |  |               |        |                      |   |                       |  |                 |   |  |   |       
|------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | --------------- | - |  | - | ------
|September 30, 2007        |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairMarketValue
|Cash and cash equivalents |  | $             | 16,995 |                      | $ |                      |  | $               |  |  | $ | 16,995
|Marketable investments    |  |               | 32,900 |                      |   | 15                    |  |                 |  |  |   | 32,915
|                          |  |               |        |                      |   |                       |  |                 |   |  |   |       
|                          |  | $             | 49,895 |                      | $ | 15                    |  | $               |  |  | $ | 49,910
|                          |  |               |        |                      |   |                       |  |                 |   |  |   |       
|                          |  |               |        |                     
|December 31, 2006         |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | FairMarketValue
|Cash and cash equivalents |  | $             | 45,915 |                      | $ |                      |  | $               |  |  | $ | 45,915
|                          |  |               |        |                      |   |                       |  |                 |   |  |   |       
|                          |  | $             | 45,915 |                      | $ |                      |  | $               |  |  | $ | 45,915
|                          |  |               |        |                      |   |                       |  |                 |   |  |   |       

The Companys investment portfolio as of September 30, 2007 consists primarily of
corporate obligations, auction rates securities and U.S. Government securities with weighted average contractual maturity of within one year.

Inventories, Net

Inventories, net consist of the following:



|                |  |                   |       |                  |   |      
|--------------- |  | ----------------- | ----- | ---------------- | - | -----
|                |  | September 30,2007 |       | December 31,2006
|Raw materials   |  | $                 | 2,346 |                  | $ | 2,134
|Work-in-process |  |                   | 1,102 |                  |   | 710  
|Finished goods  |  |                   | 3,487 |                  |   | 2,375
|                |  |                   |       |                  |   |      
|                |  | $                 | 6,935 |                  | $ | 5,219
|                |  |                   |       |                  |   |      



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Accrued Liabilities

Accrued liabilities consist of the following:



|                             |  |                   |       |                  |   |      
|---------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                             |  | September 30,2007 |       | December 31,2006
|Marketing expenses           |  | $                 | 264   |                  | $ | 226  
|Travel and entertainment     |  |                   | 215   |                  |   | 191  
|Warranty                     |  |                   | 517   |                  |   | 329  
|Sales and use tax            |  |                   | 146   |                  |   | 171  
|Payroll and related expenses |  |                   | 3,911 |                  |   | 3,947
|Professional fees            |  |                   | 465   |                  |   | 269  
|Fixed assets                 |  |                   | 6     |                  |   | 283  
|IPO expenses                 |  |                   |      |                  |   | 409  
|Accrued claims               |  |                   | 379   |                  |   | 477  
|Accrued inventory purchases  |  |                   | 258   |                  |   | 294  
|Other                        |  |                   | 469   |                  |   | 776  
|                             |  |                   |       |                  |   |      
|                             |  | $                 | 6,630 |                  | $ | 7,372
|                             |  |                   |       |                  |   |      

NOTE 5  WARRANTY AND SERVICE CONTRACTS

Standard Warranty

The Company
currently accrues for the estimated cost to repair or replace products under warranty at the time of sale. A summary of standard warranty accrual activity is shown below:



|                                                 |  |                                |      |   |      |   |      |  
|------------------------------------------------ |  | ------------------------------ | ---- | - | ---- | - | ---- | -
|                                                 |  | Nine Months EndedSeptember 30, |     
|                                                 |  | 2007                           |      |   | 2006 |  
|Balance at beginning of period                   |  | $                              | 329  |   |      | $ | 296  |  
|Accruals for warranties issued during the period |  |                                | 483  |   |      |   | 174  |  
|Accruals related to pre-existing warranties      |  |                                |      |   |      |   |      |  
|(including changes in estimates)                 |  |                                | 17   |   |      |   | 50   |  
|Settlements made during the period               |  |                                | (312 | ) |      |   | (200 | )
|                                                 |  |                                |      |   |      |   |      |  
|Balance at end of period                         |  | $                              | 517  |   |      | $ | 320  |  
|                                                 |  |                                |      |   |      |   |      |  

Extended Warranty Contracts

The Company sells extended warranty contracts to its customers. At the time of sale, the Company defers the amounts billed for such service contracts.
Deferred service contract revenue is recognized on a straight-line basis over the period of the applicable extended warranty contract. A summary of extended warranty contract activity is shown below:



|                               |  |                                |       |   |      |   |       |  
|------------------------------ |  | ------------------------------ | ----- | - | ---- | - | ----- | -
|                               |  | Nine Months EndedSeptember 30, |      
|                               |  | 2007                           |       |   | 2006 |  
|Balance at beginning of period |  | $                              | 1,646 |   |      | $ | 1,442 |  
|Payments received              |  |                                | 834   |   |      |   | 907   |  
|Revenue recognized             |  |                                | (811  | ) |      |   | (755  | )
|                               |  |                                |       |   |      |   |       |  
|Balance at end of period       |  | $                              | 1,669 |   |      | $ | 1,594 |  
|                               |  |                                |       |   |      |   |       |  

Under extended warranty contracts, the Company incurred costs of $107 and $349 during the three
and nine months ended September 30, 2007, respectively, and costs of $175 and $511 during the three and nine months ended September 30, 2006, respectively.



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NOTE 6  CONTINGENCIES

Contingencies

From time to time, the Company is involved in litigation relating to claims
arising from the ordinary course of business. Management does not believe the final disposition of these matters will have a material adverse effect on the financial statements and future cash flows of the Company.

The Company advised Alma Lasers, Ltd. and Alma Lasers, Inc. (together Alma) in February 2006 that Almas Accent product infringed
numerous Thermage patents. On April 26, 2007, Alma filed a lawsuit against the Company in the United States District Court for the District of Delaware requesting declaratory judgment that Almas Accent product does not infringe
Thermages patents and that Thermages patents are invalid. Management believes that the Company has meritorious defenses in this action and intends to defend the action vigorously. On June 20, 2007 the Company filed counterclaims in
the United States District Court for the District of Delaware asserting that Almas Accent XL and Harmony devices infringe 10 Thermage U.S. patents. In addition to damages and attorney fees, the Company is asking the Court to enjoin Alma from
further infringement. The case is active and discovery is ongoing. Management does not believe the final disposition of these matters will have a material adverse effect on the financial statements and future cash flows of the Company.

Indemnifications

In the
normal course of business, the Company enters into contracts and agreements that contain a variety of representation and warranties and provide for general indemnifications. The Companys exposure under these agreements is unknown because it
involves future claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the
Company may record charges in the future as a result of these indemnification obligations.

In accordance with its certificate of
incorporation, bylaws and individual indemnification agreements, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Companys
request in such a capacity. There have been no claims to date and the Company has a director and officer insurance policy that enables it to recover a portion of any amount paid for future claims.



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NOTE 7  COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) generally represents all changes in stockholders equity except those resulting from investments or contributions by
stockholders. The Companys unrealized gain on marketable investments represents the only component of other comprehensive income (loss) that is excluded from net income (loss). The changes in components of comprehensive income (loss) for the
periods presented are as follows:



|                                                      |  |                                 |     |      |                                |       |      |  |      |       |  |    |       |  
|----------------------------------------------------- |  | ------------------------------- | --- | ---- | ------------------------------ | ----- | ---- |  | ---- | ----- |  | -- | ----- | -
|                                                      |  | Three Months EndedSeptember 30, |     |      | Nine Months EndedSeptember 30, |      
|                                                      |  | 2007                            |     | 2006 |                                |       | 2007 |  | 2006 |      
|Net income (loss)                                     |  | $                               | 423 |      | ($                             | 1,546 | )    |  | $    | 1,790 |  | ($ | 5,298 | )
|Unrealized gain on marketable investments, net of tax |  |                                 | 15  |      |                                |      |      |  |      | 15    |  |    |      |  
|                                                      |  |                                 |     |      |                                |       |      |  |      |       |  |    |       |  
|Comprehensive income (loss)                           |  | $                               | 438 |      | ($                             | 1,546 | )    |  | $    | 1,805 |  | ($ | 5,298 | )
|                                                      |  |                                 |     |      |                                |       |      |  |      |       |  |    |       |  

NOTE 8  STOCK-BASED COMPENSATION

Stock-based compensation expense recorded under APB No. 25, SFAS No. 123R and EITF No. 96-18 related to options granted to employees and
non-employees was allocated to cost of revenue, sales and marketing, research and development and general and administrative expense as follows:



|                           |  |                                 |       |                                |   |      |  |      |       |  |   |      
|-------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                           |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                           |  | 2007                            |       | 2006                           |   | 2007 |  | 2006
|Cost of revenue            |  | $                               | 78    |                                | $ | 12   |  | $    | 217   |  | $ | 53   
|Sales and marketing        |  |                                 | 441   |                                |   | 264  |  |      | 1,357 |  |   | 1,023
|Research and development   |  |                                 | 226   |                                |   | 174  |  |      | 780   |  |   | 462  
|General and administrative |  |                                 | 477   |                                |   | 329  |  |      | 1,351 |  |   | 1,124
|                           |  |                                 |       |                                |   |      |  |      |       |  |   |      
|                           |  | $                               | 1,222 |                                | $ | 779  |  | $    | 3,705 |  | $ | 2,662
|                           |  |                                 |       |                                |   |      |  |      |       |  |   |      



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These statements include, but are not limited to, those concerning our expectations that ThermaTip sales will
continue to increase as a percentage of revenue versus generator sales; increase in ThermaTip revenue as a result of greater demand; introduction of new treatment tips in the future; expansion of average selling price; number of systems expected to
be sold worldwide; sales organization growth; growth in international sales and expansion into new international markets; and our belief that our cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements. These
statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see
Risk Factors section in Item 1A of this Quarterly Report on Form 10-Q. We caution the reader not to place undue reliance of these forward-looking statements, which reflect managements analysis only as of the date of this Form
10-Q. We undertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Form 10-Q.

Overview

We design, develop, manufacture and market medical devices for the non-invasive treatment of wrinkles. We received
FDA clearance for treatment of periorbital wrinkles and rhytids and commercially launched our ThermaCool system in 2002. In June 2004, we received FDA clearance for the treatment of facial wrinkles and rhytids. In December 2005, we received FDA
clearance to market our ThermaCool system for the treatment of wrinkles and rhytids, without limitation to particular areas of the body. In October 2006, we received FDA clearance to market our ThermaCool



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##### Table of Contents

system for the temporary improvement in the appearance of cellulite. In June 2007, we received FDA clearance to market our ThermaCool system for treatment of
wrinkles and rhytids for the upper and lower eyelids. Our patented and FDA-cleared ThermaCool system uses radiofrequency, or RF, energy to heat and shrink collagen and tighten tissue while simultaneously cooling and protecting the surface of the
skin. The ThermaCool system consists primarily of an RF generator with cooling capability and a reusable handpiece, a variety of consumable, single-use ThermaTips that attach to the handpiece, and several other consumable accessories. We offer a
variety of ThermaTips that a physician can select based on the area of the body being treated. We currently offer four ThermaTip sizes in several configurations of pulse counts, pulse durations and heating profiles for efficient implementation of
treatment guidelines. As of September 30, 2007, we had an installed base of 2,321 ThermaCool RF generators and had sold approximately 450,000 ThermaTips.

Significant Business Trends

We derive revenue primarily from the sale of ThermaTips and other consumables and sales of our
ThermaCool RF generator. For the years ended December 31, 2005, 2006 and first nine months of 2007 we derived 66%, 73% and 70% respectively, of our revenue from ThermaTip and other consumable sales, and 31%, 24% and 27% respectively, of our
revenue from ThermaCool RF generator sales. The balance of our revenue is derived from product service and shipping. As the installed base of ThermaCool RF generators has grown, so too have grown the number of physicians performing our Thermage
procedure, and, consequently, sales of disposable ThermaTips have increased as a percentage of revenue versus generator sales. We expect this trend to continue, and we expect to derive a greater percentage of our revenue from sales of ThermaTips and
other consumables in the future. During the third quarter of 2007, we launched the new STC ThermaTip, which was well received. Sales of the new STC ThermaTip represented an approximate one third of the sales in the quarter. We launched the DC
ThermaTip in the beginning of the fourth quarter of 2007. We intend to introduce more ThermaTip products, including a new tip that will address cellulite, all of which we believe will help drive top line growth in 2008, as well as expansion of
average selling price. In February 2007, we introduced and began shipment of the ThermaCool NXT, our next generation system. The ThermaCool NXT is designed to save time, reduce procedure cost, simplify the treatment experience and improve patient
comfort compared to our prior generator. Since the introduction of the ThermaCool NXT generator, customer demand for upgrade from the older generation product was higher than expected in the second and third quarter of 2007. During the third quarter
of 2007, we sold 120 generators, which included sales of 63 systems to new customers and sales of 57 systems as upgrades to existing customers. During the nine months ended September 30, 2007, we sold a total of 491 systems, of which 277
systems were sold to new customers and 214 systems were sold to existing customers as upgrades. The 277 systems sold to new customers is in line with our expectation to sell approximately 400 ThermaCool NXT systems to new customers worldwide in
2007.

We market the ThermaCool system, including our single-use ThermaTips in the United States to physicians, primarily dermatologists
and plastic surgeons, through a direct sales force, and internationally in 82 countries through a network of 34 distributors. Our sales force trains physicians on the proper use of the ThermaCool system and maintains frequent interaction with these
customers to promote repeat sales of our disposable ThermaTip products. In the years ended December 31, 2005, 2006, and the first nine months of 2007, we derived 56%, 52% and 52%, respectively, of our revenue from sales of our products and
services within the United States, and 44%, 48% and 48%, respectively, of our total sales outside of the United States. We believe that a significant portion of our business will continue to come from international sales through increased
penetration in countries we currently sell our ThermaCool system, combined with expansion into new international markets. The percentages of our revenue by region are presented in the below table:



|                   |  |                                 |   |  |                                |   |  |      |   |  |      |  
|------------------ |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                   |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                   |  | 2007                            |   |  | 2006                           |   |  | 2007 |   |  | 2006 |  
|United States      |  | 53                              | % |  | 52                             | % |  | 52   | % |  | 52   | %
|Asia Pacific       |  | 22                              | % |  | 22                             | % |  | 21   | % |  | 23   | %
|Europe/Middle East |  | 15                              | % |  | 12                             | % |  | 17   | % |  | 13   | %
|Rest of the world  |  | 10                              | % |  | 14                             | % |  | 10   | % |  | 12   | %
|                   |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Total net revenue  |  | 100                             | % |  | 100                            | % |  | 100  | % |  | 100  | %
|                   |  |                                 |   |  |                                |   |  |      |   |  |      |  

During 2008, we expect to expand our global sales force to better address customer needs. Our U.S.
sales force will be increased by about 50 percent in headcount and be segmented into two groups, with about two-thirds of the sales force focus on existing customers on sales of treatment tips, upgrades and training, and the remainder focus on
securing new accounts. We expect to nearly double our international sales force to help drive additional business in our major markets in Asia, Europe and Canada. To this end, we expect a proportionately larger increase in sales and marketing
expenses to promote revenue growth and geographic expansion. We continue to expect our operating expenses to increase in the future for research and development of new products and technologies, and increased general and administrative expenses to
support our overall business.



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Future operating results are difficult to predict accurately. We anticipate that our quarterly results of
operations may fluctuate for the foreseeable future due to several factors, including the timing of introduction and the degree of acceptance of future product offerings, unanticipated interruptions and expenses related to our manufacturing
operations, and the performance of our direct sales force and international distributors.

Significant Industry Factors

The growth of our business relies on continued growth of the industry, our ability to continue to develop new products, applications and innovative
technologies, obtain and maintain regulatory clearances for our products, protect our proprietary technology and products and our manufacturing processes, manufacture our products cost-effectively, and successfully market and distribute our
products. Our industry is characterized by seasonally lower demand during the third calendar quarter of the year, when both physicians and prospective patients take summer vacations. Additionally, our industry is highly competitive and our success
depends on our ability to compete successfully. We have in the past noticed brief fluctuations both in demand for our products and in demand for our Thermage procedure, as well as in traffic to our website, following media coverage and promotional
campaigns. We experience frequent positive, negative and neutral media coverage throughout a fiscal quarter. Our sales are also impacted by other factors outside of our control, such as prior patient and practicing physician recommendations.
Consequently, while we believe that media exposure and other factors outside of our direct control play a role in our long-term success, to date we have not been able to quantify the impact of particular media exposure or media exposure in general,
and have not observed any material effect, positive or negative, on our quarterly financial results of operations. A detailed discussion of these and other factors that impact our business is provided in the Risk Factors section in this
Form 10-Q.

Results of Operations

Three and Nine Months Ended September 30, 2007 and 2006

Net Revenue. Revenue is derived from the
sale of single-use ThermaTips and other consumables, ThermaCool RF generator sales, and service and other revenue. Net revenue increased $1.4 million, or 11%, from $12.5 million to $13.9 million for the three months ended September 30, 2006 and
2007, respectively. The increase in sales was primarily driven by sales of ThermaTips and other consumable products. Sales of ThermaTips and other consumables increased $1.4 million, or 11%, from $8.9 million to $10.2 million for the three months
ended September 30, 2006 and 2007, respectively. Sales of ThermaCool RF generators were $3.2 million and $3.3 million for the three months ended September 30, 2006 and 2007, respectively. International sales to distributors accounted for
47% of revenue for the three months ended September 30, 2007, as compared to 48% in the same period in 2006. The increase in revenue was primarily due to increased unit sales and higher average selling price of ThermaTips, driven by demand of
our STC tips introduced in August 2007. During the third quarter of 2007, we sold 63 systems to new customers and our installed base grew to 2,321 at September 30, 2007.

Revenue of $46.5 million in the nine months ended September 30, 2007 grew $6.9 million, or
18%, from $39.6 million in the same period in 2006. The increase in revenue was driven by increased sales of $2.7 million, or 27% growth from the year-ago period of our systems products, due to the higher than expected demand to upgrade from
existing installed base; continued expansion into new international markets; and increased sales of $4.0 million, or 14% growth from the year-ago period of our single-use ThermaTips and other consumables, primarily in sales of our 3.0 cm2ThermaTip and the newly-introduced STC ThermaTip.

Cost of Revenue. Our cost of revenue consists primarily of material, labor and manufacturing overhead expenses. Gross margin was 77.6% of revenue in the third quarter of 2007, compared with 72.1% of revenue in the third quarter
of 2006. The increase in gross margin as a percent of revenue in 2007 was primarily due to sales mix towards the higher margin ThermaTip products and higher average selling price of ThermaTips, increase in sales volume and direct cost efficiencies
in the production of ThermaTips.

Gross margin was 74.0% of revenue in the nine month period in 2007, compared with 71.8% of revenue in the
same period in 2006. The increase in gross margin as a percent of revenue in 2007 was primarily due to higher average selling price of ThermaTips, increase in sales volume, cost reductions in ThermaTips and RF generators, partially offset by a
higher sales mix towards the lower margin RF generator products.

Sales and Marketing. Sales and marketing expenses consist
primarily of personnel costs and costs related to customer-attended workshops, trade shows and advertising, as well as marketing and customer service expenses. Sales and marketing expenses increased $0.2 million, or 4%, from $5.8 million to $6.0
million for the three months ended September 30, 2006 and 2007, respectively. The increase in 2007 was primarily attributable to increased personnel and related travel and entertainment expenses, higher stock-based compensation expenses,
partially offset by lower public relations costs.



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Sales and marketing expenses in the nine months ended September 30, 2007 increased $1.3 million, or
7%, from the same period a year ago. The increase in sales and marketing expenses in 2007 was driven by an increase in marketing expenses in support of the launch of the new ThemaCool NXT product, as well as the new procedures of Hands by
Thermageand Lips by Thermage; additional personnel and related travel and entertainment expenses and higher stock-based compensation expenses.

Research and Development. Research and development expenses consist primarily of personnel costs, clinical and regulatory costs, material costs and regulatory and quality assurance costs not directly
related to the manufacturing of our products. Research and development expenses increased $0.1 million, or 4%, from $2.2 million to $2.3 million for the three months ended September 30, 2006 and 2007, respectively. The increase in research and
development expenses was primarily from higher employee-related expenses and higher stock-based compensation expenses. Lower spending in research and development costs and in clinical studies were partially offset by higher stock-based compensation
expenses. Research and development expenses in the nine months ended September 30, 2007 decreased $0.1 million, or 2%, from the same period a year ago. Lower spending in research and development costs and in clinical studies were partially
offset by higher stock-based compensation expenses.

General and Administrative. General and administrative expenses consist
primarily of personnel costs, legal and accounting fees, information technology costs, human resources costs and other general operating expenses. General and administrative expenses remained stable at $2.7 million for each of the three months ended
September 30, 2006 and 2007. General and administrative expenses in the nine months ended September 30, 2007 increased $0.8 million, or 11%, from the same period a year ago. The increase in general and administrative expenses in 2007 was
primarily in professional fees and insurance and other expenses in connection with being a public company.

Interest and Other
Income. Interest and other income consist primarily of interest income generated from our cash and cash equivalent balances. Interest and other income increased $0.6 million from $0.1 million to $0.7 million in the three months ended
September 30, 2006 and 2007, respectively, due to higher average cash balances resulting from the proceeds of our initial public offering. Interest and other income increased $1.4 million from $0.4 million in the nine months ended
September 30, 2006 to $1.8 million in the same period in 2007. The increase in interest and other income was also due to higher average cash balances from the proceeds of our initial public offering in November 2006.

Interest, Warrants and Other Expense. Interest, warrants and other expense of $33,000 and $1.7 million for the three months and nine months
ended September 30, 2006 consisted primarily of expenses related to changes in the fair value of our convertible preferred stock warrants under FSP 150-5 and interest expenses on our GE Capital borrowing. Changes in the fair value of
convertible preferred stock warrants resulted in a $0.2 million gain and a $1.1 million expense in the three months and nine months ended September 30, 2006, respectively. Interest expenses were $0.2 million and $0.6 million in the three months
and nine months ended September 30, 2006, respectively. Subsequent to our initial public offering, we repaid the GE Capital borrowing. The majority of the convertible preferred stock warrants were exercised upon our initial public offering in
2006, with additional preferred stock warrants for 27,778 shares of preferred stock converted into warrants for common stock. As a result, we incurred no interest expense nor charges related to change in the fair value of our convertible preferred
stock warrants during 2007.

Provision for Income Taxes. Provision for income taxes for the nine months ended
September 30, 2007 was $147,000, compared with zero provision for income taxes for the prior year period. Our effective tax rate of 9%, comprised primarily of alternative minimum tax, differs from the federal statutory rate of 34% due primarily
to the utilization of net operating loss carryforward. During the three months ended September 30, 2007 no provision for income taxes was recorded.



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Stock-Based Compensation

For the three months and nine months September 30, 2007 and 2006, employee and non-employee stock-based compensation expense has been allocated as follows (in thousands):



|                           |  |                                 |       |                                |   |      |  |      |       |  |   |      
|-------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                           |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                           |  | 2007                            |       | 2006                           |   | 2007 |  | 2006
|Cost of revenue            |  | $                               | 78    |                                | $ | 12   |  | $    | 217   |  | $ | 53   
|Sales and marketing        |  |                                 | 441   |                                |   | 264  |  |      | 1,357 |  |   | 1,023
|Research and development   |  |                                 | 226   |                                |   | 174  |  |      | 780   |  |   | 462  
|General and administrative |  |                                 | 477   |                                |   | 329  |  |      | 1,351 |  |   | 1,124
|                           |  |                                 |       |                                |   |      |  |      |       |  |   |      
|                           |  | $                               | 1,222 |                                | $ | 779  |  | $    | 3,705 |  | $ | 2,662
|                           |  |                                 |       |                                |   |      |  |      |       |  |   |      

Liquidity and Capital Resources

Prior to our initial public offering in November 2006, we have funded our operations principally from the issuance of our preferred stock that resulted in
aggregate net proceeds of $45.2 million. In addition, in 2005, we obtained a working capital line with GE Capital on which we drew $2.5 million in November 2005, bearing interest at the rate of 10.2% per annum, and $2.5 million in December
2005, bearing interest at the rate of 10.6% per annum. On November 9, 2006, we completed an initial public offering of 6,000,000 shares of our common stock at $7.00 per share. Additionally, on December 4, 2006, the underwriters
partially exercised their over-allotment option and purchased 150,000 shares at $7.00 per share. We raised approximately $38.3 million, net of underwriting discounts, commissions and other offering costs. Upon the closing of the offering, all of our
outstanding shares of preferred stock converted on a one-to-one basis into 12,406,134 shares of common stock. Upon the completion of our initial public offering, we repaid the outstanding balance and interest on the working capital line.

On September 30, 2007, we had working capital of $52.9 million, which consists primarily of $17.0 million in cash and cash equivalents and $32.9
million in marketable investments.

Net Cash Provided by (Used in) Operating Activities. Net cash provided by operating
activities was $3.9 million in the nine months ended September 30, 2007, compared with net cash used of $0.4 million in the same period a year ago. During 2007, $6.5 million net cash was provided from net income after adjusting for non-cash
items, which was offset by $2.6 million net cash used in assets and liabilities (primarily $2.0 million decrease in cash used in purchase of inventories and $1.3 million increase in accounts receivable as a result of increased revenue, partially
offset by $0.7 million cash provided from decrease in prepaid expenses and other current assets, and $0.4 million cash provided from higher deferred revenue as a result of deferral of revenue on sales of our predecessor generators with rights to
upgrade to the new ThermaCool NXT generator.) During 2006, $0.2 million net cash was provided from operating loss after adjusting for by non-cash items, which was fully offset by $0.6 million of net cash used in assets and liabilities (primarily
$1.0 million decrease in cash used in accounts receivable as a result of increased revenue, payment of accounts payable, offset by $1.1 million cash provided from increase in accrued and other liabilities and $0.3 million cash provided from decrease
in prepaid expenses and other current assets.)

Net Cash Used in Investing Activities. Net cash used in investing activities
was $33.6 million and $0.3 million for the nine months ended September 30, 2007 and 2006, respectively. During the third quarter of 2007, the Company began to purchase marketable investments.

Net Cash Provided by Financing Activities. Net cash provided by financing activities was $0.8 million and $1.2 million for the nine months
ended September 30, 2007 and 2006, respectively. During 2007, cash was provided by proceeds from exercise of stock options and employee stock purchase plan, partially offset by payment of capitalized IPO expenses. During 2006, cash was
primarily provided from proceeds of exercise of stock options, proceeds from exercise of preferred stock warrants and collection of notes receivable from stockholders.

We believe that our current cash, cash equivalents, and investments, along with the cash we expect to generate from operations, will be sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.



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Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance 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. In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We are, therefore, not
materially exposed to any financing, liquidity, market or credit risk that could arise if we engaged in such relationships.

Recent Accounting
Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement clarifies the
definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We have not determined the
effect, if any, the adoption of this statement will have on our results of operations or financial position.

In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  including an amendment of FAS 115(SFAS No. 159). SFAS No. 159 allows companies to chose, at specified election
dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in
earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and will be applied prospectively. We are
currently evaluating the impact of adopting SFAS No. 159 on our financial statements.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Our exposure to interest rate risk
relates primarily to our investment portfolio. Our investment portfolio includes fixed rate debt instruments of corporate obligations, auction rate securities and U.S. government securities. A change in prevailing interest rates may cause the fair
value of our investments to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing rate rises, the fair value of the principal amount of our investment will probably
decline. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at a weighted average maturity of generally one year or less. Due to the short-term nature of these investments, we believe we have no material
exposure to interest rate risk arising from our investments. Assuming a hypothetical change in interest rates of one percentage point, the fair value of our total investment portfolio as of September 30, 2007 would have potentially changed by
$0.2 million.

Although, currently, all of our sales and purchases are denominated in U.S. dollars, future fluctuations in the value of the
U.S. dollar may affect the price competitiveness of our products. We do not believe, however, that we currently have significant direct foreign currency exchange rate risk and have not hedged exposures denominated in foreign currencies.



|ITEM 4T. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Evaluation of Disclosure Controls and Procedures. Our management
evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act of 1934, as amended) as of the end of the
period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are
required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to management as appropriate to allow for timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this Quarterly
Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

We advised Alma Lasers, Ltd. and Alma Lasers, Inc. (together,
Alma) as early as February 2006 that its Accent product infringed numerous Thermage patents.



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On April 26, 2007, Alma filed a lawsuit against us in the United States District Court for the
District of Delaware requesting declaratory judgment that Almas Accent product does not infringe Thermages patents and that Thermages patents are invalid. We intend to defend the action vigorously. We believe that we have
meritorious defenses in this action. However, litigation is unpredictable and we may not prevail in successfully defending or asserting our position. If we do not prevail, we may lose certain patent protection, exposing us to increased direct
competition.

On June 20, 2007, we filed patent infringement counterclaims against Alma in the United States District Court for the
District of Delaware. The counter suit claims that 10 of Thermage U.S. patents, covering our innovative skin tightening and contouring technology, are infringed by Almas Accent XL product, and six of those patents are infringed by Almas
Harmony product. In addition to damages and attorney fees, we are asking the Court to enjoin Alma from further infringement. The litigation is active and discovery is ongoing.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

It is difficult to forecast future performance, which may cause our financial results to
fluctuate unpredictably.

Our limited operating history makes it difficult for us to predict future performance. Historically, the
demand for our ThermaCool system has varied from quarter to quarter. A number of factors, over which we have limited or no control, may contribute to fluctuations in our financial results, such as:



| |  |  | delays in receipt of anticipated purchase orders;
| | - |  | -------------------------------------------------



| |  |  | seasonal variations in patient demand for aesthetic procedures;
| | - |  | ---------------------------------------------------------------



| |  |  | performance of our independent distributors;
| | - |  | --------------------------------------------



| |  |  | positive or negative media coverage of our ThermaCool system, the Thermage procedure or products of our competitors or our industry;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain further regulatory clearances or approvals;
| | - |  | -----------------------------------------------------------------



| |  |  | delays in, or failure of, product and component deliveries by our subcontractors and suppliers;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | changes in the length of the sales process;
| | - |  | -------------------------------------------



| |  |  | customer response to the introduction of new product offerings; and
| | - |  | -------------------------------------------------------------------



| |  |  | fluctuations in foreign currency.
| | - |  | ---------------------------------

Our operating performance has in the past been negatively impacted as we have attempted to determine the proper sales prices for our ThermaCool radiofrequency, or RF, generator and our single-use ThermaTips. Establishing appropriate pricing
for our capital equipment and components has been challenging because there have not existed directly comparable competitive products. While we expect to increase average selling price with the introduction of new ThermaTips, we could experience a
reaction from our customers and potential customers that could either negatively impact demand or require us to adjust our selling prices downward, either of which could adversely impact our future financial performance.

We may not be able to achieve sustainable profitability even if we are able to generate significant revenue.

We incurred a loss of $3.9 million in 2006 and a profit of $0.1 million, $1.3 million and $0.4 million for the three months ended March 31,
2007, June 30, 2007, and September 30, 2007, respectively. In the past, with increasing revenue, we have expanded our business and increased our expenses to meet anticipated increased demand for our ThermaCool system. We expect this
trend to continue for the foreseeable future. We will have to increase our revenue while effectively managing our expenses in order to achieve sustained profitability. Our failure to achieve sustained profitability could negatively impact the market
price of our common stock and require us to seek additional financing for our business.

We may not be successful in, or may be delayed in,
commercializing a product for cellulite.

In October 2006, we received FDA clearance to market the ThermaCool system for the temporary
improvement in the appearance of cellulite. We currently intend to commercially launch a product for cellulite in the first quarter of 2008. The timing and success of our launch depends on our current effort at demonstrating compelling evidence of
meaningful clinical effect and optimizing treatment tip design. We have not previously marketed our ThermaCool system to reduce the appearance of cellulite, and our anticipated marketing and training efforts may not be successful in encouraging
physicians and patients to adopt this new procedure in commercially meaningful numbers. We expect to face significant competition in the area of cellulite products, in some cases from companies that are more established, market more widely known
products and have greater resources than we do. We may not be able to differentiate our cellulite product sufficiently from our competitors products to achieve significant market penetration. As a result of these factors, we may incur
significant clinical, marketing and development expenses relating to this new product opportunity without achieving commercial success, which could harm our business and our competitive position.



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We are totally dependent upon the success of our ThermaCool system, which has a limited commercial history. If the
ThermaCool system fails to increase market acceptance, our business will suffer.

We introduced our ThermaCool system in 2002, and
expect that sales of our ThermaCool system, including our line of single-use ThermaTips, will account for substantially all of our revenue for the foreseeable future. We expect to expand our line of ThermaTips in the near future for new
applications. This may not occur when expected, or at all, which would negatively affect our anticipated revenue. Our ThermaCool system may not significantly penetrate current or new markets. If demand for the ThermaCool system does not increase as
we anticipate, or declines, our business, financial condition and results of operations will be harmed.

We are involved in intellectual property
litigation, which could be costly and time consuming, and may impact our future business and financial performance.

We advised Alma
Lasers as early as February 2006 that its Accent product infringed numerous Thermage patents. A number of these patents are the same as those at issue in our 2004 litigation against Syneron, which was settled in 2005 with Syneron acknowledging the
validity of these patents in a paid license. In April 2007, Alma filed a complaint in Federal Court seeking a declaratory judgment of non-infringement, and also seeking a judgment that our patents are invalid. In June 2007, we filed patent
infringement counterclaims against Alma. The litigation is active and discovery is ongoing. Our intellectual property has not been tested at trial. If we initiate litigation to protect our rights, we run the risk of having our patents invalidated,
which would undermine our competitive position.

Litigation related to infringement and other intellectual property claims, with or without
merit, is unpredictable, can be expensive and time-consuming and could divert managements attention from our core business. If we lose this kind of litigation, a court could require us to pay substantial damages, and prohibit us from using
technologies essential to our ThermaCool system, any of which would have a material adverse effect on our business, results of operations and financial condition. We do not know whether necessary licenses would be available to us on satisfactory
terms, or whether we could redesign our ThermaCool system or processes to avoid infringement.

Our industry has been characterized by
frequent intellectual property litigation. Our competitors or other patent holders may assert that our ThermaCool system and the methods we employ are covered by their patents. If our ThermaCool system or methods are found to infringe, we could be
prevented from marketing our ThermaCool system. In addition, we do not know whether our competitors or potential competitors have applied for, or will apply for or obtain, patents that will prevent, limit or interfere with our ability to make, use,
sell, import or export our ThermaCool system. Competing products may also appear in other countries in which our patent coverage might not exist or be as strong. If we lose a foreign patent lawsuit, we could be prevented from marketing our
ThermaCool system in one or more countries.

In addition, we may hereafter become involved in litigation to protect our trademark rights
associated with our company name or the names used with our ThermaCool system. Names used with our ThermaCool system and procedures may be claimed to infringe names held by others or to be ineligible for proprietary protection. If we have to change
the name of our company or ThermaCool system, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales.

Intellectual property rights may not provide adequate protection for our ThermaCool system, which may permit third parties to compete against us more effectively.

We rely on patent, copyright, trade secret and trademark laws and confidentiality agreements to protect our technology and ThermaCool system. As of
September 30, 2007, we had 32 issued U.S. patents and 19 issued foreign patents outside of the United States, mostly covering our ThermaCool system. Some of our system components are not, and in the future may not be, protected by patents.
Additionally, our patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Any patents we obtain may be challenged, invalidated or legally circumvented by third parties. Consequently,
competitors could market products and use manufacturing processes that are substantially similar to, or superior to, ours. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by
consultants, vendors, former employees or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures of our intellectual property is difficult,
and we do not know whether the steps we have taken to protect our intellectual property will be effective. Moreover, we do not have patent rights in all foreign countries in which a market may exist, and where we have applied for foreign patent
rights, the laws of many foreign countries will not protect our intellectual property rights to the same extent as the laws of the United States.



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In addition, competitors could purchase our ThermaCool system and attempt to replicate some or all of the
competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property
rights. If our intellectual property is not adequately protected so as to protect our market against competitors products and methods, our competitive position could be adversely affected, as could our business.

Our ability to market our ThermaCool system in the United States is limited. If we want to expand our marketing claims, we will need to obtain additional FDA
clearances or approvals, which may not be granted.

Developing and promoting new applications for our ThermaCool system are elements of
our growth strategy. We currently have U.S. Food and Drug Administration, or FDA, clearance in the United States to market our ThermaCool system for the non-invasive treatment of wrinkles and rhytids, and for the temporary improvement in the
appearance of cellulite and for therapeutic massage. These clearances restrict our ability to market or advertise our ThermaCool system for many specific indications, which could affect our growth. We intend to expand our line of ThermaTips for new
applications and conditions. We are in the process of seeking, and intend to continue to seek, clearances from the FDA to expand our marketing efforts. We cannot predict whether we will receive such clearances. Future indications may be more
difficult to obtain. The FDA may require us to conduct clinical trials to support a regulatory clearance or approval, which trials may be time-consuming and expensive, and may produce results that do not result in approval of our FDA application. In
the event that we do not obtain additional FDA clearances, our ability to promote our ThermaCool system in the United States and to grow our revenue may be adversely affected.

If there is not sufficient patient demand for Thermage procedures, practitioner demand for our ThermaCool system, including our single-use ThermaTips, could drop, resulting in unfavorable operating results.

Most procedures performed using our ThermaCool system are elective procedures, the cost of which must be borne by the patient, and are not
reimbursable through government or private health insurance. The decision to undergo a Thermage procedure is thus driven by consumer demand, which may be influenced by a number of factors, such as:



| |  |  | our sales and marketing efforts directed toward consumers, as to which we have limited experience and resources;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | the extent to which physicians recommend our procedures to their patients;
| | - |  | --------------------------------------------------------------------------



| |  |  | the cost, safety and effectiveness of a Thermage procedure versus alternative treatments;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | general consumer sentiment about the benefits and risks of aesthetic procedures; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | consumer confidence, which may be impacted by economic and political conditions.
| | - |  | --------------------------------------------------------------------------------

Our financial performance could be materially harmed in the event that any of the above factors discourage patients from seeking Thermage procedures.

The failure of our ThermaCool system to meet patient expectations or the occurrence of unpleasant side effects from the Thermage procedure could impair
our financial performance.

Our future success depends upon patients having a positive experience with the Thermage procedure in order
to increase physician demand for our products, as a result of both individual patients repeat business and as a result of word-of-mouth referrals. We believe that patients may be dissatisfied with the Thermage procedure if they find it to be
too painful. Furthermore, Thermage patients may experience temporary swelling or reddening of the skin as a procedure side effect. In rare instances patients may receive burns, blisters, skin discoloration or skin depressions. Experiencing excessive
pain, any of these side effects or adverse events could discourage a patient from having a Thermage procedure or discourage a patient from having additional procedures or referring Thermage procedures to others. In order to generate repeat and
referral business, we also believe that patients must be satisfied with the effectiveness of the Thermage procedure. Results obtained from a Thermage procedure are subjective and may be subtle. A Thermage treatment may produce results that may not
meet patients expectations. If patients are not satisfied with the procedure or feel that it is too expensive for the results obtained, our reputation and future sales will suffer.

Our success depends on growing physician adoption of our ThermaCool system and continued use of our ThermaTips.

Our target physician customers typically already own one or more aesthetic device products. Our ability to grow our business and convince physicians to purchase our ThermaCool system depends on the success of our
clinical and sales and marketing efforts. Our business model involves both a capital equipment purchase of our ThermaCool RF generator and continued purchases by our customers of single-use ThermaTips. This may be a novel business model for many
potential



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customers who may be used to competing products that are either exclusively capital equipment, such as many laser-based systems, or that are exclusively
single-use products, such as Botox or dermal fillers. We must be able to demonstrate that the cost of our ThermaCool system and the revenue that the physician can derive from performing procedures using our product are compelling when compared to
the cost and revenue associated with alternative products. When marketing to plastic surgeons, we must also, in some cases, overcome a bias against non-invasive aesthetic procedures. If we are unable to increase physician adoption of our ThermaCool
system and use of our ThermaTips, our financial performance will be adversely affected.

We have limited sales and marketing experience and failure to
build and manage our sales force or to market and distribute our ThermaCool system effectively could have a material adverse effect on our business.

We rely on a direct sales force to sell our ThermaCool system in the United States. In order to meet our anticipated sales objectives, we expect to grow our domestic sales organization significantly over the next
several years. There are significant risks involved in building and managing our sales organization, including risks related to our ability to:



| |  |  | hire qualified individuals as needed;
| | - |  | -------------------------------------



| |  |  | provide adequate training for the effective sale of our ThermaCool system; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | retain and motivate our sales employees.
| | - |  | ----------------------------------------

In addition, sales to non-traditional practitioners of aesthetic procedures is a key element of our growth strategy. However, our sales force historically has sold primarily to dermatologists and plastic surgeons. Also, our ThermaCool
system competes with products that are well-established in the market. Accordingly, it is difficult for us to predict how well our sales force will perform. Our failure to adequately address these risks could have a material adverse effect on our
ability to sell our ThermaCool system, causing our revenue to be lower than expected and harming our results of operations.

To successfully market and
sell our ThermaCool system internationally, we must address many issues with which we have limited experience.

International sales
accounted for 48% of our revenue for the year ended December 31, 2006, and for the nine months ended September 30, 2007. We believe that a significant portion of our business will continue to come from international sales through increased
penetration in countries where we currently sell our ThermaCool system, combined with expansion into new international markets. However, international sales are subject to a number of risks, including:



| |  |  | difficulties in staffing and managing our international operations;
| | - |  | -------------------------------------------------------------------



| |  |  | difficulties in penetrating markets in which our competitors products are more established;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | reduced or no protection for intellectual property rights in some countries;
| | - |  | ----------------------------------------------------------------------------



| |  |  | export restrictions, trade regulations and foreign tax laws;
| | - |  | ------------------------------------------------------------



| |  |  | fluctuating foreign currency exchange rates;
| | - |  | --------------------------------------------



| |  |  | foreign certification and regulatory clearance or approval requirements;
| | - |  | ------------------------------------------------------------------------



| |  |  | difficulties in developing effective marketing campaigns for unfamiliar, foreign countries;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | customs clearance and shipping delays;
| | - |  | --------------------------------------



| |  |  | political and economic instability; and
| | - |  | ---------------------------------------



| |  |  | preference for locally produced products.
| | - |  | -----------------------------------------

If one or more of these risks were realized, it could require us to dedicate significant resources to remedy the situation, and if we are unable to find a solution, our revenue may decline.

To market and sell our ThermaCool system internationally, we depend on distributors, and they may not be successful.

We currently depend exclusively on third-party distributors to sell and service our ThermaCool system internationally and to train our international
customers, and if these distributors terminate their relationships with us or under-perform we may be unable to maintain or increase our level of international revenue. We will also need to engage additional international distributors to grow our
business and expand the territories in which we sell our ThermaCool system. Distributors may not commit the necessary resources to market, sell and service our ThermaCool system to the level of our expectations. If current or future distributors do
not perform adequately, or if we are unable to engage distributors in particular geographic areas, our revenue from international operations will be adversely affected.



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We compete against companies that have more established products, longer operating histories and greater resources,
which may prevent us from achieving significant market penetration or increased operating results.

The aesthetics market is highly
competitive and dynamic, and is marked by rapid and substantial technological development and product innovations. Demand for our ThermaCool system could be diminished by equivalent or superior products and technologies offered by competitors.
Specifically, our ThermaCool system competes against a variety of offerings in the aesthetics market, including laser and other light-based medical devices, pharmaceutical products such as Botox, filler injections, chemical peels, microdermabrasion,
liposuction, cosmetic surgical procedures and less invasive surgical solutions such as implanted sutures. Our closest competitors are makers of laser and other light-based devices, which include public companies such as Candela, Cutera, Cynosure,
Lumenis, Palomar Medical Technologies and Syneron Medical, as well as many private companies.

Competing in the aesthetics market could
result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations. Our ability to compete effectively depends upon our ability to distinguish our company and
our ThermaCool system from our competitors and their products, and on such factors as:



| |  |  | safety and effectiveness;
| | - |  | -------------------------



| |  |  | product pricing;
| | - |  | ----------------



| |  |  | success of our marketing initiatives;
| | - |  | -------------------------------------



| |  |  | compelling clinical data;
| | - |  | -------------------------



| |  |  | intellectual property protection;
| | - |  | ---------------------------------



| |  |  | quality of customer support; and
| | - |  | --------------------------------



| |  |  | development of successful distribution channels, both domestically and internationally.
| | - |  | ---------------------------------------------------------------------------------------

Some of our competitors have more established products and customer relationships than we do, which could inhibit our market penetration efforts. For
example, we have encountered, and expect to continue to encounter, situations where, due to pre-existing relationships, potential customers decided to purchase additional products from our competitors. Potential customers also may need to recoup the
cost of expensive products that they have already purchased from our competitors and thus may decide not to purchase our ThermaCool system, or to delay such purchase. If we are unable to achieve continued market penetration, we will be unable to
compete effectively and our business will be harmed.

In addition, some of our current and potential competitors have significantly greater
financial, research and development, manufacturing, and sales and marketing resources than we have. Our competitors could utilize their greater financial resources to acquire other companies to gain enhanced name recognition and market share, as
well as new technologies or products that could effectively compete with our existing product line. Given the relatively few competitors currently in the market, any business combination could exacerbate any existing competitive pressures, which
could harm our business.

Competition among providers of devices for the aesthetics market is characterized by rapid innovation, and we must
continuously develop new products or our revenue may decline.

While we attempt to protect our ThermaCool system through patents and
other intellectual property rights, there are few barriers to entry that would prevent new entrants or existing competitors from developing products that compete directly with ours. For example, while we believe our monopolar RF technology maintains
a strong intellectual property position, there are other companies employing competing technologies which claim to have a similar clinical effect to ours. Additionally, there are others who may market monopolar RF technology for competing purposes
in a direct challenge to our intellectual property position. As we continue to create market demand for a non-surgical, non-invasive way to treat wrinkles, competitors will enter the market with other products making similar or superior claims. We
expect that any competitive advantage we may enjoy from our current and future innovations may diminish over time, as companies successfully respond to our, or create their own, innovations. Consequently, we believe that we will have to continuously
innovate and improve our ThermaCool system and technology to compete successfully. If we are unable to innovate successfully, our ThermaCool system could become obsolete and our revenue will decline as our customers purchase competing products.



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Performing clinical studies on, and collecting data from, the Thermage procedure is inherently subjective, and we have
limited data regarding the efficacy of our ThermaCool system. If future data is not positive or consistent with our prior experience, rates of physician adoption will likely be harmed.

We believe that in order to significantly grow our business, we will need to conduct future clinical studies of the effectiveness of the ThermaCool
system. Clinical studies of aesthetic wrinkle treatments and cellulite are subject to a number of limitations. First, these studies do not involve well-established objective standards for measuring the effectiveness of treatment. Subjective, before
and after, evaluation of the extent of change in the patients appearance, performed by a medical professional or by the patient, is the most common method of evaluating effectiveness. A clinical study may conclude that a treatment is effective
even if the change in appearance is subtle and not long-lasting. Second, as with other non-invasive, energy-based devices, the effect of the Thermage procedure varies from patient to patient and can be influenced by a number of factors, including
the area of the body being treated, the age and skin laxity of the patient and operator technique.

Most published studies of our ThermaCool system have investigated the tissue-tightening effect of our monopolar RF technology in procedures on the face, using a single treatment with our first generation 1.0 cm2ThermaTip and our prior procedure protocol, which involved the use of fewer energy pulses at a higher power than our current procedure protocol. We have not
conducted any head-to-head clinical studies that compare results from treatment with our ThermaCool system to surgery or treatment with other aesthetic devices. Without head-to-head studies against competing alternative treatments, which we have no
current plans to conduct, potential customers may not find clinical studies of our technology sufficiently compelling to purchase our ThermaCool system. If we decide to pursue additional studies in the future, they could be expensive and time
consuming, and the data collected may not produce favorable or compelling results. If the results of such studies do not meet physicians expectations, our ThermaCool system may not become widely adopted, physicians may recommend alternative
treatments for their patients, and our business may be harmed.

Negative publicity and other publicly-available information regarding our
Thermage procedure could harm demand, which would adversely affect sales and our financial performance.

We have in the past
experienced, and expect that in the future we will experience, negative media exposure. Such publicity may present negative individual physician or patient experience regarding the safety or effectiveness of the Thermage procedure. Competitors could
attempt to use such publicity to harm our reputation and disrupt current or potential future customer relationships. While, to date, we have not observed a material impact on our quarterly financial results of operations from negative publicity,
future results could be negatively impacted. Additionally, while we believe that obtaining positive publicity is important to our success, and it is an important component of our marketing efforts, we have also not observed a material impact on our
quarterly financial results of operations from positive publicity.

Our reputation and competitive position may be harmed not only by
negative media exposure, but also by other publicly-available information suggesting that our Thermage procedure is not safe. For example, we file adverse event reports with the FDA that are publicly available on the FDAs website if our
product may have caused or contributed to a serious injury or malfunctioned in a way that would likely cause or contribute to a serious injury if it were to recur. Competitors may attempt to harm our reputation by pointing to isolated injuries that
have been reported or publicized, or by claiming that their product is superior because they have not filed as many adverse event reports with the FDA. Such negative publicity and competitor behavior could harm our reputation and our future sales.

We outsource the repair of key elements of our ThermaCool RF generator to a single repair subcontractor.

We outsource the repair of our first generation RF generator to a single contract manufacturer, Stellartech. If Stellartechs operations are
interrupted, we may be limited in our ability to repair equipment at customer sites. Stellartech is dependent on trained technical labor to effectively repair our ThermaCool RF generator. In addition, Stellartech is a medical device manufacturer and
is required to demonstrate and maintain compliance with the FDAs Quality System Regulation, or QSR. If Stellartech fails to comply with the FDAs QSR, its repair operations could be halted and our ability to repair first generation
ThermaCool systems would be impaired.

Our manufacturing operations and those of our key manufacturing subcontractors are dependent upon third-party
suppliers, making us vulnerable to supply shortages and price fluctuations, which could harm our business.

Several components and
materials that comprise our ThermaCool system are currently manufactured by a single supplier or a limited number of suppliers. In many of these cases, we have not yet qualified alternate suppliers and rely upon purchase orders, rather than
long-term supply agreements. A supply interruption or an increase in demand beyond our current suppliers capabilities could harm our ability to manufacture our ThermaCool system until new sources of supply are identified and qualified. Our
reliance on these suppliers subjects us to a number of risks that could harm our business, including:



| |  |  | interruption of supply resulting from modifications to or discontinuation of a suppliers operations;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | delays in product shipments resulting from uncorrected defects, reliability issues or a suppliers variation in a component;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



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| |  |  | a lack of long-term supply arrangements for key components with our suppliers;
| | - |  | ------------------------------------------------------------------------------



| |  |  | inability to obtain adequate supply in a timely manner, or to obtain adequate supply on commercially reasonable terms;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | difficulty locating and qualifying alternative suppliers for our components in a timely manner;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | production delays related to the evaluation and testing of products from alternative suppliers, and corresponding regulatory qualifications;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delay in delivery due to our suppliers prioritizing other customer orders over ours;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | damage to our brand reputation caused by defective components produced by our suppliers;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | increased cost of our warranty program due to product repair or replacement based upon defects in components produced by our suppliers; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | fluctuation in delivery by our suppliers due to changes in demand from us or their other customers.
| | - |  | ---------------------------------------------------------------------------------------------------

Any interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate sources at
acceptable prices in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.

If, in the future, we decide to perform additional manufacturing functions internally that we currently outsource, our business could be harmed by our limited manufacturing experience and related capabilities.

We currently perform certain value-added and proprietary manufacturing processes internally at our principal facility, and we outsource the manufacture of
components, subassemblies and certain finished products to a limited number of third parties. For financial or operational purposes, we may elect to perform additional component or system manufacturing functions internally. In that event, we may
face a number of challenges beyond those that we currently address in our internal assembly, inspection, testing and certification activities. Implementing complex or specialized manufacturing processes could lead to difficulties in producing
sufficient quantities of manufactured items that meet our quality standards and that comply with applicable regulatory requirements in a timely and cost-effective manner. In addition, if we experience these types of internal manufacturing
difficulties, it may be expensive and time consuming to engage a new or previous subcontractor or supplier to fulfill our replacement manufacturing needs. The occurrence of any of these events could harm our business.

Problems in our manufacturing processes, or those of our manufacturing subcontractors, that lead to an actual or possible malfunction in the ThermaCool
system, may require us to recall product from customers and could disrupt our operations. Our results of operations, our reputation and market acceptance of our products could be harmed if we encounter difficulties in manufacturing that result in a
recall or patient injury, and delays in our ability to fill customer orders.

We may not be able to develop an alternative cooling system that will be
in compliance with changing environmental regulations in a timely or cost-effective manner.

The cooling capability of our ThermaCool RF
generators relies upon a hydroflurocarbon, or HFC, called R134a, to protect the outer layer of the skin from over-heating while our device delivers RF energy to the subcutaneous tissue. New environmental regulations phasing out certain HFCs over the
next decade have been adopted or are under consideration in a number of countries, and recent European Union directives require the phase-out of certain HFCs and place certain restrictions on the import of R134a, and new products that utilize R134a
starting July 4, 2007. Our research and development group is in the process of, and has made good progress in developing an alternative cooling system to address changing environmental regulations. In the interim, we have put in place a
solution for the European Union import restrictions prior to the July 4, 2007 deadline. If we are unable to develop an alternative cooling system for our device in a timely or cost-effective manner, our ThermaCool system may not be in
compliance with changing environmental regulations, which could result in fines, civil penalties and the inability to sell our products in certain major international markets.

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

We keep limited materials, components and finished product on hand. To manage our manufacturing operations with our suppliers, we forecast
anticipated product orders and material requirements to predict our inventory needs up to six months in advance 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
inventory, which would increase our expenses. If we underestimate our



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component and material requirements, we may have inadequate inventory, which could interrupt, delay or prevent delivery of our ThermaCool system to our
customers. Any of these occurrences would negatively affect our financial performance and the level of satisfaction our customers have with our business.

Even though we require training for users of our ThermaCool system and do not sell our ThermaCool system to non-physicians, there exists a potential for misuse, which could harm our reputation and our business.

While we only sell our ThermaCool system to licensed physicians who have met our training requirements, Federal regulations allow us to sell our
ThermaCool system to licensed practitioners. The definition of licensed practitioners varies from state to state. As a result, our ThermaCool system may be operated by licensed practitioners with varying levels of training,
and in many states by non-physicians, including physician assistants, registered nurses and nurse practitioners. Thus, in some states, the definition of licensed practitioner may result in the legal use of our ThermaCool system by
non-physicians. Outside the United States, our independent distributors sell in many jurisdictions that do not require specific qualifications or training for purchasers or operators of our ThermaCool system. We do not supervise the procedures
performed with our ThermaCool system, nor can we be assured that direct physician supervision of our equipment occurs according to our recommendations. We, and our distributors, require purchasers of our ThermaCool system to undergo an initial
training session as a condition of purchase, but do not require ongoing training. In addition, we generally prohibit the sale of our system to companies that rent our system to third parties, but cannot prevent an otherwise qualified physician from
contracting with a rental company in violation of their purchase agreement with us. The use of our ThermaCool system by non-physicians, as well as noncompliance with the operating guidelines set forth in our training programs, may result in product
misuse and adverse treatment outcomes, which could harm our reputation and expose us to costly product liability litigation.

Product liability suits
could be brought against us due to defective design, labeling, material or workmanship, or misuse of our ThermaCool system, and could result in expensive and time-consuming litigation, payment of substantial damages and an increase in our insurance
rates.

If our ThermaCool system is defectively designed, manufactured or labeled, contains defective components or is misused, we may
become subject to substantial and costly litigation by our customers or their patients. Misusing our ThermaCool system or failing to adhere to operating guidelines could cause significant skin damage and underlying tissue damage. In addition, if our
operating guidelines are found to be inadequate, we may be subject to liability. We have been and may, in the future, be involved in litigation related to the use of our ThermaCool system. Product liability claims could divert managements
attention from our core business, be expensive to defend and result in sizable damage awards against us. We may not have sufficient insurance coverage for all future claims. We may not be able to obtain insurance in amounts or scope sufficient to
provide us with adequate coverage against all 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. Product liability claims in excess of our insurance coverage would be paid out of cash reserves, harming our financial condition and reducing our operating results.

The dielectric material in our ThermaTips may degrade with prolonged operation of our device, which could, in turn, lead to skin burns. Our research and
development staff is working to implement strategies to mitigate the risks associated with breakdown of the dielectric material in our ThermaTips. If we are unable to address this issue effectively, we could be subject to product liability
litigation, as well as damage to our reputation in the marketplace, as a result of potential injury to patients.

After-market modifications to our
ThermaTips by third parties and the development of counterfeit treatment tips could reduce ThermaTip sales, expose us to product liability litigation and dilute our brand quality.

Third parties have introduced adulterated after-market modifications to our ThermaTips which have enabled re-use of our ThermaTips in multiple procedures.
Because our ThermaTips are designed to withstand a finite number of firings, modifications intended to increase the number of firings could result in patient injuries caused by the use of worn-out or damaged ThermaTips. In addition, third parties
may seek to develop counterfeit treatment tips that are compatible with our ThermaCool system and available to practitioners at lower prices than our own. If security features incorporated into the design of our ThermaCool system are unable to
prevent after-market modifications to our ThermaTips or the introduction of counterfeit treatment tips, we could be subject to reduced ThermaTip sales, product liability lawsuits resulting from the use of damaged or defective goods and damage to our
reputation for providing a quality product.



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We depend on skilled and experienced personnel to operate our business effectively. If we are unable to recruit, hire
and retain these employees, our ability to manage and expand our business will be harmed, which would impair our future revenue and profitability.

Our success largely depends on the skills, experience and efforts of our officers and other key employees. Many of our officers and key employees do not have employment contracts us and can terminate their employment
at any time. The loss of any of our senior management team members could weaken our management expertise and harm our business.

Our
ability to retain our skilled labor force and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We may not be able to meet our future hiring needs or
retain existing personnel. We will face particularly significant challenges and risks in hiring, training, managing and retaining engineering and sales and marketing employees, as well as independent distributors, most of whom are geographically
dispersed and must be trained in the use and benefits of our ThermaCool system. Failure to attract and retain personnel, particularly technical and sales and marketing personnel, would materially harm our ability to compete effectively and grow our
business.

Risks Related to Regulatory Matters

If we fail to obtain and maintain necessary FDA clearances for our ThermaCool system and indications, if clearances for future products and indications are delayed, not issued or rescinded or if there are federal or state level
regulatory changes, our commercial operations would be harmed.

Our ThermaCool system is a medical device that is subject to extensive
regulation in the United States by the FDA for manufacturing, labeling, sale, promotion, distribution and shipping. Before a new medical device, or a new use of or claim for an existing product, can be marketed in the United States, it must first
receive either 510(k) clearance or premarketing approval from the FDA, unless an exemption applies. Either process can be expensive and lengthy. The FDAs 510(k) clearance process usually takes from three to 12 months, but it can last
significantly longer. The process of obtaining premarketing approval is much more costly and uncertain than the 510(k) clearance process, and it generally takes from one to three years, or even longer, from the time the application is filed with the
FDA.

Medical devices may be marketed only for the indications for which they are approved or cleared. We have obtained 510(k) clearance
for the non-invasive treatment of wrinkles and rhytids. However, our clearances can be revoked if safety or effectiveness problems develop. We also are subject to Medical Device Reporting regulations, which require us to report to the FDA if our
product causes or contributes to a death or serious injury, or malfunctions in a way that would likely cause or contribute to a death or serious injury. Our ThermaCool system is also subject to state regulations which are, in many instances, in
flux. Changes in state regulations may impede sales. For example, federal regulations allow our ThermaCool system to be sold to, or on the order of, licensed practitioners, as determined on a state-by-state basis. As a result, in some
states, non-physicians may legally purchase and operate our ThermaCool system. However, a state could change its regulations at any time, disallowing sales to particular types of end users. We cannot predict the impact or effect of future
legislation or regulations at the federal or state levels.

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:



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



| |  |  | repair, replacement, refunds, recall or seizure of our product;
| | - |  | ---------------------------------------------------------------



| |  |  | operating restrictions or partial suspension or total shutdown of production;
| | - |  | -----------------------------------------------------------------------------



| |  |  | refusing our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to our existing product;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | criminal prosecution.
| | - |  | ---------------------

If any of
these events were to occur, our business could be harmed.

If we modify our FDA-cleared device, we may need to seek and obtain new clearances, which, if
not granted, would prevent us from selling our modified product or require us to redesign our product.

Any modifications to an
FDA-cleared device that would significantly affect its safety or effectiveness or that would constitute a major change in its intended use would require a new 510(k) clearance or possibly a premarket approval. We may not be able to obtain additional
510(k) clearances or premarket approvals for new products or for modifications to, or additional indications for, our existing product in a timely fashion, or at all. Delays in obtaining future clearances would



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adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and potential future
profitability. We have made modifications to our device in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees, and requires new clearances
or approvals for the modifications, we may be required to recall and to stop marketing the modified device, which could harm our operating results and require us to redesign our product.

If we or our repair subcontractor fail to comply with the FDAs Quality System Regulation, our business would suffer.

We and our repair subcontractor are required to demonstrate and maintain compliance with the FDAs Quality System Regulation, or QSR. The QSR is a complex regulatory scheme that covers the methods and
documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our product. The FDA enforces the QSR through periodic unannounced inspections. We have been, and anticipate in the future
to be, subject to such inspections. Our failure, or the failure of our repair subcontractor, to take satisfactory corrective action in response to an adverse QSR inspection could result in enforcement actions, including a public warning letter, a
shutdown of our manufacturing operations, a recall of our product, civil or criminal penalties or other sanctions, which would cause our sales and business to suffer.

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

Sales of our ThermaCool system outside the United States are subject to foreign regulatory requirements that vary widely from country to country. In
addition, the FDA regulates exports of medical devices from the United States. Complying with international regulatory requirements can be an expensive and time-consuming process and approval is not certain. The time required to obtain clearance or
approvals, if required by other countries, may be longer than that required for FDA clearance or approvals, and requirements for such clearances or approvals may significantly differ from FDA requirements. We primarily rely upon third-party
distributors to obtain most regulatory clearances and approvals required in other countries, and these distributors may be unable to obtain or maintain such clearances or approvals. Our distributors may also incur significant costs in attempting to
obtain and in maintaining foreign regulatory approvals or qualifications, which could increase the difficulty of attracting and retaining qualified distributors. If our distributors experience delays in receiving necessary qualifications, clearances
or approvals to market our products outside the United States, or if they fail to receive those qualifications, clearances or approvals, we may be unable to market our products or enhancements in international markets effectively, or at all. To
support the registration of products outside the United States, we must comply with and be registered to the ISO 13485: 2003 Quality System Standard. Failure to adequately maintain our ISO 13485: 2003 registration may adversely impact or prevent the
registration of our products in some foreign countries.

Risks Related to Our Capital Requirements and Finances

Our financial controls and procedures may not be sufficient to ensure timely and reliable reporting of financial information, which, as a public company, could
materially harm our stock price and Nasdaq listing.

As a public company, we require greater financial resources than we have had as a
private company. We cannot provide you with assurance that our finance department has or will maintain adequate resources to ensure that we will not have any future material weakness in our system of internal controls. The effectiveness of our
controls and procedures may in the future be limited by a variety of factors, including:



| |  |  | faulty human judgment and simple errors, omissions or mistakes;
| | - |  | ---------------------------------------------------------------



| |  |  | fraudulent action of an individual or collusion of two or more people;
| | - |  | ----------------------------------------------------------------------



| |  |  | inappropriate management override of procedures; and
| | - |  | ----------------------------------------------------



| |  |  | the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial information.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------

If we fail to have effective controls and procedures for financial reporting in place, we could be unable to provide
timely and accurate financial information and be subject to Nasdaq delisting, Securities and Exchange Commission investigation and civil or criminal sanctions.



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We must implement additional and expensive procedures and controls in order to grow our business and organization and
to satisfy new reporting requirements, which will increase our costs and require additional management resources.

As a public reporting
company, we are required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, including the requirements that we maintain disclosure controls and procedures and adequate internal control over financial
reporting. As a public company listed on Nasdaq, we are also required to comply with marketplace rules and the heightened corporate governance standards of Nasdaq. Compliance with the Sarbanes-Oxley Act and other SEC and Nasdaq requirements will
increase our costs and require additional management resources. We have begun upgrading our procedures and controls and will need to continue to implement additional procedures and controls as we grow our business and organization and to satisfy new
reporting requirements. If we are unable to complete the required assessment as to the adequacy of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act or if we fail to maintain internal control
over financial reporting, our ability to produce timely, accurate and reliable periodic financial statements could be impaired. We have previously restated our fiscal 2004 financial statements to reflect an adjustment to the calculation of net
income allocable to common stockholders and the calculation of basic and diluted net income per share available to common stockholders as further described in Note 1 to the financial statements included in our Amendment No. 5 to Form S-1 filed
on November 9, 2006. If we do not maintain adequate internal control over financial reporting, investors could lose confidence in the accuracy of our periodic reports filed under the Exchange Act. Additionally, our ability to obtain additional
financing could be impaired. A lack of investor confidence in the reliability and accuracy of our public reporting could cause our stock price to decline.

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

We expect to evaluate potential
strategic acquisitions of complementary businesses, products or technologies. We may also 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 acquisitions of any businesses, products or technologies. Furthermore, the integration of any acquisition and management of any collaborative project may divert managements time and resources from
our core business and disrupt our operations. We do not have any experience with acquiring companies or products. If we decide to expand our product offerings beyond radiofrequency technologies, we may spend time and money on projects that do not
increase our revenue. Any cash acquisition we pursue would diminish funds available to us for other uses, and any stock acquisition would dilute our stockholders ownership. While we from time to time evaluate potential collaborative projects
and acquisitions of businesses, products and technologies, and anticipate continuing to make these evaluations, we have no present understandings, commitments or agreements with respect to any acquisitions or collaborative projects.

Risks Related to Our Common Stock

If our public
guidance or our future operating performance does not meet investor expectations, our stock price could decline.

We provide guidance to
the investing community regarding our anticipated future operating performance. In the past we have updated guidance because our actual results were different than originally anticipated. Our business typically has a short sales cycle, so that we do
not have significant backlog of orders at the start of a quarter, and our ability to sell our ThermaCool system successfully is subject to many uncertainties, as discussed. In light of these factors, it is difficult for us to estimate with accuracy
our future results. Our expectations regarding these results will be subject to numerous risks and uncertainties that could make actual results differ materially from those anticipated. If our actual results do not meet our public guidance or our
guidance or actual results do not meet the expectations of third-party financial analysts, our stock price could decline significantly.

We expect that
the price of our common stock will fluctuate substantially.

The market price of our common stock is likely to be highly volatile and
may fluctuate substantially due to many factors, including:



| |  |  | volume and timing of sales of our ThermaCool system;
| | - |  | ----------------------------------------------------



| |  |  | the introduction of new products or product enhancements by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | disputes or other developments with respect to our intellectual property rights or the intellectual property rights of others;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to develop, obtain regulatory clearance or approval for and market new and enhanced products on a timely basis;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | product liability claims or other litigation;
| | - |  | ---------------------------------------------



| |  |  | quarterly variations in our or our competitors results of operations;
| | - |  | ----------------------------------------------------------------------



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| |  |  | sales of large blocks of our common stock, including sales by our executive officers and directors;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | developments in our industry;
| | - |  | -----------------------------



| |  |  | media exposure of our ThermaCool system or products of our competitors;
| | - |  | -----------------------------------------------------------------------



| |  |  | changes in governmental regulations or in the status of our regulatory approvals or applications;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | changes in earnings estimates or recommendations by securities analysts; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

These and other factors may make the price of our stock volatile and subject to unexpected fluctuation.

A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

If our stockholders sell substantial amounts of our common stock in the public market, for example, liquidation of shares held by our principal
shareholders, including shares issued upon the exercise of outstanding options or warrants, the market price of our common stock could decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem reasonable or appropriate.

Our directors, officers and principal stockholders have significant voting power and
may take actions that may not be in the best interests of our other stockholders.

Our officers, directors and principal stockholders
each holding more than 5% of our common stock collectively control more than 50% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to control the management and affairs of our company and most
matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely
affect the market price of our common stock. This concentration of ownership may not be in the best interests of our other stockholders.

Anti-takeover
provisions in our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that could discourage a takeover.

Our certificate of incorporation and bylaws, and Delaware law, contain provisions that might enable our management to resist a takeover, and might make it more difficult for an investor to acquire a substantial block
of our common stock. These provisions include:



| |  |  | a classified board of directors;
| | - |  | --------------------------------



| |  |  | advance notice requirements to stockholders for matters to be brought at stockholder meetings;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | a supermajority stockholder vote requirement for amending certain provisions of our Amended and Restated Certificate of Incorporation and Bylaws;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limitations on stockholder actions by written consent; and
| | - |  | ----------------------------------------------------------



| |  |  | the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

These provisions might discourage, delay or prevent a change in control of our company or a change in our management.
The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.

We have a large number of authorized but unissued shares of stock, which could negatively impact you if you purchase our common stock.

Our certificate of incorporation provides for 100,000,000 shares of authorized common stock, of which 76.6 million shares will be available for
future issuance, and 10,000,000 shares of preferred stock, all of which will be available for future issuance. The issuance of additional shares of common stock may have a dilutive effect on earnings per share and relative voting power. We could use
the shares of common stock that are available for future issuance in dilutive equity financing transactions, or to oppose a hostile takeover attempt or delay or prevent changes in control or changes in or removal of management, including
transactions that are favored by a majority of the stockholders or in which the stockholders might otherwise receive a premium for their shares over then-current market prices or benefit in some other manner.



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Our board of directors will be authorized, without further stockholder approval, to issue up to
10,000,000 shares of preferred stock with such rights, preferences and privileges as our board may determine. These rights, preferences and privileges may include dividend rights, conversion rights, voting rights and liquidation rights that may be
greater than the rights of our common stock. As a result, the rights of holders of our common stock will be subject to, and could be adversely affected by, the rights of holders of any preferred stock that may be issued in the future.

We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock.

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable
future. The payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our
stock may be less valuable because a return on investment will only occur if our stock price appreciates.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

We did not sell any equity
securities during the period covered by this report.

We registered for the initial public offering of our common stock, par value $0.001
per share, on a Registration Statement on Form S-1 (Registration No. 333-136501), which was declared effective on November 9, 2006. On November 15, 2006 we completed the initial public offering of our common stock by selling
6.0 million shares at $7.00 per share. Additionally, on December 4, 2006, the underwriters partially exercised their over-allotment option and purchased 150,000 shares at $7.00 per share. Gross proceeds from the offering were $43.0
million. Total expenses from the offering were $4.7 million, which included underwriting discounts and commissions of $3.0 million, and $1.7 million in other offering-related expenses. Net offering proceeds, after deducting total expenses were $38.3
million.

Of the $38.3 million in net proceeds, through September 30, 2007, we have applied all of the offering proceeds, spending
approximately $5.0 million for repayment of our working capital line with GE Capital, $19.1 million for sales and marketing initiatives, $6.8 million for research and development activities and $7.4 million for operating and general corporate
purposes. In addition, we invested the proceeds from the offering primarily in U.S. government securities and investment-grade marketable debt securities of financial institutions and corporations.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

We held an annual meeting on July 11, 2007 at our corporate headquarters in Hayward, California. The first item of business was the election of three Class I directors and one Class III director. The Class I nominees elected were Marti
Morfitt, Stephen J. Fanning and Harold L. Covert, and the Class III nominee elected was Cathy L. McCarthy. The nominees were elected by a majority of votes present at the meeting as follows:



|                   |  |            |  |               
|------------------ |  | ---------- |  | --------------
|Name               |  | Votes For  |  | Votes Withheld
|Marti Morfitt      |  | 17,049,353 |  | 83,561        
|Stephen J. Fanning |  | 16,437,915 |  | 694,999       
|Harold L. Covert   |  | 17,049,243 |  | 83,671        
|Cathy L. McCarthy  |  | 17,045,423 |  | 87,491        

There was no vote on the re-election of Edward W. Knowlton, M.D. or Mark M. Sieczkarek, whose
terms will expire at the annual meeting of stockholders in 2008 and 2009, respectively. The appointment of PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm for the year ended December 31, 2007 was
ratified with 17,119,774 votes in favor, 3,869 against and 9,270 abstentions.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



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##### Table of Contents

|ITEM 6. | EXHIBITS
|------- | --------



|            |  |                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                  
|            | 
|3.2*        |  | Amended and Restated Certificate of Incorporation.                                                                                           
|            | 
|3.4*        |  | Amended and Restated Bylaws.                                                                                                                 
|            | 
|4.1*        |  | Specimen Common Stock Certificate.                                                                                                           
|            | 
|4.2*        |  | Amended and Restated Investor Rights Agreement dated March 12, 2002 by and among Thermage and certain of its stockholders.                   
|            | 
|31.1        |  | Certification of Chief Executive Officer under Securities Exchange Act Rule 13a-14(a).                                                       
|            | 
|31.2        |  | Certification of Chief Financial Officer under Securities Exchange Act Rule 13a-14(a).                                                       
|            | 
|32.1        |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S. C. 1350 and Securities Exchange Act Rule 13a-14(b).

---

|* | Incorporated by reference from our Registration Statement on Form S-1 (Registration No. 333-136501), which was declared effective on November 9, 2006.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.



|                       |  |  |  |                                             
|---------------------- |  |  |  | --------------------------------------------
|Date: November 9, 2007 |  |  |  | /s/ Stephen J. Fanning                      
|                       |  |  |  | Stephen J. Fanning                          
|                       |  |  |  | President and Chief Executive Officer       
|                       |  |  |  | (Principal Executive Officer)               
|                       |  | 
|Date: November 9, 2007 |  |  |  | /s/ Laureen DeBuono                         
|                       |  |  |  | Laureen DeBuono                             
|                       |  |  |  | Chief Financial Officer                     
|                       |  |  |  | (Principal Financial and Accounting Officer)



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##### Table of Contents

INDEX TO EXHIBITS



|            |  |                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                  
|            | 
|3.2*        |  | Amended and Restated Certificate of Incorporation.                                                                                           
|            | 
|3.4*        |  | Amended and Restated Bylaws.                                                                                                                 
|            | 
|4.1*        |  | Specimen Common Stock Certificate.                                                                                                           
|            | 
|4.2*        |  | Amended and Restated Investor Rights Agreement dated March 12, 2002 by and among Thermage and certain of its stockholders.                   
|            | 
|31.1        |  | Certification of Chief Executive Officer under Securities Exchange Act Rule 13a-14(a).                                                       
|            | 
|31.2        |  | Certification of Chief Financial Officer under Securities Exchange Act Rule 13a-14(a).                                                       
|            | 
|32.1        |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S. C. 1350 and Securities Exchange Act Rule 13a-14(b).

---

|* | Incorporated by reference from our Registration Statement on Form S-1 (Registration No. 333-136501), which was declared effective on November 9, 2006.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------



33