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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 June 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
July 31, 2007, 23,350,627 shares of the registrants common stock were outstanding.



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##### Table of Contents

THERMAGE, INC.

INDEX



|         |  |                                                                                              |  |     
|-------- |  | -------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                              |  | Page
|PART I   |  | FINANCIAL INFORMATION                                                                        |  | 3   
|         |  |                                                                                             
|ITEM 1   |  | CONDENSED FINANCIAL STATEMENTS (unaudited)                                                   |  | 3   
|         |  |                                                                                             
|         |  | Condensed Balance Sheets as of June 30, 2007 and December 31, 2006                           |  | 3   
|         |  |                                                                                             
|         |  | Condensed Statements of Operations for the three and six months ended June 30, 2007 and 2006 |  | 4   
|         |  |                                                                                             
|         |  | Condensed Statements of Cash Flows for the six months ended June 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        |  | 11  
|         |  |                                                                                             
|ITEM 3   |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                   |  | 15  
|         |  |                                                                                             
|ITEM 4T  |  | CONTROLS AND PROCEDURES                                                                      |  | 16  
|         |  |                                                                                             
|PART II  |  | OTHER INFORMATION                                                                            |  | 16  
|         |  |                                                                                             
|ITEM 1.  |  | LEGAL PROCEEDINGS                                                                            |  | 16  
|         |  |                                                                                             
|ITEM 1A. |  | RISK FACTORS                                                                                 |  | 16  
|         |  |                                                                                             
|ITEM 2   |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                  |  | 28  
|         |  |                                                                                             
|ITEM 3   |  | DEFAULTS UPON SENIOR SECURITIES                                                              |  | 28  
|         |  |                                                                                             
|ITEM 4   |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                          |  | 28  
|         |  |                                                                                             
|ITEM 5   |  | OTHER INFORMATION                                                                            |  | 29  
|         |  |                                                                                             
|ITEM 6.  |  | EXHIBITS                                                                                     |  | 29  
|         |  |                                                                                             
|         |  | SIGNATURES                                                                                   |  | 30  

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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##### Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

Thermage, Inc.

CONDENSED BALANCE SHEETS

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

(Unaudited)



|                                                                                                                                           |  |              |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                           |  | June 30,2007 |         |   | December 31,2006 |  
|ASSETS                                                                                                                                     |  |              |         |   |                  |   |         |  
|Current assets:                                                                                                                            |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                  |  | $            | 48,649  |   |                  | $ | 45,915  |  
|Accounts receivable, net                                                                                                                   |  |              | 5,842   |   |                  |   | 3,285   |  
|Inventories, net                                                                                                                           |  |              | 5,241   |   |                  |   | 5,219   |  
|Prepaid expenses and other current assets                                                                                                  |  |              | 1,027   |   |                  |   | 1,717   |  
|                                                                                                                                           |  |              |         |   |                  |   |         |  
|Total current assets                                                                                                                       |  |              | 60,759  |   |                  |   | 56,136  |  
|Property and equipment, net                                                                                                                |  |              | 3,308   |   |                  |   | 3,638   |  
|Other assets                                                                                                                               |  |              | 138     |   |                  |   | 101     |  
|                                                                                                                                           |  |              |         |   |                  |   |         |  
|Total assets                                                                                                                               |  | $            | 64,205  |   |                  |   | 59,875  |  
|                                                                                                                                           |  |              |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                       |  |              |         |   |                  |   |         |  
|Liabilities                                                                                                                                |  |              |         |   |                  |   |         |  
|Accounts payable                                                                                                                           |  | $            | 1,583   |   |                  | $ | 1,398   |  
|Accrued liabilities                                                                                                                        |  |              | 6,395   |   |                  |   | 7,372   |  
|Current portion of deferred revenue                                                                                                        |  |              | 1,684   |   |                  |   | 1,151   |  
|Customer deposits                                                                                                                          |  |              | 44      |   |                  |   | 62      |  
|                                                                                                                                           |  |              |         |   |                  |   |         |  
|Total current liabilities                                                                                                                  |  |              | 9,706   |   |                  |   | 9,983   |  
|Deferred revenue, net of current portion                                                                                                   |  |              | 852     |   |                  |   | 716     |  
|Other liabilities                                                                                                                          |  |              | 118     |   |                  |   | 55      |  
|                                                                                                                                           |  |              |         |   |                  |   |         |  
|Total liabilities                                                                                                                          |  |              | 10,676  |   |                  |   | 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 23,258,494 and 22,906,851 shares issued and outstanding at June 30, 2007 and December 31, 2006,
respectively |  |              | 23      |   |                  |   | 23      |  
|Additional paid-in capital                                                                                                                 |  |              | 96,560  |   |                  |   | 93,418  |  
|Deferred stock-based compensation                                                                                                          |  |              | (5      | ) |                  |   | (6      | )
|Notes receivable from stockholders                                                                                                         |  |              | (127    | ) |                  |   | (125    | )
|Accumulated deficit                                                                                                                        |  |              | (42,922 | ) |                  |   | (44,189 | )
|                                                                                                                                           |  |              |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                 |  |              | 53,529  |   |                  |   | 49,121  |  
|                                                                                                                                           |  |              |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                 |  | $            | 64,205  |   |                  | $ | 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 Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                                            |  | 2007                        |            |   | 2006                      |   |           | 2007 |  |   | 2006       |  
|Net revenue                                                                                 |  | $                           | 17,499     |   |                           | $ | 14,631    |      |  | $ | 32,654     |   |  | $ | 27,062    |  
|Cost of revenue                                                                             |  |                             | 4,818      |   |                           |   | 3,901     |      |  |   | 8,970      |   |  |   | 7,679     |  
|                                                                                            |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Gross margin                                                                                |  |                             | 12,681     |   |                           |   | 10,730    |      |  |   | 23,684     |   |  |   | 19,383    |  
|                                                                                            |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Operating expenses                                                                          |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Sales and marketing                                                                         |  |                             | 6,815      |   |                           |   | 6,301     |      |  |   | 13,189     |   |  |   | 12,150    |  
|Research and development                                                                    |  |                             | 2,232      |   |                           |   | 2,563     |      |  |   | 4,698      |   |  |   | 4,940     |  
|General and administrative                                                                  |  |                             | 2,784      |   |                           |   | 2,393     |      |  |   | 5,467      |   |  |   | 4,657     |  
|                                                                                            |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Total operating expenses                                                                    |  |                             | 11,831     |   |                           |   | 11,257    |      |  |   | 23,354     |   |  |   | 21,747    |  
|                                                                                            |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Income (loss) from operations                                                               |  |                             | 850        |   |                           |   | (527      | )    |  |   | 330        |   |  |   | (2,364    | )
|Interest and other income                                                                   |  |                             | 598        |   |                           |   | 126       |      |  |   | 1,184      |   |  |   | 240       |  
|Interest, warrants and other expense                                                        |  |                             |           |   |                           |   | (579      | )    |  |   |           |   |  |   | (1,628    | )
|                                                                                            |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Income (loss) before income taxes                                                           |  |                             | 1,448      |   |                           |   | (980      | )    |  |   | 1,514      |   |  |   | (3,752    | )
|Provision for income taxes                                                                  |  |                             | (140       | ) |                           |   |          |      |  |   | (147       | ) |  |   |          |  
|                                                                                            |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Net income (loss)                                                                           |  | $                           | 1,308      |   |                           | $ | (980      | )    |  | $ | 1,367      |   |  | $ | (3,752    | )
|                                                                                            |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Net income (loss) per share:                                                                |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Basic                                                                                       |  | $                           | 0.06       |   |                           | $ | (0.23     | )    |  | $ | 0.06       |   |  | $ | (0.91     | )
|                                                                                            |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Diluted                                                                                     |  | $                           | 0.05       |   |                           | $ | (0.23     | )    |  | $ | 0.06       |   |  | $ | (0.91     | )
|                                                                                            |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Weighted average shares outstanding used in calculating net income (loss) per common share: |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Basic                                                                                       |  |                             | 23,104,942 |   |                           |   | 4,205,383 |      |  |   | 23,041,983 |   |  |   | 4,132,187 |  
|                                                                                            |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Diluted                                                                                     |  |                             | 24,735,037 |   |                           |   | 4,205,383 |      |  |   | 24,761,794 |   |  |   | 4,132,187 |  
|                                                                                            |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  

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)



|                                                                                                   |  |                          |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                                   |  | Six Months EndedJune 30, |       
|                                                                                                   |  | 2007                     |        |   | 2006 |  
|Cash flows provide by (used in) operating activities                                               |  |                          |        |   |      |   |        |  
|Net income (loss)                                                                                  |  | $                        | 1,367  |   |      | $ | (3,752 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                          |        |   |      |   |        |  
|Depreciation and amortization                                                                      |  |                          | 741    |   |      |   | 1,020  |  
|Interest receivable on stockholder notes                                                           |  |                          | (2     | ) |      |   | (9     | )
|Amortization of warrants on notes payable                                                          |  |                          |       |   |      |   | 54     |  
|Changes in preferred stock warrant liability                                                       |  |                          |       |   |      |   | 1,240  |  
|Loss on disposal on property, plant and equipment                                                  |  |                          | 11     |   |      |   | 5      |  
|Stock-based compensation                                                                           |  |                          | 2,483  |   |      |   | 1,883  |  
|Allowance for doubtful accounts                                                                    |  |                          | (21    | ) |      |   | (5     | )
|Reserve for excess and obsolete inventory                                                          |  |                          | (71    | ) |      |   | (116   | )
|Change in assets and liabilities                                                                   |  |                          |        |   |      |   |        |  
|Accounts receivable                                                                                |  |                          | (2,536 | ) |      |   | (1,177 | )
|Inventories                                                                                        |  |                          | (318   | ) |      |   | 222    |  
|Prepaid expenses and other current assets                                                          |  |                          | 690    |   |      |   | 400    |  
|Other non-current assets                                                                           |  |                          | (37    | ) |      |   |       |  
|Accounts payable                                                                                   |  |                          | 185    |   |      |   | (309   | )
|Accrued and other liabilities                                                                      |  |                          | (433   | ) |      |   | 490    |  
|Deferred revenue                                                                                   |  |                          | 669    |   |      |   | (69    | )
|Customer deposits                                                                                  |  |                          | (18    | ) |      |   | (7     | )
|Deferred rent                                                                                      |  |                          | (37    | ) |      |   | (24    | )
|                                                                                                   |  |                          |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                                |  |                          | 2,673  |   |      |   | (154   | )
|                                                                                                   |  |                          |        |   |      |   |        |  
|Cash flows used in investing activities                                                            |  |                          |        |   |      |   |        |  
|Acquisition of property and equipment                                                              |  |                          | (352   | ) |      |   | (319   | )
|Change in restricted cash                                                                          |  |                          |       |   |      |   | 107    |  
|Proceeds from sale of property and equipment                                                       |  |                          |       |   |      |   | 2      |  
|                                                                                                   |  |                          |        |   |      |   |        |  
|Net cash used in investing activities                                                              |  |                          | (352   | ) |      |   | (210   | )
|                                                                                                   |  |                          |        |   |      |   |        |  
|Cash flows from financing activities                                                               |  |                          |        |   |      |   |        |  
|Repayments on equipment leases                                                                     |  |                          |       |   |      |   | (3     | )
|Proceeds from exercise of stock options                                                            |  |                          | 308    |   |      |   | 421    |  
|Proceeds from employee stock purchase plan                                                         |  |                          | 514    |   |      |   |       |  
|Payments of capitalized IPO related costs                                                          |  |                          | (409   | ) |      |   |       |  
|                                                                                                   |  |                          |        |   |      |   |        |  
|Net cash provided by financing activities                                                          |  |                          | 413    |   |      |   | 418    |  
|                                                                                                   |  |                          |        |   |      |   |        |  
|Net increase in cash and cash equivalents                                                          |  |                          | 2,734  |   |      |   | 54     |  
|Cash and cash equivalents at beginning of period                                                   |  |                          | 45,915 |   |      |   | 10,121 |  
|                                                                                                   |  |                          |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                         |  | $                        | 48,649 |   |      | $ | 10,175 |  
|                                                                                                   |  |                          |        |   |      |   |        |  

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 six months ended June 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.

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.

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 does not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.

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 Company is currently under examination with the State of California for the years 2003 and 2004. The final outcome of the examination is not yet known; however,
management does not anticipate any adjustments which would result in material changes to the Companys results of operations, financial condition or liquidity.

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.



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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 EndedJune 30, |        | Six Months EndedJune 30,
|                                 |  | 2007                       |        | 2006                     |   | 2007   |  | 2006
|RF generators                    |  | $                          | 5,514  |                          | $ | 3,420  |  | $    | 9,406  |  | $ | 6,679 
|ThermaTips and other consumables |  |                            | 11,518 |                          |   | 10,809 |  |      | 22,358 |  |   | 19,630
|                                 |  |                            |        |                          |   |        |  |      |        |  |   |       
|Net revenue from products        |  |                            | 17,032 |                          |   | 14,229 |  |      | 31,764 |  |   | 26,309
|Services and other               |  |                            | 467    |                          |   | 402    |  |      | 890    |  |   | 753   
|                                 |  |                            |        |                          |   |        |  |      |        |  |   |       
|Total net revenue                |  | $                          | 17,499 |                          | $ | 14,631 |  | $    | 32,654 |  | $ | 27,062
|                                 |  |                            |        |                          |   |        |  |      |        |  |   |       

The following table summarizes net revenue by geographic region:



|                   |  |                            |        |                          |   |        |  |      |        |  |   |       
|------------------ |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                   |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                   |  | 2007                       |        | 2006                     |   | 20 0 7 |  | 2006
|United States      |  | $                          | 9,347  |                          | $ | 7,506  |  | $    | 16,980 |  | $ | 14,035
|Asia Pacific       |  |                            | 3,640  |                          |   | 3,205  |  |      | 6,868  |  |   | 6,369 
|Europe/Middle East |  |                            | 2,934  |                          |   | 2,080  |  |      | 5,589  |  |   | 3,733 
|Rest of the world  |  |                            | 1,578  |                          |   | 1,840  |  |      | 3,217  |  |   | 2,925 
|                   |  |                            |        |                          |   |        |  |      |        |  |   |       
|Total net revenue  |  | $                          | 17,499 |                          | $ | 14,631 |  | $    | 32,654 |  | $ | 27,062
|                   |  |                            |        |                          |   |        |  |      |        |  |   |       

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.

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.



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|                                                                                |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | --------- | ---- |  | - | ---------- | - |  | - | --------- | -
|                                                                                |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                                |  | 2007                        |            |   | 2006                      |   |           | 2007 |  |   | 2006       |  
|Net income (loss) per share :                                                   |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Numerator                                                                       |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Net income (loss)                                                               |  | $                           | 1,308      |   |                           | $ | (980      | )    |  | $ | 1,367      |   |  | $ | (3,752    | )
|                                                                                |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Denominator                                                                     |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Weighted-average common shares outstanding                                      |  |                             | 23,109,317 |   |                           |   | 4,238,196 |      |  |   | 23,046,983 |   |  |   | 4,173,437 |  
|Less: weighted-average unvested common shares subject to repurchase             |  |                             | (4,375     | ) |                           |   | (32,813   | )    |  |   | (5,000     | ) |  |   | (41,250   | )
|                                                                                |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Denominator for basic net income (loss) per share                               |  |                             | 23,104,942 |   |                           |   | 4,205,383 |      |  |   | 23,041,983 |   |  |   | 4,132,187 |  
|Dilutive potential common shares used in computing diluted net income per share |  |                             | 1,630,095  |   |                           |   |          |      |  |   | 1,719,811  |   |  |   |          |  
|                                                                                |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Denominator for diluted net income (loss) per share                             |  |                             | 24,735,037 |   |                           |   | 4,205,383 |      |  |   | 24,761,794 |   |  |   | 4,132,187 |  
|                                                                                |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Basic net income (loss) per share                                               |  | $                           | 0.06       |   |                           | $ | (0.23     | )    |  | $ | 0.06       |   |  | $ | (0.91     | )
|                                                                                |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  
|Diluted net income (loss) per share                                             |  | $                           | 0.05       |   |                           | $ | (0.23     | )    |  | $ | 0.06       |   |  | $ | (0.91     | )
|                                                                                |  |                             |            |   |                           |   |           |      |  |   |            |   |  |   |           |  

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 EndedJune 30, |  | Six Months EndedJune 30,
|                                     |  | 2007                       |  | 2006                     |  | 2007    |  | 2006      
|Options to purchase common stock     |  | 1,045,732                  |  | 3,145,579                |  | 983,750 |  | 3,145,579 
|Common stock subject to repurchase   |  |                           |  | 24,375                   |  |        |  | 24,375    
|Convertible preferred stock          |  |                           |  | 12,042,274               |  |        |  | 12,042,274
|Convertible preferred stock warrants |  |                           |  | 617,607                  |  |        |  | 617,607   

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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NOTE 4  BALANCE SHEET DETAIL

Inventories, Net

Inventories, net consist of the following:



|                |  |              |       |                  |   |      
|--------------- |  | ------------ | ----- | ---------------- | - | -----
|                |  | June 30,2007 |       | December 31,2006
|Raw materials   |  | $            | 2,170 |                  | $ | 2,134
|Work-in-process |  |              | 515   |                  |   | 710  
|Finished goods  |  |              | 2,556 |                  |   | 2,375
|                |  |              |       |                  |   |      
|                |  | $            | 5,241 |                  | $ | 5,219
|                |  |              |       |                  |   |      

Accrued Liabilities

Accrued liabilities consist of the following:



|                             |  |              |       |                  |   |      
|---------------------------- |  | ------------ | ----- | ---------------- | - | -----
|                             |  | June 30,2007 |       | December 31,2006
|Marketing expenses           |  | $            | 289   |                  | $ | 226  
|Travel and entertainment     |  |              | 198   |                  |   | 191  
|Warranty                     |  |              | 484   |                  |   | 329  
|Sales and use tax            |  |              | 221   |                  |   | 171  
|Payroll and related expenses |  |              | 3,399 |                  |   | 3,947
|Professional fees            |  |              | 345   |                  |   | 269  
|Fixed assets                 |  |              | 250   |                  |   | 283  
|IPO expenses                 |  |              |      |                  |   | 409  
|Accrued claims               |  |              | 359   |                  |   | 477  
|Accrued inventory purchases  |  |              | 152   |                  |   | 294  
|Income tax payable           |  |              | 110   |                  |   |     
|Other                        |  |              | 588   |                  |   | 776  
|                             |  |              |       |                  |   |      
|                             |  | $            | 6,395 |                  | $ | 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:



|                                                                             |  |                  |      |   |              |   |      |  
|---------------------------------------------------------------------------- |  | ---------------- | ---- | - | ------------ | - | ---- | -
|                                                                             |  | Six Months Ended |     
|                                                                             |  | June 30,2007     |      |   | June 30,2006 |  
|Balance at beginning of period                                               |  | $                | 329  |   |              | $ | 296  |  
|Accruals for warranties issued during the period                             |  |                  | 370  |   |              |   | 101  |  
|Accruals related to pre-existing warranties (including changes in estimates) |  |                  | 17   |   |              |   | 50   |  
|Settlements made during the period                                           |  |                  | (232 | ) |              |   | (138 | )
|                                                                             |  |                  |      |   |              |   |      |  
|Balance at end of period                                                     |  | $                | 484  |   |              | $ | 309  |  
|                                                                             |  |                  |      |   |              |   |      |  



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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:



|                               |  |                  |       |   |              |   |       |  
|------------------------------ |  | ---------------- | ----- | - | ------------ | - | ----- | -
|                               |  | Six Months Ended |      
|                               |  | June 30,2007     |       |   | June 30,2006 |  
|Balance at beginning of period |  | $                | 1,646 |   |              | $ | 1,442 |  
|Payments received              |  |                  | 733   |   |              |   | 585   |  
|Revenue recognized             |  |                  | (551  | ) |              |   | (483  | )
|                               |  |                  |       |   |              |   |       |  
|Balance at end of period       |  | $                | 1,828 |   |              | $ | 1,544 |  
|                               |  |                  |       |   |              |   |       |  

Under extended warranty contracts, the Company incurred costs of $116 and $243 during the three
and six months ended June 30, 2007, respectively, and costs of $176 and $336 during the three and six months ended June 30, 2006, respectively.

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 of the Company.

The Company advised
Alma Lasers, Ltd. and Alma Lasers, Inc. (together Alma) as early as 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.

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  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 EndedJune 30, |       | Six Months EndedJune 30,
|                           |  | 2007                       |       | 2006                     |   | 2007 |  | 2006
|Cost of revenue            |  | $                          | 40    |                          | $ | 10   |  | $    | 140   |  | $ | 42   
|Sales and marketing        |  |                            | 434   |                          |   | 249  |  |      | 916   |  |   | 758  
|Research and development   |  |                            | 242   |                          |   | 137  |  |      | 553   |  |   | 289  
|General and administrative |  |                            | 506   |                          |   | 259  |  |      | 874   |  |   | 794  
|                           |  |                            |       |                          |   |      |  |      |       |  |   |      
|                           |  | $                          | 1,222 |                          | $ | 655  |  | $    | 2,483 |  | $ | 1,883
|                           |  |                            |       |                          |   |      |  |      |       |  |   |      



|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; 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 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 June 30, 2007, we had an installed base of 2,258 ThermaCool RF generators and had sold over
415,000 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 six months of 2007 we derived 66%, 73%
and 68% respectively, of our revenue from ThermaTip and other consumable sales, and 31%, 24% and 29% 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. In February 2007, we introduced and began shipment of the ThermaCool



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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. During the second quarter of 2007, we sold a record 224
generators, which included sales of 111 systems to new customers and sales of 113 systems as upgrades to existing customers. The high demand in upgrades from our installed customer base required that our sales organization spend a higher than
expected amount of time to respond to this demand. As a result, systems sales in the second quarter of 2007 represented 31% of total sales, and sales of ThermaTips and other consumables represented 66% of total sales. During the first six months of
2007, we sold a total of 371 systems, of which 214 systems were sold to new customers and 157 systems were sold to existing customers as upgrades. The 214 systems sold to new customers is in line with our expectation to sell over 400 ThermaCool NXT
systems to new customers worldwide in 2007. We believe the increased systems sales as a percentage of total sales in the first six months of 2007 was due primarily to the change in system platform, and may not be sustainable for the remainder of the
year.

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 81 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 six 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 EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                   |  | 2007                       |   |  | 2006                     |   |  | 2007 |   |  | 2006 |  
|United States      |  | 53                         | % |  | 51                       | % |  | 52   | % |  | 52   | %
|Asia Pacific       |  | 21                         | % |  | 22                       | % |  | 21   | % |  | 23   | %
|Europe/Middle East |  | 17                         | % |  | 14                       | % |  | 17   | % |  | 14   | %
|Rest of the world  |  | 9                          | % |  | 13                       | % |  | 10   | % |  | 11   | %
|                   |  |                            |   |  |                          |   |  |      |   |  |      |  
|Total net revenue  |  | 100                        | % |  | 100                      | % |  | 100  | % |  | 100  | %
|                   |  |                            |   |  |                          |   |  |      |   |  |      |  

We expect our operating expenses to increase in the future as a result of increased sales and
marketing activity to promote revenue growth and geographic expansion, continued research and development of new products and technologies, and increased general and administrative expenses to support our overall anticipated growth and public
company requirements.

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 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.



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Results of Operations

Three and Six Months Ended June 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 $2.9 million, or 20%, from $14.6 million to $17.5 million for the three months ended
June 30, 2006 and 2007, respectively. Sales of ThermaTips and other consumables increased $0.7 million, or 7%, from $10.8 million to $11.5 million for the three months ended June 30, 2006 and 2007, respectively. Sales of ThermaCool RF
generator increased $2.1 million, or 61%, from $3.4 million to $5.5 million for the three months ended June 30, 2006 and 2007, respectively. International sales to distributors accounted for 47% of revenue for the three months ended
June 30, 2007, as compared to 49% in the same period in 2006. The increase in revenue was driven by increased demand of our recently introduced ThermaCool NXT generator system, which represented 31% of our second quarter 2007 revenue, continued
expansion into new international markets, and increase sales of ThermaTips and other consumables. During the second quarter of 2007, we sold 111 systems to new customers and our installed base grew to 2,258 at June 30, 2007.

Revenue of $32.7 million in the six months ended June 30, 2007 grew $5.6 million, or 21%,
from $27.1 million in the same period in 2006. The increase in revenue was driven by increased sales of $2.8 million, or 41% 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 $2.7 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.

Cost of
Revenue. Our cost of revenue consists primarily of material, labor and manufacturing overhead expenses. Cost of revenue increased $0.9 million, or 24%, from $3.9 million to $4.8 million for the three months ended June 30, 2006 and
2007, respectively. Gross margin was 72.5% of revenue in the second quarter of 2007, compared with 73.4% of revenue in the second quarter of 2006. The decrease in gross margin as a percent of revenue in 2007 was primarily due to sales mix towards
the lower margin RF generator sales, which was partially offset by higher average selling price of ThermaTips, increase in sales volume and direct cost efficiencies in the production of ThermaTips.

Cost of revenue in the six months ended June 30, 2007 increased $1.3 million, or 17% from the same period a year ago. Gross margin was 72.5% of
revenue in the six month period in 2007, compared with 71.6% 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 $0.5 million, or 8%, from $6.3 million to $6.8 million for the three months ended June 30, 2006 and 2007, respectively. The increase in 2007 was primarily attributable to an increase in marketing expenses in support
of the launch of the new ThermaCool NXT product, as well as the Hands by Thermage and Lips by Thermage new procedures; additional personnel and related travel and entertainment expenses and higher stock-based compensation expenses.

Sales and marketing expenses in the six months ended June 30, 2007 increased $1.0 million, or 9%, from the same period a year ago.
The increase in sales and marketing expenses in 2007 was driven by the same factors as those mentioned in the second quarter of 2007 and 2006.

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 decreased $0.4 million, or 9%, from $2.6 million to $2.2 million for the three months ended June 30, 2006 and 2007, respectively. 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 six months ended June 30, 2007 decreased $0.2 million, or 5%, from the same period a year ago. The decrease in research
and development expenses in 2007 were driven by the same factors as those mentioned in the second quarter of 2007 and 2006.

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 increased $0.4 million, or 16%, from $2.4 million to $2.8 million for the three months ended June 30, 2006 and 2007, respectively. The increase in 2007 was primarily attributable to higher stock-based compensation
charges, employee-related expenses and insurance and expenses in connection with being a public company. General and administrative expenses in the six months ended June 30, 2007 increased $0.8 million, or 17%, 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.



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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 $0.5 million from $0.1 million to $0.6 million in the three months ended June 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 $0.9 million from $0.2 million in the six months ended June 30, 2006 to $1.2 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 and
Other Expense. Interest and other expense of $1.0 million and $1.6 million for the three months and six months ended June 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. Expenses related to changes in the fair value of convertible preferred stock warrants were $0.4 million and $1.2 million in the three months and six months ended
June 30, 2006, respectively. Interest expenses were $0.2 million and $0.4 million in the three months and six months ended June 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 an 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 three months and six months ended June 30, 2007 were $140,000 and $147,000, respectively, compared with zero provision for income taxes for the prior year
periods. Our effective tax rate of 10%, comprised primarily of alternative minimum tax, differs from the federal statutory rate of 34% due primarily to the utilization of net operating loss carryforward.

Stock-Based Compensation

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



|                           |  |                            |       |                          |   |      |  |      |       |  |   |      
|-------------------------- |  | -------------------------- | ----- | ------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                           |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|                           |  | 2007                       |       | 2006                     |   | 2007 |  | 2006
|Cost of revenue            |  | $                          | 40    |                          | $ | 10   |  | $    | 140   |  | $ | 42   
|Sales and marketing        |  |                            | 434   |                          |   | 249  |  |      | 916   |  |   | 758  
|Research and development   |  |                            | 242   |                          |   | 137  |  |      | 553   |  |   | 289  
|General and administrative |  |                            | 506   |                          |   | 259  |  |      | 874   |  |   | 794  
|                           |  |                            |       |                          |   |      |  |      |       |  |   |      
|                           |  | $                          | 1,222 |                          | $ | 655  |  | $    | 2,483 |  | $ | 1,883
|                           |  |                            |       |                          |   |      |  |      |       |  |   |      

Liquidity and Capital Resources

While we have had two consecutive quarters of profitable results in 2007, we have not demonstrated sustained profitability. 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 June 30,
2007, we had working capital of $51.1 million, which consists primarily of $48.6 million in cash and cash equivalents.



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Net Cash Provided by (Used in) Operating Activities. Net cash provided by operating
activities was $2.7 million in the six months ended June 30, 2007, compared with net cash used of $0.2 million in the same period a year ago. During 2007, $4.5 million net cash was provided from net income after adjusting for non-cash items,
which was offset by $1.8 million net cash used in assets and liabilities (primarily $2.5 million decrease in cash used in accounts receivable as a result of increased revenue, partially offset by $0.7 million cash provided from higher deferred
revenue as a result of deferral of $0.5 million of revenue on sales of our predecessor generators with rights to upgrade to the new ThermaCool NXT generator.) During 2006, $0.3 million net cash was provided from operating loss after adjusting for by
non-cash items, which was fully offset by $0.5 million of net cash used in assets and liabilities (primarily $1.2 million decrease in cash used in accounts receivable as a result of increased revenue, offset by $0.4 million cash provided from
decrease in prepaid expenses and other current assets, $0.2 million cash provided from increase in inventory and $0.2 million cash provided from increase in accounts payable and accrued and other liabilities.)

Net Cash Used in Investing Activities. Net cash used in investing activities was $0.4 million and $0.2 million for the six months ended
June 30, 2007 and 2006, respectively. Investing activities were primarily related to acquisition of property and equipment in both periods.

Net Cash Provided by Financing Activities. Net cash provided by financing activities was $0.4 million each for the six months ended June 30, 2006 and 2007. 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.

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.

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
|------- | ----------------------------------------------------------

We invest our excess cash primarily in U.S. government securities and investment-grade marketable debt securities of financial institutions and corporations. These instruments have maturities of three months or less when acquired. We do not
utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that, while the instruments we hold are subject to
changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect
market risk sensitive instruments.

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.



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|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.

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 a patent
infringement lawsuit against Alma in the United States District Court for the District of Delaware. The lawsuit 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.



|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. We may experience similar pricing challenges in the future as we introduce new products, which could have an
unanticipated negative impact on our financial performance.



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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 and $1.3 million for the three months ended March 31,
2007 and June 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 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 a patent infringement lawsuit against Alma. 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 June 30, 2007, we had 31 issued U.S. patents and 18 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



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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.

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.

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 half 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.

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.



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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 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 50% and 47% of our revenue for the quarters ended March 31, 2007 and June 30, 2007, respectively. 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;
| | - |  | ------------------------------------------------------------



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| |  |  | 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.

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.



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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.

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.



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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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.



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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 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



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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.

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.



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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 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.



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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.

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.



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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. 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;
| | - |  | ----------------------------------------------------------------------



| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------------------------



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| |  |  | 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.

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 June 30, 2007, we have spent approximately $5.0 million
for repayment of our working capital line with GE Capital, $15.3 million for sales and marketing initiatives, $5.4 million for research and development activities and $5.9 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
|------- | ---------------------------------------------------

None.



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

None.



|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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##### Table of Contents

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: August 13, 2007 |  | /s/ Stephen J. Fanning                      
|                      |  | Stephen J. Fanning                          
|                      |  | President and Chief Executive Officer       
|                      |  | (Principal Executive Officer)               
|                      | 
|Date: August 13, 2007 |  | /s/ Laureen DeBuono                         
|                      |  | Laureen DeBuono                             
|                      |  | Chief Financial Officer                     
|                      |  | (Principal Financial and Accounting Officer)



30



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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.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------



31