##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549





Form 10-Q





(Mark one)

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

For the quarterly period ended June 30, 2010

OR



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

For the transition period from  to

Commission File Number 000-51623





Cynosure, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 04-3125110                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                               | 
|5 Carlisle Road
Westford, MA                                   |  | 01886                               
|(Address of principal executive offices)                       |  | (Zip code)                          

(978) 256-4200

(Registrants telephone number, including area code)





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).     ̈  Yes     ̈  No

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



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

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

The number of shares outstanding of each of the registrants classes of common stock, as of August 2, 2010:



|                                       |  |                 
|-------------------------------------- |  | ----------------
|Class                                  |  | Number of Shares
|Class A Common Stock, $0.001 par value |  | 9,743,889       
|Class B Common Stock, $0.001 par value |  | 2,939,161       









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##### Table of Contents

Cynosure, Inc.

Table of Contents



|                                                                                                                    |  |                                                                                                        |  |         
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | --------
|                                                                                                                    |  |                                                                                                        |  | Page No.
|PART I                                                                                                              |  | Financial Information                                                                                  |  |         
|                                                                                                                    |  |                                                                                                       
|Item 1.                                                                                                             |  | Financial Statements (Unaudited)                                                                       |  |         
|                                                                                                                    |  | Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009                                  |  | 1       
|                                                                                                                    |  | Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 2010 and 2009 |  | 2       
|                                                                                                                    |  | Consolidated Statements of Cash Flows for the Three and Six Month Periods Ended June 30, 2010 and 2009 |  | 3       
|                                                                                                                    |  | Notes to Consolidated Financial Statements                                                             |  | 4       
|Item 2.                                                                                                             |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                  |  | 10      
|Item 3.                                                                                                             |  | Quantitative and Qualitative Disclosures About Market Risk                                             |  | 18      
|Item 4.                                                                                                             |  | Controls and Procedures                                                                                |  | 19      
|                                                                                                                    |  |                                                                                                       
|PART II                                                                                                             |  | Other Information                                                                                      |  |         
|                                                                                                                    |  |                                                                                                       
|Item 1.                                                                                                             |  | Legal Proceedings                                                                                      |  | 19      
|Item 1A.                                                                                                            |  | Risk Factors                                                                                           |  | 20      
|Item 2.                                                                                                             |  | Unregistered Sales of Equity Securities and Use of Proceeds                                            |  | 20      
|Item 6.                                                                                                             |  | Exhibits                                                                                               |  | 21      
|SIGNATURES                                                                                                          |  | 22                                                                                                    
|EXHIBIT INDEX                                                                                                       |  | 23                                                                                                    
|                                                                                                                   
|EX-31.1 Certification of the Principal Executive Officer                                                           
|                                                                                                                   
|EX-31.2 Certification of the Principal Financial Officer                                                           
|                                                                                                                   
|EX-32.1 Certification of the Principal Executive Officer Pursuant to Section 
906 of the Sarbanes-Oxley Act of 2002
|                                                                                                                   
|EX-32.2 Certification of the Principal Financial Officer Pursuant to Section 
906 of the Sarbanes-Oxley Act of 2002



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##### Table of Contents

Cynosure, Inc.

Consolidated Balance Sheets

(in thousands)



|                                                                                                                                                                  |  |                          |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                  |  | (Unaudited)June 
30,2010 |         |   | December 31,2009 |  
|                                                                                                                                                                  |  |                         
|Assets                                                                                                                                                            |  |                          |         |   |                  |   |         |  
|Current assets:                                                                                                                                                   |  |                          |         |   |                  |   |         |  
|Cash and cash equivalents (Note 4)                                                                                                                                |  | $                        | 25,474  |   |                  | $ | 44,797  |  
|Short-term marketable securities (Notes 4 and 5)                                                                                                                  |  |                          | 62,717  |   |                  |   | 23,708  |  
|Short-term investments and related financial instruments (Notes 4 and 5)                                                                                          |  |                          | 5,900   |   |                  |   | 18,454  |  
|Accounts receivable, net                                                                                                                                          |  |                          | 10,671  |   |                  |   | 11,773  |  
|Inventories                                                                                                                                                       |  |                          | 19,967  |   |                  |   | 21,815  |  
|Prepaid expenses and other current assets                                                                                                                         |  |                          | 3,343   |   |                  |   | 6,441   |  
|Deferred income taxes                                                                                                                                             |  |                          | 324     |   |                  |   | 160     |  
|                                                                                                                                                                  |  |                          |         |   |                  |   |         |  
|Total current assets                                                                                                                                              |  |                          | 128,396 |   |                  |   | 127,148 |  
|                                                                                                                                                                  |  |                          |         |   |                  |   |         |  
|Property and equipment, net                                                                                                                                       |  |                          | 9,014   |   |                  |   | 10,567  |  
|Long-term marketable securities (Notes 4 and 5)                                                                                                                   |  |                          | 2,013   |   |                  |   | 5,008   |  
|Other noncurrent assets                                                                                                                                           |  |                          | 2,140   |   |                  |   | 2,510   |  
|                                                                                                                                                                  |  |                          |         |   |                  |   |         |  
|Total assets                                                                                                                                                      |  | $                        | 141,563 |   |                  | $ | 145,233 |  
|                                                                                                                                                                  |  |                          |         |   |                  |   |         |  
|                                                                                                                                                                  |  |                         
|Liabilities and Stockholders Equity                                                                                                                              |  |                          |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                              |  |                          |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                  |  | $                        | 4,676   |   |                  | $ | 4,822   |  
|Amounts due to related party (Note 11)                                                                                                                            |  |                          | 2,081   |   |                  |   | 1,350   |  
|Accrued expenses                                                                                                                                                  |  |                          | 9,822   |   |                  |   | 9,535   |  
|Deferred revenue                                                                                                                                                  |  |                          | 3,011   |   |                  |   | 4,269   |  
|Capital lease obligation                                                                                                                                          |  |                          | 202     |   |                  |   | 264     |  
|                                                                                                                                                                  |  |                          |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                         |  |                          | 19,792  |   |                  |   | 20,240  |  
|                                                                                                                                                                  |  |                          |         |   |                  |   |         |  
|Capital lease obligation, net of current portion                                                                                                                  |  |                          | 85      |   |                  |   | 171     |  
|Deferred revenue, net of current portion                                                                                                                          |  |                          | 586     |   |                  |   | 620     |  
|Other noncurrent liability                                                                                                                                        |  |                          | 325     |   |                  |   | 372     |  
|                                                                                                                                                                  |  |                         
|Commitments and contingencies (Note 10)                                                                                                                           |  |                          |         |   |                  |   |         |  
|                                                                                                                                                                  |  |                         
|Stockholders equity:                                                                                                                                             |  |                          |         |   |                  |   |         |  
|Preferred stock, $0.001 par value                                                                                                                                 |  |                          |         |   |                  |   |         |  
|Authorized  5,000 shares                                                                                                                                         |  |                          |         |   |                  |   |         |  
|Issued  none                                                                                                                                                     |  |                          |        |   |                  |   |        |  
|Class A and Class B common stock, $0.001 par value                                                                                                                |  |                          |         |   |                  |   |         |  
|Authorized  70,000 shares                                                                                                                                        |  |                          |         |   |                  |   |         |  
|Issued  9,785 Class A shares and 2,975 Class B shares at June 30,
2010; Issued 9,775 Class A shares and 2,975 Class B shares at December 31, 2009,
respectively |  |                          | 13      |   |                  |   | 13      |  
|Additional paid-in capital                                                                                                                                        |  |                          | 120,326 |   |                  |   | 117,814 |  
|Retained earnings                                                                                                                                                 |  |                          | 3,484   |   |                  |   | 7,773   |  
|Accumulated other comprehensive loss                                                                                                                              |  |                          | (2,653  | ) |                  |   | (1,451  | )
|Treasury stock, 11 Class A shares and 36 Class B shares at June 30, 2010 (at cost), and 3 Class A shares and 36
Class B shares at December 31, 2009 (at cost)     |  |                          | (395    | ) |                  |   | (319    | )
|                                                                                                                                                                  |  |                          |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                        |  |                          | 120,775 |   |                  |   | 123,830 |  
|                                                                                                                                                                  |  |                          |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                        |  | $                        | 141,563 |   |                  | $ | 145,233 |  
|                                                                                                                                                                  |  |                          |         |   |                  |   |         |  

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



1



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##### Table of Contents

Cynosure, Inc.

Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)



|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|-------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                   |  | Three Months EndedJune 30, |        |   | Six Months
EndedJune 30, |  
|                                                   |  | 2010                       |        |   | 2009                     |   |        | 2010 |  |   | 2009   |  
|Product revenues                                   |  | $                          | 16,385 |   |                          | $ | 16,492 |      |  | $ | 30,606 |   |  | $ | 27,394  |  
|Parts, accessories and service revenues            |  |                            | 5,104  |   |                          |   | 4,321  |      |  |   | 9,776  |   |  |   | 8,235   |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Total revenues                                     |  |                            | 21,489 |   |                          |   | 20,813 |      |  |   | 40,382 |   |  |   | 35,629  |  
|Cost of revenues                                   |  |                            | 9,069  |   |                          |   | 8,737  |      |  |   | 17,162 |   |  |   | 14,537  |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Gross profit                                       |  |                            | 12,420 |   |                          |   | 12,076 |      |  |   | 23,220 |   |  |   | 21,092  |  
|                                                   |  |                            |        |  
|Operating expenses:                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Sales and marketing                                |  |                            | 8,645  |   |                          |   | 10,423 |      |  |   | 17,047 |   |  |   | 20,953  |  
|Research and development                           |  |                            | 1,848  |   |                          |   | 1,696  |      |  |   | 3,555  |   |  |   | 3,437   |  
|General and administrative                         |  |                            | 2,830  |   |                          |   | 4,049  |      |  |   | 6,063  |   |  |   | 7,929   |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Total operating expenses                           |  |                            | 13,323 |   |                          |   | 16,168 |      |  |   | 26,665 |   |  |   | 32,319  |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Loss from operations                               |  |                            | (903   | ) |                          |   | (4,092 | )    |  |   | (3,445 | ) |  |   | (11,227 | )
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Interest income, net                               |  |                            | 45     |   |                          |   | 106    |      |  |   | 98     |   |  |   | 371     |  
|Other (expense) income, net                        |  |                            | (550   | ) |                          |   | 390    |      |  |   | (701   | ) |  |   | 334     |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Loss before provision (benefit) for income taxes   |  |                            | (1,408 | ) |                          |   | (3,596 | )    |  |   | (4,048 | ) |  |   | (10,522 | )
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Provision (benefit) for income taxes               |  |                            | 69     |   |                          |   | (1,272 | )    |  |   | 241    |   |  |   | (4,177  | )
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Net loss                                           |  | $                          | (1,477 | ) |                          | $ | (2,324 | )    |  | $ | (4,289 | ) |  | $ | (6,345  | )
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Basic net loss per share                           |  | $                          | (0.12  | ) |                          | $ | (0.18  | )    |  | $ | (0.34  | ) |  | $ | (0.50   | )
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Diluted net loss per share                         |  | $                          | (0.12  | ) |                          | $ | (0.18  | )    |  | $ | (0.34  | ) |  | $ | (0.50   | )
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Basic weighted-average common shares outstanding   |  |                            | 12,710 |   |                          |   | 12,711 |      |  |   | 12,711 |   |  |   | 12,706  |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Diluted weighted-average common shares outstanding |  |                            | 12,710 |   |                          |   | 12,711 |      |  |   | 12,711 |   |  |   | 12,706  |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  

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



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##### Table of Contents

Cynosure, Inc.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)



|                                                                                               |  |                          |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                               |  | Six Months EndedJune
30, |        
|                                                                                               |  | 2010                     |         |   | 2009 |  
|Operating activities:                                                                          |  |                          |         |   |      |   |         |  
|Net loss                                                                                       |  | $                        | (4,289  | ) |      | $ | (6,345  | )
|Reconciliation of net loss to net cash provided by (used in) operating activities:             |  |                          |         |   |      |   |         |  
|Depreciation and amortization                                                                  |  |                          | 2,888   |   |      |   | 2,535   |  
|Stock-based compensation expense                                                               |  |                          | 2,437   |   |      |   | 3,646   |  
|(Gain) loss on investments                                                                     |  |                          | (21     | ) |      |   | 45      |  
|Loss on disposal of fixed assets                                                               |  |                          | 7       |   |      |   | 25      |  
|Deferred income taxes                                                                          |  |                          | 1       |   |      |   |        |  
|Accretion of discounts on marketable securities                                                |  |                          | 448     |   |      |   | 139     |  
|Changes in operating assets and liabilities:                                                   |  |                          |         |   |      |   |         |  
|Accounts receivable                                                                            |  |                          | 402     |   |      |   | 8,093   |  
|Inventories                                                                                    |  |                          | (1,031  | ) |      |   | (850    | )
|Net book value of demonstration inventory sold                                                 |  |                          | 748     |   |      |   | 299     |  
|Prepaid expenses and other current assets                                                      |  |                          | 2,995   |   |      |   | (4,813  | )
|Accounts payable                                                                               |  |                          | (73     | ) |      |   | (1,173  | )
|Due to related party                                                                           |  |                          | 748     |   |      |   | (3,164  | )
|Tax benefit from stock option exercises                                                        |  |                          | (2      | ) |      |   | (3      | )
|Accrued expenses                                                                               |  |                          | 588     |   |      |   | (4,777  | )
|Deferred revenue                                                                               |  |                          | (1,214  | ) |      |   | 640     |  
|Other noncurrent liability                                                                     |  |                          | (1      | ) |      |   | (6      | )
|                                                                                               |  |                          |         |   |      |   |         |  
|Net cash provided by (used in) operating activities                                            |  |                          | 4,631   |   |      |   | (5,709  | )
|                                                                                               |  |                         
|Investing activities:                                                                          |  |                          |         |   |      |   |         |  
|Purchases of property and equipment                                                            |  |                          | (244    | ) |      |   | (510    | )
|Proceeds from the sales and maturities of marketable securities                                |  |                          | 29,741  |   |      |   | 24,277  |  
|Purchases of marketable securities                                                             |  |                          | (53,603 | ) |      |   | (18,835 | )
|Increase in other noncurrent assets                                                            |  |                          | (46     | ) |      |   | (205    | )
|                                                                                               |  |                          |         |   |      |   |         |  
|Net cash (used in) provided by investing activities                                            |  |                          | (24,152 | ) |      |   | 4,727   |  
|                                                                                               |  |                         
|Financing activities:                                                                          |  |                          |         |   |      |   |         |  
|Excess tax benefit on options exercised                                                        |  |                          | 2       |   |      |   | 3       |  
|Repurchases of common stock                                                                    |  |                          | (75     | ) |      |   |        |  
|Proceeds from stock option exercises                                                           |  |                          | 78      |   |      |   | 42      |  
|Payments on capital lease obligation                                                           |  |                          | (133    | ) |      |   | (208    | )
|                                                                                               |  |                          |         |   |      |   |         |  
|Net cash used in financing activities                                                          |  |                          | (128    | ) |      |   | (163    | )
|Effect of exchange rate changes on cash and cash equivalents                                   |  |                          | 326     |   |      |   | 62      |  
|                                                                                               |  |                          |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                      |  |                          | (19,323 | ) |      |   | (1,083  | )
|Cash and cash equivalents, beginning of the period                                             |  |                          | 44,797  |   |      |   | 49,257  |  
|                                                                                               |  |                          |         |   |      |   |         |  
|Cash and cash equivalents, end of the period                                                   |  | $                        | 25,474  |   |      | $ | 48,174  |  
|                                                                                               |  |                          |         |   |      |   |         |  
|                                                                                               |  |                         
|Supplemental cash flow information                                                             |  |                          |         |   |      |   |         |  
|Cash paid for interest                                                                         |  | $                        | 26      |   |      | $ | 44      |  
|                                                                                               |  |                          |         |   |      |   |         |  
|Cash paid for income taxes                                                                     |  | $                        | 178     |   |      | $ | 49      |  
|                                                                                               |  |                          |         |   |      |   |         |  
|                                                                                               |  |                         
|Supplemental noncash investing and financing activities                                        |  |                          |         |   |      |   |         |  
|Transfer of demonstration equipment from inventory to fixed assets                             |  | $                        | 2,110   |   |      | $ | 4,188   |  
|Net unrealized gain on marketable securities, net of $11 and $18 deferred income tax provision |  | $                        | 21      |   |      | $ | 32      |  
|                                                                                               |  |                          |         |   |      |   |         |  

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



3



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##### Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements

Note 1  Interim Consolidated Financial Statements

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for
complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes that appear in the Annual Report on Form 10-K of Cynosure,
Inc. (Cynosure) for the year ended December 31, 2009. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and
cash flows as of the dates and for the periods presented have been included. The results of operations for the six months ended June 30, 2010 may not be indicative of the results that may be expected for the year ending December 31, 2010,
or any other period.

Note 2  Stock-Based Compensation

Cynosure recorded stock-based compensation expense of $1.2 million and $1.8 million for the three months ended June 30, 2010 and
2009, respectively. Cynosure recorded stock-based compensation expense of $2.4 million and $3.6 million for the six months ended June 30, 2010 and 2009, respectively. Cynosure capitalized $51,000 and $17,000 of stock-based compensation expense
as part of inventory during the six months ended June 30, 2010 and 2009, respectively.

Total stock-based compensation
expense was recorded to cost of revenues and operating expenses based upon the functional responsibilities of the individual holding the respective options, as follows:



|                                       |  |                            |       |                          |   |       |  |      |       |  |   |      
|-------------------------------------- |  | -------------------------- | ----- | ------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                       |  | Three Months EndedJune
30, |       | Six Months EndedJune 30,
|                                       |  | 2010                       |       | 2009                     |   | 2010  |  | 2009
|                                       |  | (In thousands)            
|Cost of revenues                       |  | $                          | 103   |                          | $ | 142   |  | $    | 189   |  | $ | 263  
|Sales and marketing                    |  |                            | 591   |                          |   | 797   |  |      | 1,170 |  |   | 1,584
|Research and development               |  |                            | 160   |                          |   | 260   |  |      | 338   |  |   | 529  
|General and administrative             |  |                            | 363   |                          |   | 622   |  |      | 740   |  |   | 1,270
|                                       |  |                            |       |                          |   |       |  |      |       |  |   |      
|Total stock-based compensation expense |  | $                          | 1,217 |                          | $ | 1,821 |  | $    | 2,437 |  | $ | 3,646
|                                       |  |                            |       |                          |   |       |  |      |       |  |   |      

Cash received from option exercises was $78,000 and
$42,000 during the six months ended June 30, 2010 and 2009, respectively.

Cynosure granted 397,000 and 445,500 stock
options during the six months ended June 30, 2010 and 2009, respectively. Cynosure has elected to use the Black-Scholes model to determine the weighted average fair value of options. The weighted average fair value of the options granted during
the six months ended June 30, 2010 and 2009 was $5.82 and $4.43, respectively, using the following assumptions:



|                          |  |                           |  |              
|------------------------- |  | ------------------------- |  | -------------
|                          |  | Six Months Ended
June 30,
|                          |  | 2010                      |  | 2009         
|Risk-free interest rate   |  | 2.10% - 2.50%             |  | 1.87% - 2.66%
|Expected dividend yield   |  |                          |  |             
|Expected term             |  | 5.8 years                 |  | 5.8 years    
|Expected volatility       |  | 59%                       |  | 63% - 64%    
|Estimated forfeiture rate |  | 5%                        |  | 5%           

Option-pricing models
require the input of various subjective assumptions, including the options expected life and the price volatility of the underlying stock. Cynosures estimated expected stock price volatility is based on its own historical volatility.
Cynosures expected term of options granted in the six months ended June 30, 2010 and 2009 was derived from the short-cut method. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at
the time of grant. The dividend yield of zero is based on the fact that Cynosure has never paid cash dividends and has no present intention to pay cash dividends.



4



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##### Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements(Continued)



Note 3  Inventories

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



|                |  |                |        |                   |   |       
|--------------- |  | -------------- | ------ | ----------------- | - | ------
|                |  | June 30,2010   |        | December 
31,2009
|                |  | (in thousands)
|Raw materials   |  | $              | 3,363  |                   | $ | 3,700 
|Work in process |  |                | 1,034  |                   |   | 1,302 
|Finished goods  |  |                | 15,570 |                   |   | 16,813
|                |  |                |        |                   |   |       
|                |  | $              | 19,967 |                   | $ | 21,815
|                |  |                |        |                   |   |       

Note 4  Fair Value

U.S. GAAP establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about
fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes the following fair value
hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:



| |  |  | Level 1  Quoted prices in active markets for identical assets or liabilities.
| | - |  | ------------------------------------------------------------------------------



| |  |  | Level 2  Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable markets data for substantially the full term of the assets or liabilities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

The following table represents Cynosures fair value hierarchy for its financial assets
(cash equivalents, marketable securities and short-term investments) measured at fair value as of June 30, 2010 (in thousands):



|                                   |  |         |        |         |   |         |  |       |   |  |   |       
|---------------------------------- |  | ------- | ------ | ------- | - | ------- |  | ----- | - |  | - | ------
|                                   |  | Level 1 |        | Level 2 |   | Level 3 |  | Total
|Money market funds (1)             |  | $       | 11,311 |         | $ |        |  | $     |  |  | $ | 11,311
|State and municipal bonds          |  |         |       |         |   | 17,334  |  |       |  |  |   | 17,334
|Treasuries and government agencies |  |         |       |         |   | 47,385  |  |       |  |  |   | 47,385
|Equity securities                  |  |         | 11     |         |   |        |  |       |  |  |   | 11    
|Auction rate securities            |  |         |       |         |   | 5,900   |  |       |  |  |   | 5,900 
|                                   |  |         |        |         |   |         |  |       |   |  |   |       
|Total                              |  | $       | 11,322 |         | $ | 70,619  |  | $     |  |  | $ | 81,941
|                                   |  |         |        |         |   |         |  |       |   |  |   |       



|(1) | Included in cash and cash equivalents at June 30, 2010.
|--- | -------------------------------------------------------

At June 30, 2010, Cynosures short-term investments consisted of auction rate securities (ARS) at full par value. As of
June 30, 2010 and December 31, 2009, Cynosure held $5.9 million and $18.5 million, respectively, at par value, of auction rate securities investments. The ARS were managed by UBS Financial Services, Inc. (UBS). On November 3, 2008,
Cynosure agreed to accept Auction Rate Securities Rights (the Rights) from UBS. The Rights permitted Cynosure to sell, or Put, its ARS at par value to UBS at any time during the period from June 30, 2010 through July 2, 2012. On
June 30, 2010, Cynosure exercised the Rights and Put its ARS to UBS at full par value. The transaction settled on July 1, 2010.

During the six months ended June 30, 2010, there were no significant transfers in and out of Level 1 and Level 2. ARS were
transferred from Level 3 to Level 2, as the Rights were valued using the quoted price of the Rights and exercised at June 30, 2010, providing Cynosure with full par value of the ARS.

The following table provides a summary of changes in fair value of Cynosures Level 3 financial assets for the six months ended
June 30, 2010 (in thousands):



|                                                                      |  |                |         |  
|--------------------------------------------------------------------- |  | -------------- | ------- | -
|                                                                      |  | Level 3 Assets |        
|Balance at December 31, 2009                                          |  | $              | 18,454  |  
|Recovery on ARS included in gain on investments                       |  |                | 1,212   |  
|Loss related to value of ARS Rights included in (loss) on investments |  |                | (1,191  | )
|Transfer to Level 2                                                   |  |                | (5,900  | )
|Net settlements                                                       |  |                | (12,575 | )
|                                                                      |  |                |         |  
|Balance at June 30, 2010                                              |  | $              |        |  
|                                                                      |  |                |         |  



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##### Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements(Continued)



Note 5  Short and Long-Term Marketable Securities and Short-Term Investments

Cynosures available-for-sale securities at June 30, 2010 consist of approximately $64.7 million of investments in debt
securities consisting of state and municipal bonds, treasuries and government agencies and approximately $11,000 in equity securities. Cynosures trading securities at June 30, 2010 consisted of approximately $5.9 million of investments in
auction rate securities at full par value. All investments in available-for-sale securities are recorded at fair market value, with any unrealized gains and losses reported as a separate component of accumulated other comprehensive loss. All
investments in trading securities are recorded at fair market value, with any adjustments recorded to earnings. As of June 30, 2010, Cynosures marketable securities consist of the following (in thousands):





|                                                       |  |              |        |               |   |                 |  |                  |    |  |   |    |  
|------------------------------------------------------ |  | ------------ | ------ | ------------- | - | --------------- |  | ---------------- | -- |  | - | -- | -
|                                                       |  | Market Value |        | AmortizedCost |   | UnrealizedGains |  | UnrealizedLosses |   
|Available-for-Sale Securities:                         |  |              |        |               |   |                 |  |                  |    |  |   |    |  
|Short-term marketable securities:                      |  |              |        |               |   |                 |  |                  |    |  |   |    |  
|State and municipal bonds                              |  | $            | 17,334 |               | $ | 17,334          |  | $                | 3  |  | $ | (3 | )
|Treasuries and government agencies                     |  |              | 45,372 |               |   | 45,343          |  |                  | 31 |  |   | (2 | )
|Equity securities                                      |  |              | 11     |               |   | 14              |  |                  |   |  |   | (3 | )
|                                                       |  |              |        |               |   |                 |  |                  |    |  |   |    |  
|Total short-term marketable securities                 |  | $            | 62,717 |               | $ | 62,691          |  | $                | 34 |  |   | (8 | )
|                                                       |  |              |        |               |   |                 |  |                  |    |  |   |    |  
|                                                       |  |              |        |              
|Long-term marketable securities:                       |  |              |        |               |   |                 |  |                  |    |  |   |    |  
|Treasuries and government agencies                     |  | $            | 2,013  |               | $ | 2,010           |  |                  | 3  |  |   |   |  
|                                                       |  |              |        |               |   |                 |  |                  |    |  |   |    |  
|Total long-term marketable securities                  |  |              | 2,013  |               |   | 2,010           |  | $                | 3  |  |   |   |  
|                                                       |  |              |        |               |   |                 |  |                  |    |  |   |    |  
|Total available-for-sale securities                    |  | $            | 64,730 |               | $ | 64,701          |  | $                | 37 |  | $ | (8 | )
|                                                       |  |              |        |               |   |                 |  |                  |    |  |   |    |  
|                                                       |  |              |        |              
|Trading Securities:                                    |  |              |        |               |   |                 |  |                  |    |  |   |    |  
|Short-term investments:                                |  |              |        |               |   |                 |  |                  |    |  |   |    |  
|Auction rate securities                                |  | $            | 5,900  |               |   |                 |  |                  |    |  |   |    |  
|                                                       |  |              |        |               |   |                 |  |                  |    |  |   |    |  
|Total marketable securities and short-term investments |  | $            | 70,630 |               |   |                 |  |                  |    |  |   |    |  
|                                                       |  |              |        |               |   |                 |  |                  |    |  |   |    |  

As of June 30, 2010, Cynosures available-for-sale debt securities mature as follows (in
thousands):





|                                         |  |                    |        |                   |   |                      |  |   |       |  |   |  
|---------------------------------------- |  | ------------------ | ------ | ----------------- | - | -------------------- |  | - | ----- |  | - | -
|                                         |  | Total              |        | Maturities       
|                                         |  | Less Than One Year |        | One to Five Years |   | More than five years
|State and municipal bonds                |  | $                  | 17,334 |                   | $ | 17,334               |  | $ |      |  | $ | 
|Treasuries and government agencies       |  |                    | 47,385 |                   |   | 45,372               |  |   | 2,013 |  |   | 
|                                         |  |                    |        |                   |   |                      |  |   |       |  |   |  
|Total available-for-sale debt securities |  | $                  | 64,719 |                   | $ | 62,706               |  | $ | 2,013 |  | $ | 
|                                         |  |                    |        |                   |   |                      |  |   |       |  |   |  

Note 6  Warranty Costs

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

The following table provides the detail of the change in Cynosures product warranty accrual during the six months ended
June 30, 2010, which is a component of accrued expenses in the consolidated balance sheets:





|                                        |  |                |        |  
|--------------------------------------- |  | -------------- | ------ | -
|                                        |  | June 30,2010   |       
|                                        |  | (in thousands) |       
|Warranty accrual, beginning of period   |  | $              | 2,440  |  
|Warranty provision related to new sales |  |                | 1,501  |  
|Costs incurred                          |  |                | (1,882 | )
|                                        |  |                |        |  
|Warranty accrual, end of period         |  | $              | 2,059  |  
|                                        |  |                |        |  



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##### Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements(Continued)



Note 7  Segment Information

Cynosure identifies operating segments as components of an enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. Cynosures chief decision-maker is a combination of the Chief Executive Officer and the Chief
Financial Officer. Cynosure views its operations and manages its business as one segment, aesthetic treatment products and services.

The following table represents total revenue by geographic destination:



|               |  |                             |        |                          |   |        |  |      |        |  |   |       
|-------------- |  | --------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|               |  | Three Months EndedJune 
30, |        | Six Months
EndedJune 30,
|               |  | 2010                        |        | 2009                     |   | 2010   |  | 2009
|               |  | (in thousands)             
|United States  |  | $                           | 8,491  |                          | $ | 7,963  |  | $    | 14,675 |  | $ | 15,330
|Europe         |  |                             | 6,007  |                          |   | 5,671  |  |      | 12,241 |  |   | 9,600 
|Asia / Pacific |  |                             | 5,447  |                          |   | 5,229  |  |      | 9,114  |  |   | 7,193 
|Other          |  |                             | 1,544  |                          |   | 1,950  |  |      | 4,352  |  |   | 3,506 
|               |  |                             |        |                          |   |        |  |      |        |  |   |       
|Total          |  | $                           | 21,489 |                          | $ | 20,813 |  | $    | 40,382 |  | $ | 35,629
|               |  |                             |        |                          |   |        |  |      |        |  |   |       

Total assets by geographic area are as follows:



|               |  |                |         |   |                  |   |         |  
|-------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|               |  | June 30,2010   |         |   | December 31,2009 |  
|               |  | (in thousands) |        
|United States  |  | $              | 126,237 |   |                  | $ | 127,752 |  
|Europe         |  |                | 10,768  |   |                  |   | 13,123  |  
|Asia / Pacific |  |                | 6,199   |   |                  |   | 6,346   |  
|Eliminations   |  |                | (1,641  | ) |                  |   | (1,988  | )
|               |  |                |         |   |                  |   |         |  
|Total          |  | $              | 141,563 |   |                  | $ | 145,233 |  
|               |  |                |         |   |                  |   |         |  

Long-lived assets by geographic area are as follows:



|               |  |                |        |                   |   |       
|-------------- |  | -------------- | ------ | ----------------- | - | ------
|               |  | June 30,2010   |        | December 
31,2009
|               |  | (in thousands)
|United States  |  | $              | 7,673  |                   | $ | 8,398 
|Europe         |  |                | 1,718  |                   |   | 2,867 
|Asia / Pacific |  |                | 1,763  |                   |   | 1,812 
|               |  |                |        |                   |   |       
|Total          |  | $              | 11,154 |                   | $ | 13,077
|               |  |                |        |                   |   |       

No individual country within Europe or Asia/Pacific
represented greater than 10% of total revenue or total assets for any period presented.

Cynosure Korea has long-lived assets
of $1.4 million, or 12% of the Companys total long-lived assets, as of June 30, 2010. These long-lived assets consist primarily of goodwill and intangibles associated with Cynosures acquisition of the aesthetic division of Orient MG
in December 2008. Cynosure Spain has long-lived assets of $1.3 million, or 12% of the Companys total long-lived assets, as of June 30, 2010. These long-lived assets consist primarily of demonstration equipment.



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##### Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements(Continued)



Note 8  Net Loss Per Common Share

Basic net loss per share was determined by dividing net loss by the weighted average common shares outstanding during the period. Diluted
net loss per share was determined by dividing net loss by diluted weighted average shares outstanding. Diluted weighted average shares reflect the dilutive effect, if any, of common stock options based on the treasury stock method. Common shares
outstanding includes both Class A and Class B common stock as each participates equally in earnings. Class B shares are convertible at any time into shares of Class A on a one-for-one basis at the option of the holder.

A reconciliation of basic and diluted shares is as follows:



|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                   |  | Three Months EndedJune
30, |        |   | Six Months
EndedJune 30, |  
|                                                   |  | 2010                       |        |   | 2009                     |   |        | 2010 |  |   | 2009   |  
|Net loss                                           |  | $                          | (1,477 | ) |                          | $ | (2,324 | )    |  | $ | (4,289 | ) |  | $ | (6,345 | )
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic weighted average common shares outstanding   |  |                            | 12,710 |   |                          |   | 12,711 |      |  |   | 12,711 |   |  |   | 12,706 |  
|Weighted average common equivalent shares          |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Diluted weighted average common shares outstanding |  |                            | 12,710 |   |                          |   | 12,711 |      |  |   | 12,711 |   |  |   | 12,706 |  
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic net loss per share                           |  | $                          | (0.12  | ) |                          | $ | (0.18  | )    |  | $ | (0.34  | ) |  | $ | (0.50  | )
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Diluted net loss per share                         |  | $                          | (0.12  | ) |                          | $ | (0.18  | )    |  | $ | (0.34  | ) |  | $ | (0.50  | )
|                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

For the three and six months ended June 30, 2010 and 2009, the number of basic and diluted weighted
average shares outstanding was the same because any increase in the number of shares of common stock equivalents for those periods would be antidilutive based on the net loss for the period. During the three months ended June 30, 2010 and 2009,
respectively, outstanding options to purchase 1,245,000 and 1,560,000 were excluded from the computation of diluted earnings per share because their inclusion would have been antidilutive. During the six months ended June 30, 2010 and 2009,
respectively, outstanding options to purchase 1,213,000 and 1,561,000 were excluded from the computation of diluted earnings per share because their inclusion would have been antidilutive.

Note 9  Comprehensive Loss

Comprehensive loss is the change in equity of a company during a period from transactions and other events and circumstances, excluding
transactions resulting from investments by owners and distributions to owners.

The components of accumulated other
comprehensive loss as of June 30, 2010 and December 31, 2009 are as follows:



|                                                       |  |                |        |   |                  |   |        |  
|------------------------------------------------------ |  | -------------- | ------ | - | ---------------- | - | ------ | -
|                                                       |  | June 30,2010   |        |   | December 31,2009 |  
|                                                       |  | (in thousands) |       
|Unrealized gain on marketable securities, net of taxes |  | $              | 24     |   |                  | $ | 6      |  
|Cumulative translation adjustment                      |  |                | (2,677 | ) |                  |   | (1,457 | )
|                                                       |  |                |        |   |                  |   |        |  
|Total accumulated other comprehensive loss             |  | $              | (2,653 | ) |                  | $ | (1,451 | )
|                                                       |  |                |        |   |                  |   |        |  

The components of total comprehensive loss for the three and six month periods ended June 30, 2010 and
2009 are as follows:



|                                                |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------- |  | --------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                |  | Three Months EndedJune 
30, |        |   | Six Months
EndedJune 30, |  
|                                                |  | 2010                        |        |   | 2009                     |   |        | 2010 |  |   | 2009   |  
|                                                |  | (in thousands)              |       
|Cumulative translation adjustment               |  | $                           | (564   | ) |                          | $ | 1,062  |      |  | $ | (1,220 | ) |  | $ | 291    |  
|Unrealized gain (loss) on marketable securities |  |                             | 20     |   |                          |   | 24     |      |  |   | 18     |   |  |   | (51    | )
|                                                |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total other comprehensive (loss) gain           |  |                             | (544   | ) |                          |   | 1,086  |      |  |   | (1,202 | ) |  |   | 240    |  
|Reported net loss                               |  |                             | (1,477 | ) |                          |   | (2,324 | )    |  |   | (4,289 | ) |  |   | (6,345 | )
|                                                |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total comprehensive loss                        |  | $                           | (2,021 | ) |                          | $ | (1,238 | )    |  | $ | (5,491 | ) |  | $ | (6,105 | )
|                                                |  |                             |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



8



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##### Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements(Continued)



Note 10  Litigation

In 2005, Dr. Ari Weitzner, individually and as putative representative of a purported class, filed a complaint against Cynosure under
the federal Telephone Consumer Protection Act (TCPA) in Massachusetts Superior Court in Middlesex County seeking monetary damages, injunctive relief, costs and attorneys fees. The complaint alleges that Cynosure violated the TCPA by sending
unsolicited advertisements by facsimile to the plaintiff and other recipients without the prior express invitation or permission of the recipients. Under the TCPA, recipients of unsolicited facsimile advertisements are entitled to damages of up to
$500 per facsimile for inadvertent violations and up to $1,500 per facsimile for knowing or willful violations. Based on discovery in this matter, the plaintiff alleges that approximately three million facsimiles were sent on Cynosures behalf
by a third party to approximately 100,000 individuals. On February 6, 2008, several months after the close of discovery, the plaintiff served a motion for class certification, which Cynosure opposed on numerous factual and legal grounds,
including that a nationwide class action may not be maintained in a Massachusetts state court by Dr. Weitzner, a New York resident; individual issues predominate over common issues; a class action is not superior to other methods of resolving
TCPA claims; and Dr. Weitzner is an inadequate class representative. Cynosure also believes it has many merits defenses, including that the faxes in question do not constitute advertising within the meaning of the TCPA and many
recipients had an established business relationship with Cynosure and are thereby deemed to have consented to the receipt of facsimile communications. The Court held a hearing on the plaintiffs class certification motion on June 17, 2008,
but no decision on the motion was rendered. On July 14, 2010, the Court issued an order dismissing this matter without prejudice for Dr. Weitzners failure to prosecute the case; however, the Company believes that the plaintiff is
likely to file a motion requesting that the Court vacate the dismissal order. Cynosure is not currently able to estimate the amount or range of loss that could result from an unfavorable outcome of this lawsuit.

On July 16, 2008, Cynosure commenced a declaratory judgment action in the U.S. District Court for the District of Massachusetts
requesting a declaration that Dr. Weitzners and the putative class claims are covered under the Companys general liability insurance policies. On August 11, 2008, Cynosures insurance company filed an Answer and
Counterclaim against Cynosure seeking a declaration that the Companys policy does not provide coverage for Dr. Weitzners claims. On August 19, 2008, Cynosure filed a reply to the Counterclaim. The insurance company filed a
Motion for Summary Judgment on December 15, 2008, and Cynosure cross moved for Summary Judgment on January 15, 2009. The court held a hearing on the motions on February 26, 2009, and on April 8, 2009 rendered a decision that
Cynosures liability insurer is obligated to provide Cynosure with a defense to the Weitzner action and, if necessary, indemnify Cynosure for the putative class claims. Thereafter, Cynosures liability insurer filed a motion for
reconsideration, which Cynosure opposed. The court denied the insurers motion on May 13, 2009. On January 7, 2010, the court entered an Order for Judgment consistent with its April 8, 2009 decision that the insurer is obligated
to defend Cynosure against the putative class claims and to indemnify Cynosure for any single damages, attorneys fees or costs. Per agreement of the parties, Cynosure was awarded $0.4 million in fees and costs for the period through
July 1, 2009. The insurer filed a Notice of Appeal of the judgment on January 27, 2010. The insurers appeal of Cynosures fee application is currently pending before the U.S. First Circuit Court of Appeals.

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

Note 11 
Related Party Transactions

As of June 30, 2010, El. En. S.p.A. (El.En.) owned 23% of Cynosures outstanding
common stock. Purchases of inventory from El.En. during the three months ended June 30, 2010 and 2009 were approximately $1.6 million and $1.1 million. Purchases of inventory from El.En. during the six months ended June 30, 2010 and 2009
were approximately $3.0 million and $2.3 million, respectively. As of June 30, 2010 and December 31, 2009, amounts due to related party for these purchases were approximately $2.1 million and $1.4 million, respectively.
There were no amounts due from El.En. as of June 30, 2010 or December 31, 2009.

Note 12  Income Taxes

At June 30, 2010, there are no material gross unrecognized tax benefits. Cynosure files income tax returns in the U.S. federal
jurisdiction, and in various state and foreign jurisdictions. With few exceptions, Cynosure is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2006.

Note 13  Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic
605)Multiple-Deliverable Revenue Arrangements. ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a
combined unit. This guidance establishes a



9



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##### Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements(Continued)



selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates.
This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance
significantly expands required disclosures related to a vendors multiple-deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning
on or after June 15, 2010 and early adoption is permitted. A company may elect, but will not be required, to adopt the amendments in ASU No. 2009-13 retrospectively for all prior periods. Cynosure adopted ASU 2009-13 during the second
quarter of 2010 and applied it retrospectively beginning January 1, 2010. The adoption of ASU 2009-13 did not have a material impact on Cynosures financial position or statement of operations.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Forward-Looking Statements

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



| |  |  | our ability to identify and penetrate new markets for our products and technology;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | our ability to innovate, develop and commercialize new products;
| | - |  | ----------------------------------------------------------------



| |  |  | our ability to obtain and maintain regulatory clearances;
| | - |  | ---------------------------------------------------------



| |  |  | our sales and marketing capabilities and strategy in the United States and internationally;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | our intellectual property portfolio; and
| | - |  | ----------------------------------------



| |  |  | our estimates regarding expenses, future revenues, capital requirements and needs for additional financing.
| | - |  | -----------------------------------------------------------------------------------------------------------

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place
undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary
statements included in our Annual Report on Form 10-K for the year ended December 31, 2009, particularly in Part I  Item 1A and in our other public filings with the Securities and Exchange Commission that could cause actual
results or events to differ materially from the forward-looking statements that we make.

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

The following discussion should be read in conjunction with, and is
qualified in its entirety by, the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and the condensed consolidated financial statements and notes thereto and Managements Discussion
and Analysis of Financial Condition and Results of Operations in our Form 10-K filed with the SEC on March 12, 2010. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of
trends in operating results for any future periods.

Company Overview

We develop and market aesthetic treatment systems that are used by physicians and other practitioners to perform non-invasive procedures
to remove hair, treat vascular lesions, rejuvenate skin through the treatment of shallow vascular lesions and pigmented lesions, as well as multi-colored tattoos, temporarily reduce the appearance of cellulite, treat wrinkles, skin texture, skin
discoloration and skin tightening, and to perform minimally invasive procedures for LaserBodySculpting for the removal of unwanted fat. Our systems incorporate a broad range of laser and other light-based energy sources, including Alexandrite, pulse
dye, Nd:Yag and diode lasers, as well as intense pulsed light. We believe that we are one of only a few companies that currently offer aesthetic treatment systems utilizing Alexandrite and pulse dye lasers, which are particularly well suited for
some applications and skin types. We offer single energy source systems as well as workstations that incorporate two or more different types of lasers or pulsed light technologies. We offer multiple technologies and system alternatives at a variety
of price points depending primarily on the number and type of energy sources included in the system. Our newer products are designed to be easily upgradeable to add additional energy



10



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##### Table of Contents

sources and handpieces, which provide our customers with technological flexibility as they expand their practices. As the aesthetic treatment market evolves to include new customers, such as
aesthetic spas and additional physician specialties, we believe that our broad technology base and tailored solutions will provide us with a competitive advantage.

We focus our development and marketing efforts on offering leading, or flagship, products for the following high volume applications:



| |  |  | the Elite product line for hair removal, treatment of facial and leg veins and pigmentations;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | the Smartlipoproduct line for
LaserBodySculptingSMfor the removal of unwanted fat;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the Affirm/SmartSkinproduct line for anti-aging applications, including treatments for wrinkles, skin texture, skin discoloration and skin
tightening;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Cynergy product line for the treatment of vascular lesions;
| | - |  | ---------------------------------------------------------------



| |  |  | the Accolade product linefor the removal of benign pigmented lesions, including pigmented lesions as well as multi-colored tattoos; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the TriActive product line for the temporary reduction of the appearance of cellulite.
| | - |  | --------------------------------------------------------------------------------------

We sell our products through a direct sales force in North America, France, Spain, the United Kingdom, Germany, Korea, China and Japan
and through international distributors in 71 other countries.

We generate revenues primarily from sales of our products and
parts and accessories and from services, including product warranty revenues. During the six months ended June 30, 2010, we derived approximately 76% of our revenues from sales of our products and 24% of our revenues from parts, accessories and
service revenues. During the six months ended June 30, 2009, we derived approximately 77% of our revenues from sales of products and 23% of our revenues from parts, accessories and service revenues. Generally, we recognize revenues from the
sales of our products upon delivery to our customers, revenues from service contracts and extended product warranties ratably over the coverage period and revenues from service in the period in which the service occurs.

We sell our products directly in North America, France, Spain, the United Kingdom, Germany, Korea, China and Japan and use distributors
to sell our products in other countries where we do not have a direct presence. During the six months ended June 30, 2010, and 2009 we derived 59% and 53% of our revenues, respectively, from sales outside North America. As of June 30,
2010, we had 30 sales employees covering North America, 29 sales employees in France, Spain, the United Kingdom, Germany, Korea, China and Japan and 28 distributors covering 71 countries.

The following table provides revenue data by geographical region for the six months ended June 30, 2010 and 2009:



|              |  |                          |   |  |      |  
|------------- |  | ------------------------ | - |  | ---- | -
|              |  | Percentage of Revenues   |  
|              |  | Six-MonthsEnded June 30, |  
|Region        |  | 2010                     |   |  | 2009 |  
|North America |  | 41                       | % |  | 47   | %
|Europe        |  | 30                       |   |  | 27   |  
|Asia/Pacific  |  | 23                       |   |  | 20   |  
|Other         |  | 6                        |   |  | 6    |  
|              |  |                          |   |  |      |  
|Total         |  | 100                      | % |  | 100  | %
|              |  |                          |   |  |      |  

See Note 7 to our consolidated financial statements included in this Quarterly Report for revenues and asset
data by geographic region.



11



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##### Table of Contents

Results of Operations

The following table contains selected income statement information, which serves as the basis of the discussion of our results of
operations for the three months ended June, 2010 and 2009, respectively (in thousands, except for percentages):



|                                                 |        |                            |        |                         |         |     |        |         |   |                         |   |  |     |    |  |   |        |   |  |      |   
|------------------------------------------------ | ------ | -------------------------- | ------ | ----------------------- | ------- | --- | ------ | ------- | - | ----------------------- | - |  | --- | -- |  | - | ------ | - |  | ---- | --
|                                                 |        | Three Months EndedJune
30, |        |                         | $Change |     |        | %Change |  
|                                                 | 2010   |                            |        | 2009                    |         |     |       
|                                                 | Amount |                            |        | As a % 
ofTotalRevenues |         |     | Amount |         |   | As a % 
ofTotalRevenues |   |  |    
|Product revenues                                 |        | $                          | 16,385 |                         |         | 76  | %      |         | $ | 16,492                  |   |  | 79  | %  |  | $ | (107   | ) |  | (1   | )%
|Parts, accessories and service revenues          |        |                            | 5,104  |                         |         | 24  |        |         |   | 4,321                   |   |  | 21  |    |  |   | 783    |   |  | 18   |   
|                                                 |        |                            |        |                         |         |     |        |         |   |                         |   |  |     |    |  |   |        |   |  |      |   
|Total revenues                                   |        |                            | 21,489 |                         |         | 100 |        |         |   | 20,813                  |   |  | 100 |    |  |   | 676    |   |  | 3    |   
|Cost of revenues                                 |        |                            | 9,069  |                         |         | 42  |        |         |   | 8,737                   |   |  | 42  |    |  |   | 332    |   |  | 4    |   
|                                                 |        |                            |        |                         |         |     |        |         |   |                         |   |  |     |    |  |   |        |   |  |      |   
|Gross profit                                     |        |                            | 12,420 |                         |         | 58  |        |         |   | 12,076                  |   |  | 58  |    |  |   | 344    |   |  | 3    |   
|Operating expenses                               |        |                            |        |                         |         |     |        |         |   |                         |   |  |     |    |  |   |        |   |  |      |   
|Sales and marketing                              |        |                            | 8,645  |                         |         | 40  |        |         |   | 10,423                  |   |  | 50  |    |  |   | (1,778 | ) |  | (17  | ) 
|Research and development                         |        |                            | 1,848  |                         |         | 9   |        |         |   | 1,696                   |   |  | 8   |    |  |   | 152    |   |  | 9    |   
|General and administrative                       |        |                            | 2,830  |                         |         | 13  |        |         |   | 4,049                   |   |  | 19  |    |  |   | (1,219 | ) |  | (30  | ) 
|                                                 |        |                            |        |                         |         |     |        |         |   |                         |   |  |     |    |  |   |        |   |  |      |   
|Total operating expenses                         |        |                            | 13,323 |                         |         | 62  |        |         |   | 16,168                  |   |  | 77  |    |  |   | (2,845 | ) |  | (18  | ) 
|                                                 |        |                            |        |                         |         |     |        |         |   |                         |   |  |     |    |  |   |        |   |  |      |   
|Loss from operations                             |        |                            | (903   | )                       |         | (4  | )      |         |   | (4,092                  | ) |  | (20 | )  |  |   | 3,189  |   |  | 78   |   
|Interest income, net                             |        |                            | 45     |                         |         |    |        |         |   | 106                     |   |  |    |    |  |   | (61    | ) |  | (58  | ) 
|Other (expense) income, net                      |        |                            | (550   | )                       |         | (3  | )      |         |   | 390                     |   |  | 2   |    |  |   | (940   | ) |  | (241 | ) 
|                                                 |        |                            |        |                         |         |     |        |         |   |                         |   |  |     |    |  |   |        |   |  |      |   
|Loss before provision (benefit) for income taxes |        |                            | (1,408 | )                       |         | (7  | )      |         |   | (3,596                  | ) |  | (17 | )  |  |   | 2,188  |   |  | 61   |   
|Provision (benefit) for income taxes             |        |                            | 69     |                         |         |    |        |         |   | (1,272                  | ) |  | (6  | )  |  |   | 1,341  |   |  | 105  |   
|                                                 |        |                            |        |                         |         |     |        |         |   |                         |   |  |     |    |  |   |        |   |  |      |   
|Net loss                                         |        | $                          | (1,477 | )                       |         | (7  | )%     |         | $ | (2,324                  | ) |  | (11 | )% |  | $ | 847    |   |  | 36   | % 
|                                                 |        |                            |        |                         |         |     |        |         |   |                         |   |  |     |    |  |   |        |   |  |      |   

Revenues

Revenues in the three months ended June 30, 2010 increased from the three months ended June 30, 2009 by $0.7 million or 3%.
The increase was attributable to a number of factors (in thousands, except for percentages):



|                                     |  |                            |        |         |   |        |         |   |      |   |  |    |  
|------------------------------------ |  | -------------------------- | ------ | ------- | - | ------ | ------- | - | ---- | - |  | -- | -
|                                     |  | Three Months EndedJune
30, |        | $Change |   |        | %Change |  
|                                     |  | 2010                       |        | 2009    |   |       
|Product sales in North America       |  | $                          | 7,867  |         | $ | 7,793  |         | $ | 74   |   |  | 1  | %
|Product sales outside North America  |  |                            | 8,518  |         |   | 8,699  |         |   | (181 | ) |  | (2 | )
|Parts, accessories and service sales |  |                            | 5,104  |         |   | 4,321  |         |   | 783  |   |  | 18 |  
|                                     |  |                            |        |         |   |        |         |   |      |   |  |    |  
|Total Revenues                       |  | $                          | 21,489 |         | $ | 20,813 |         | $ | 676  |   |  | 3  | %
|                                     |  |                            |        |         |   |        |         |   |      |   |  |    |  



| |  |  | Revenues from the sale of products in North America increased 1% from the second quarter of 2009. We believe that the availability of credit remains
limited and demand for discretionary aesthetic laser treatments remains uncertain and as a result, our revenues may continue to be adversely affected. We develop and market aesthetic treatment systems (capital equipment) that are used by physicians
and other practitioners to perform non-invasive and minimally invasive procedures in the aesthetic marketplace. These procedures are discretionary and not reimbursed by third-party insurers. The significant majority of our business each quarter is
derived from new customers. A portion of our customers finance the purchase of these lasers through third party finance companies or banks. During the second quarter of 2010, credit continued to be difficult to obtain and, as a result, our potential
customers were not as able to expand their practices or commit to purchasing equipment from us.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revenues from sales of products outside of North America decreased by approximately $0.2 million, or 2%, from the 2009 period due to a decrease in the
number of laser units sold. Similar to North America, the availability of credit outside of North America remained limited and demand for discretionary aesthetic laser treatments remained uncertain in the second quarter of 2010. As a result, our
revenues were, and may continue to be, adversely affected.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revenues from the sale of parts, accessories and services increased by approximately $0.8 million, or 18%, from the 2009 period, primarily due to an
increase in revenues generated from the sale of our service contracts as well as an increase in sales of certain parts and accessories.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12



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##### Table of Contents

Cost of Revenues



|                                                     |  |                            |       |   |         |   |         |   |  |   |     |  |   |  
|---------------------------------------------------- |  | -------------------------- | ----- | - | ------- | - | ------- | - |  | - | --- |  | - | -
|                                                     |  | Three Months EndedJune
30, |       |   | $Change |   | %Change |  
|                                                     |  | 2010                       |       |   | 2009    |   |         |  
|Cost of revenues (in thousands)                      |  | $                          | 9,069 |   |         | $ | 8,737   |   |  | $ | 332 |  | 4 | %
|Cost of revenues (as a percentage of total revenues) |  |                            | 42    | % |         |   | 42      | % |  |   |     |  |   |  

Total cost of revenues increased $0.3 million, or 4%, to $9.1 million for three months ended
June 30, 2010, as compared to $8.7 million for the three months ended June 30, 2009, primarily related to our 3% increase in revenues. Our total cost of revenues as a percentage of total revenues was 42% for the three months ended
June 30, 2010 and for the three months ended June 30, 2009.

Sales and Marketing



|                                                        |  |                            |       |   |         |   |        |         |  |   |        |   |  |     |   
|------------------------------------------------------- |  | -------------------------- | ----- | - | ------- | - | ------ | ------- |  | - | ------ | - |  | --- | --
|                                                        |  | Three Months EndedJune
30, |       |   | $Change |   |        | %Change | 
|                                                        |  | 2010                       |       |   | 2009    |   |        |        
|Sales and marketing (in thousands)                      |  | $                          | 8,645 |   |         | $ | 10,423 |         |  | $ | (1,778 | ) |  | (17 | )%
|Sales and marketing (as a percentage of total revenues) |  |                            | 40    | % |         |   | 50     | %       |  |   |        |   |  |     |   

Sales and marketing expenses decreased $1.8 million, or 17%. The decrease is primarily attributed
to a decrease of $0.7 million in personnel, administrative costs and travel expenses associated with the overall reduction of our worldwide direct sales organization and a decrease in promotional costs of $0.9 million, primarily due to a
decreased number of workshops, trade shows and other promotional efforts. Stock compensation expense also decreased $0.2 million as compared to the 2009 period. Our sales and marketing expenses for the three months ended June 30, 2010 decreased
as a percentage of revenue to 40% primarily due to the reduction of these expenses as compared to the three months ended June 30, 2009.

Research and Development



|                                                             |  |                            |       |   |         |   |         |   |  |   |     |  |   |  
|------------------------------------------------------------ |  | -------------------------- | ----- | - | ------- | - | ------- | - |  | - | --- |  | - | -
|                                                             |  | Three Months EndedJune
30, |       |   | $Change |   | %Change |  
|                                                             |  | 2010                       |       |   | 2009    |   |         |  
|Research and development (in thousands)                      |  | $                          | 1,848 |   |         | $ | 1,696   |   |  | $ | 152 |  | 9 | %
|Research and development (as a percentage of total revenues) |  |                            | 9     | % |         |   | 8       | % |  |   |     |  |   |  

Research and development expenses increased $0.2 million, or 9% for the three months ended
June 30, 2010 when compared with the three months ended June 30, 2009. The increase is primarily due to increased professional fees and consulting associated with clinical studies.

General and Administrative



|                                                               |  |                            |       |   |         |   |       |         |  |   |        |   |  |     |   
|-------------------------------------------------------------- |  | -------------------------- | ----- | - | ------- | - | ----- | ------- |  | - | ------ | - |  | --- | --
|                                                               |  | Three Months EndedJune
30, |       |   | $Change |   |       | %Change | 
|                                                               |  | 2010                       |       |   | 2009    |   |       |        
|General and administrative (in thousands)                      |  | $                          | 2,830 |   |         | $ | 4,049 |         |  | $ | (1,219 | ) |  | (30 | )%
|General and administrative (as a percentage of total revenues) |  |                            | 13    | % |         |   | 19    | %       |  |   |        |   |  |     |   

General and administrative expenses decreased $1.2 million, or 30%, due to a decrease in legal and
professional costs incurred in connection with our patent infringement case against CoolTouch of $0.5 million, which was settled in January 2010. Bad debt expense also decreased $0.6 million for the three months ended June 30, 2010 as compared
to the three months ended June 30, 2009.

Interest Income, net



|                                    |  |                            |    |         |   |     |         |   |     |   |  |     |   
|----------------------------------- |  | -------------------------- | -- | ------- | - | --- | ------- | - | --- | - |  | --- | --
|                                    |  | Three Months EndedJune
30, |    | $Change |   |     | %Change |  
|                                    |  | 2010                       |    | 2009    |   |    
|Interest income, net (in thousands) |  | $                          | 45 |         | $ | 106 |         | $ | (61 | ) |  | (58 | )%



13



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##### Table of Contents

The decrease in interest income, net is primarily due to our investing in securities that
bear less risk and lower interest rates than the comparable period in 2009.

Other (Expense) Income, net



|                                           |  |                            |      |         |      |   |         |  |   |      |   |  |      |   
|------------------------------------------ |  | -------------------------- | ---- | ------- | ---- | - | ------- |  | - | ---- | - |  | ---- | --
|                                           |  | Three Months EndedJune 30, |      | $Change |      |   | %Change | 
|                                           |  | 2010                       |      |         | 2009 |   |        
|Other (expense) income, net (in thousands) |  | $                          | (550 | )       |      | $ | 390     |  | $ | (940 | ) |  | (241 | )%

The decrease
in other (expense) income, net is primarily a result of net foreign currency remeasurement losses in the second quarter of 2010 primarily associated with the weakening of the euro, compared to net foreign currency remeasurement gains in the second
quarter of 2009 due to the weakening of the U.S. dollar, primarily against the euro.

Provision (Benefit) for Income Taxes



|                                                                                 |  |                            |    |   |         |   |         |    |  |   |       |  |     |  
|-------------------------------------------------------------------------------- |  | -------------------------- | -- | - | ------- | - | ------- | -- |  | - | ----- |  | --- | -
|                                                                                 |  | Three Months EndedJune 30, |    |   | $Change |   | %Change |   
|                                                                                 |  | 2010                       |    |   | 2009    |   |         |   
|Provision (benefit) for income taxes (in thousands)                              |  | $                          | 69 |   |         | $ | (1,272  | )  |  | $ | 1,341 |  | 105 | %
|Provision (benefit) as a % of income before provision (benefit) for income taxes |  |                            | 5  | % |         |   | (35     | )% |  |   |       |  |     |  

The provision for income taxes results from a combination of the activities of our domestic and
foreign subsidiaries. During the three months ended June 30, 2010, we recorded an income tax provision of $0.1 million, representing an effective tax rate of 5%. Given the uncertainty of future income in the U.S. we continue to maintain a
valuation allowance against our net domestic deferred tax assets, and therefore we did not record a benefit for our current losses in the U.S. for the second quarter of 2010, with the exception of the portion that can be carried back to recover
income taxes paid in prior years. During the three months ended June 30, 2009, we recorded an income tax benefit of $1.3 million, representing an effective tax rate of (35)%. The effective tax rate from the 2009 period to the 2010 period
changed primarily due to the valuation allowance maintained against the net domestic deferred tax assets, including the deferred tax asset on the portion of the current quarter net operating loss which cannot be carried back at June 30, 2010.



14



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##### Table of Contents

SIX MONTHS ENDED JUNE 30, 2010 AND 2009

The following table contains selected statement of operations information, which serves as the basis of the discussion of our results of
operations for the six months ended June 30, 2010 and 2009, respectively (in thousands, except for percentages):



|                                                 |  |                          |        |   |                         |     |    |        |   |         |                         |  |     |         |  |   |         |   |  |      |  
|------------------------------------------------ |  | ------------------------ | ------ | - | ----------------------- | --- | -- | ------ | - | ------- | ----------------------- |  | --- | ------- |  | - | ------- | - |  | ---- | -
|                                                 |  | Six Months
EndedJune 30, |        |   |                         |     |    |        |  
|                                                 |  | 2010                     |        |   | 2009                    |     |    |        |   |         |                         | 
|                                                 |  | Amount                   |        |   | As a % 
ofTotalRevenues |     |    | Amount |   |         | As a % 
ofTotalRevenues |  |     | $Change |  |   | %Change |  
|Product revenues                                 |  | $                        | 30,606 |   |                         | 76  | %  |        | $ | 27,394  |                         |  | 77  | %       |  | $ | 3,212   |   |  | 12   | %
|Parts, accessories and service revenues          |  |                          | 9,776  |   |                         | 24  |    |        |   | 8,235   |                         |  | 23  |         |  |   | 1,541   |   |  | 19   |  
|                                                 |  |                          |        |   |                         |     |    |        |   |         |                         |  |     |         |  |   |         |   |  |      |  
|Total revenues                                   |  | $                        | 40,382 |   |                         | 100 | %  |        | $ | 35,629  |                         |  | 100 | %       |  | $ | 4,753   |   |  | 13   | %
|Cost of revenues                                 |  |                          | 17,162 |   |                         | 42  |    |        |   | 14,537  |                         |  | 41  |         |  |   | 2,625   |   |  | 18   |  
|                                                 |  |                          |        |   |                         |     |    |        |   |         |                         |  |     |         |  |   |         |   |  |      |  
|Gross profit                                     |  |                          | 23,220 |   |                         | 58  |    |        |   | 21,092  |                         |  | 59  |         |  |   | 2,128   |   |  | 10   |  
|Operating expenses                               |  |                          |        |   |                         |     |    |        |   |         |                         |  |     |         |  |   |         |   |  |      |  
|Sales and marketing                              |  |                          | 17,047 |   |                         | 42  |    |        |   | 20,953  |                         |  | 59  |         |  |   | (3,906  | ) |  | (19  | )
|Research and development                         |  |                          | 3,555  |   |                         | 9   |    |        |   | 3,437   |                         |  | 10  |         |  |   | 118     |   |  | 3    |  
|General and administrative                       |  |                          | 6,063  |   |                         | 15  |    |        |   | 7,929   |                         |  | 22  |         |  |   | (1,866  | ) |  | (24  | )
|                                                 |  |                          |        |   |                         |     |    |        |   |         |                         |  |     |         |  |   |         |   |  |      |  
|Total operating expenses                         |  |                          | 26,665 |   |                         | 66  |    |        |   | 32,319  |                         |  | 91  |         |  |   | (5,654  | ) |  | (17  | )
|                                                 |  |                          |        |   |                         |     |    |        |   |         |                         |  |     |         |  |   |         |   |  |      |  
|Loss from operations                             |  |                          | (3,445 | ) |                         | (8  | )  |        |   | (11,227 | )                       |  | (32 | )       |  |   | 7,782   |   |  | 69   |  
|Interest income, net                             |  |                          | 98     |   |                         |    |    |        |   | 371     |                         |  | 1   |         |  |   | (273    | ) |  | (74  | )
|Other (expense) income, net                      |  |                          | (701   | ) |                         | (2  | )  |        |   | 334     |                         |  | 1   |         |  |   | (1,035  | ) |  | (310 | )
|                                                 |  |                          |        |   |                         |     |    |        |   |         |                         |  |     |         |  |   |         |   |  |      |  
|Loss before provision (benefit) for income taxes |  |                          | (4,048 | ) |                         | (10 | )  |        |   | (10,522 | )                       |  | (30 | )       |  |   | 6,474   |   |  | 62   |  
|Provision (benefit) for income taxes             |  |                          | 241    |   |                         | 1   |    |        |   | (4,177  | )                       |  | (12 | )       |  |   | 4,418   |   |  | 106  |  
|                                                 |  |                          |        |   |                         |     |    |        |   |         |                         |  |     |         |  |   |         |   |  |      |  
|Net loss                                         |  | $                        | (4,289 | ) |                         | (11 | )% |        | $ | (6,345  | )                       |  | (18 | )%      |  | $ | 2,056   |   |  | 32   | %
|                                                 |  |                          |        |   |                         |     |    |        |   |         |                         |  |     |         |  |   |         |   |  |      |  

Revenues

Revenues in the six months ended June 30, 2010 increased from revenues in the six months ended June 30, 2009 by $4.8 million, or
13%. The increase in revenues was attributable to a number of factors (in thousands, except for percentages):



|                                     |  |                          |        |         |   |         |  |   |       |  |    |  
|------------------------------------ |  | ------------------------ | ------ | ------- | - | ------- |  | - | ----- |  | -- | -
|                                     |  | Six Months EndedJune 30, |        | $Change |   | %Change | 
|                                     |  | 2010                     |        | 2009    |   |        
|Product sales in North America       |  | $                        | 14,195 |         | $ | 14,050  |  | $ | 145   |  | 1  | %
|Product sales outside North America  |  |                          | 16,411 |         |   | 13,344  |  |   | 3,067 |  | 23 |  
|Parts, accessories and service sales |  |                          | 9,776  |         |   | 8,235   |  |   | 1,541 |  | 19 |  
|                                     |  |                          |        |         |   |         |  |   |       |  |    |  
|Total Revenues                       |  | $                        | 40,382 |         | $ | 35,629  |  | $ | 4,753 |  | 13 | %
|                                     |  |                          |        |         |   |         |  |   |       |  |    |  



| |  |  | Revenues from the sale of products in North America remained relatively consistent for the six months ended June 30, 2010 when compared with the
six months ended June 30, 2009. We believe that the availability of credit remains limited and demand for discretionary aesthetic laser treatments remains uncertain and as a result, our revenues may continue to be adversely affected. We develop
and market aesthetic treatment systems (capital equipment) that are used by physicians and other practitioners to perform non-invasive and minimally invasive procedures in the aesthetic marketplace. These procedures are discretionary and not
reimbursed by third-party insurers. The significant majority of our business each quarter is derived from new customers. A portion of our customers finance the purchase of these lasers through third party finance companies or banks. During the first
half of 2010, credit continued to be difficult to obtain and, as a result, our potential customers were not as able to expand their practices or commit to purchasing equipment from us.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revenues from sales of products outside of North America increased by approximately $3.1 million, or 23%, over the 2009 period, due to an increase in
the number of units sold by our Asian and European subsidiaries as a result of improved global economic business conditions compared with the first six months of 2009.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



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##### Table of Contents

| |  |  | Revenues from the sale of parts, accessories and services increased by approximately $1.5 million, or 19%, over the 2009 period, primarily due to an
increase in revenues generated from the sale of our service contracts as well as an increase in sales of certain parts and accessories.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost of Revenues



|                                                     |  |                          |        |   |         |   |         |   |  |   |       |  |    |  
|---------------------------------------------------- |  | ------------------------ | ------ | - | ------- | - | ------- | - |  | - | ----- |  | -- | -
|                                                     |  | Six Months
EndedJune 30, |        |   | $Change |   | %Change |  
|                                                     |  | 2010                     |        |   | 2009    |   |         |  
|Cost of revenues (in thousands)                      |  | $                        | 17,162 |   |         | $ | 14,537  |   |  | $ | 2,625 |  | 18 | %
|Cost of revenues (as a percentage of total revenues) |  |                          | 42     | % |         |   | 41      | % |  |   |       |  |    |  

The increase in the cost of revenues was primarily attributable to a 13% increase in revenues for
the six months ended June 30, 2010 as compared with the six months ended June 30, 2009. Our cost of revenues increased as a percentage of revenues to 42% for the six months ended June 30, 2010, from 41% for the six months ended
June 30, 2009, resulting in a decrease in our gross margin. The decline in gross margin in the 2010 period as compared to the 2009 period was primarily a result of the higher percentage of laser revenue from international distribution where the
companys products tend to have lower sales prices than in North America.

Sales and Marketing



|                                                        |  |                          |        |   |         |   |        |         |  |   |        |   |  |     |   
|------------------------------------------------------- |  | ------------------------ | ------ | - | ------- | - | ------ | ------- |  | - | ------ | - |  | --- | --
|                                                        |  | Six Months EndedJune 30, |        |   | $Change |   |        | %Change | 
|                                                        |  | 2010                     |        |   | 2009    |   |        |        
|Sales and marketing (in thousands)                      |  | $                        | 17,047 |   |         | $ | 20,953 |         |  | $ | (3,906 | ) |  | (19 | )%
|Sales and marketing (as a percentage of total revenues) |  |                          | 42     | % |         |   | 59     | %       |  |   |        |   |  |     |   

Sales and marketing expenses decreased by $3.9 million, or 19%. The decrease is due to a $1.8
million reduction in promotional costs associated with workshops, tradeshows and other promotional efforts; a reduction of $1.7 million of personnel costs, travel expenses and other administrative costs associated with the overall reduction of our
worldwide direct sales organization, and reduced stock compensation expense of $0.4 million. Our sales and marketing expenses for the six months ended June 30, 2010 decreased as a percentage of revenue to 42% due to the reduction of these
expenses as well as a 13% increase in revenues for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009.

Research and Development



|                                                             |  |                          |       |   |         |   |         |   |  |   |     |  |   |  
|------------------------------------------------------------ |  | ------------------------ | ----- | - | ------- | - | ------- | - |  | - | --- |  | - | -
|                                                             |  | Six Months EndedJune 30, |       |   | $Change |   | %Change |  
|                                                             |  | 2010                     |       |   | 2009    |   |         |  
|Research and development (in thousands)                      |  | $                        | 3,555 |   |         | $ | 3,437   |   |  | $ | 118 |  | 3 | %
|Research and development (as a percentage of total revenues) |  |                          | 9     | % |         |   | 10      | % |  |   |     |  |   |  

Research and development expenses increased by $0.1 million for the six months ended June 30,
2010, when compared with the six months ended June 30, 2009. This increase is primarily due to increased professional fees and consulting associated with clinical studies.

General and Administrative



|                                                               |  |                          |       |   |         |   |       |         |  |   |        |   |  |     |   
|-------------------------------------------------------------- |  | ------------------------ | ----- | - | ------- | - | ----- | ------- |  | - | ------ | - |  | --- | --
|                                                               |  | Six Months
EndedJune 30, |       |   | $Change |   |       | %Change | 
|                                                               |  | 2010                     |       |   | 2009    |   |       |        
|General and administrative (in thousands)                      |  | $                        | 6,063 |   |         | $ | 7,929 |         |  | $ | (1,866 | ) |  | (24 | )%
|General and administrative (as a percentage of total revenues) |  |                          | 15    | % |         |   | 22    | %       |  |   |        |   |  |     |   

General and administrative expenses decreased $1.9 million, or 24%, due to a decrease of $1.1
million in legal and professional services costs associated with the patent infringement case against CoolTouch, which was settled in January 2010, a $0.5 million decrease in bad debt expense and $0.3 million in other administrative costs.



16



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##### Table of Contents

Interest Income, net



|                                    |  |                          |    |         |   |     |         |   |      |   |  |     |   
|----------------------------------- |  | ------------------------ | -- | ------- | - | --- | ------- | - | ---- | - |  | --- | --
|                                    |  | Six Months EndedJune 30, |    | $Change |   |     | %Change |  
|                                    |  | 2010                     |    | 2009    |   |    
|Interest income, net (in thousands) |  | $                        | 98 |         | $ | 371 |         | $ | (273 | ) |  | (74 | )%

The decrease
in interest income, net is primarily due to our investing in securities that bear less risk and lower interest rates than in the comparable period in 2009.

Other (Expense) Income, net



|                                           |  |                          |      |         |      |   |         |  |   |        |   |  |      |   
|------------------------------------------ |  | ------------------------ | ---- | ------- | ---- | - | ------- |  | - | ------ | - |  | ---- | --
|                                           |  | Six Months EndedJune 30, |      | $Change |      |   | %Change | 
|                                           |  | 2010                     |      |         | 2009 |   |        
|Other (expense) income, net (in thousands) |  | $                        | (701 | )       |      | $ | 334     |  | $ | (1,035 | ) |  | (310 | )%

The decrease
in other (expense) income is primarily a result of net foreign currency remeasurement losses in the first half of 2010 due to the weakening of the euro, compared to net foreign currency remeasurement gains in the first half of 2009 due to the
weakening of the U.S. dollar, primarily against the euro.

Provision (Benefit) for Income Taxes



|                                                                                 |  |                          |     |   |         |   |         |    |  |   |       |  |     |  
|-------------------------------------------------------------------------------- |  | ------------------------ | --- | - | ------- | - | ------- | -- |  | - | ----- |  | --- | -
|                                                                                 |  | Six Months EndedJune 30, |     |   | $Change |   | %Change |   
|                                                                                 |  | 2010                     |     |   | 2009    |   |         |   
|Provision (benefit) for income taxes (in thousands)                              |  | $                        | 241 |   |         | $ | (4,177  | )  |  | $ | 4,418 |  | 106 | %
|Provision (benefit) as a % of income before provision (benefit) for income taxes |  |                          | 6   | % |         |   | (40     | )% |  |   |       |  |     |  

The provision for income taxes results from a combination of the activities of our domestic and
foreign subsidiaries. During the six months ended June 30, 2010, we recorded an income tax provision of $0.2 million, representing an effective tax rate of 6%. Given the uncertainty of future income in the U.S. we continue to maintain a
valuation allowance against our net domestic deferred tax assets, and therefore we did not record a benefit for our current year losses in the U.S. for the first half of 2010 with the exception of the portion that can be carried back to recover
income taxes paid in prior years. During the six months ended June 30, 2009, we recorded an income tax benefit of $4.2 million, representing an effective tax rate of (40)%. The effective tax rate from the 2009 period to the 2010 period changed
primarily due to the valuation allowance maintained against the net domestic deferred tax assets, including the deferred tax asset on the portion of the current year net operating loss which cannot be carried back at June 30, 2010.

Liquidity and Capital Resources

We require cash to pay our operating expenses, make capital expenditures and pay our long-term liabilities. Since our inception, we have
funded our operations through private and public placements of equity securities, short-term borrowings and funds generated from our operations. At June 30, 2010, our cash, cash equivalents, short and long-term marketable securities and
short-term investments were $96.1 million. Our cash and cash equivalents of $25.5 million are highly liquid investments with maturities of 90 days or less at date of purchase and consist of cash in operating accounts and investments
in money market funds. Our short-term marketable securities of $62.7 million consist of investments in various state and municipal governments, U.S. government agencies and treasuries, all of which mature by June 30, 2011. Our long-term
marketable securities of $2.0 million consist of investments in government agencies all of which mature by July 31, 2011. Our short-term investments of $5.9 million as of June 30, 2010 consisted of auction rate securities (ARS) at
full par value.

On November 3, 2008, we agreed to accept Auction Rate Security Rights (the Rights) from UBS Financial
Services Inc. (UBS). The Rights permitted us to sell, or Put, our auction rate securities back to UBS at par value at any time during the period from June 30, 2010 through July 2, 2012. On June 30, 2010, we exercised the Rights and
Put our ARS to UBS at full par value. The transaction settled on July 1, 2010.

Our future capital requirements depend on
a number of factors, including the rate of market acceptance of our current and future products, the resources we devote to developing and supporting our products and continued progress of our research and development of new products. We incurred
less capital expenditures for the six months ended June 30, 2010 than the same period in 2009 and expect capital expenditures for 2010 to be less than 2009. During the six months ended June 30, 2010 and 2009, respectively, we transferred
$2.1 million and $4.2 million of demonstration equipment to fixed assets.



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On July 28, 2009, our Board of Directors authorized the repurchase of up to $10 million
of our Class A common stock, from time to time, on the open market or in privately negotiated transactions under a stock repurchase program. The program will terminate on August 31, 2010, unless our Board of Directors discontinues it
sooner or extends it further. During the six months ended June 30, 2010, we repurchased 7,700 shares of our common stock at an aggregate cost of approximately $75,000 and at a weighted average price of $9.74 per share under this program. As of
June 30, 2010 we have repurchased an aggregate of 11,014 shares under the program.

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

Cash Flows

Net cash provided by operating activities was $4.6 million for the six months ended June 30, 2010, and resulted primarily from
the net loss for the period of $4.3 million, increased by approximately $5.3 million in depreciation and amortization and stock-based compensation expense and by approximately $0.4 million in accretion of discounts on marketable securities
and working capital changes. Net changes in working capital items increased cash from operating activities by approximately $3.2 million primarily related to a decrease in prepaid expenses and other assets of $3.0 million associated with our
income tax refund and an increase in amounts due to related parties and accrued expenses of $1.3 million. These changes were partially offset by a decrease in deferred revenue of $1.2 million. Net cash used in investing activities was
$24.2 million for the six months ended June 30, 2010, which consisted primarily of net purchases of marketable securities of $23.9 million and $0.2 million used for fixed asset purchases. Net cash used in financing activities during
the six months ended June 30, 2010 was $0.1 million, principally relating to payments on capital lease obligations.

Net
cash used in operating activities was $5.7 million for the six months ended June 30, 2009. This resulted primarily from the net loss for the period of $6.3 million, increased by approximately $6.2 million in depreciation and
amortization and stock-based compensation and working capital changes. Net changes in working capital items decreased cash from operating activities by approximately $5.8 million due to an increase in prepaid expenses and other assets of $4.8
million and a decrease in accounts payable and amounts due to related parties of $4.3 million as well as a decrease in accrued expenses of $4.8 million. These changes were offset with a decrease in accounts receivable of $8.1 million due to
increased collection efforts and reduced sales. Net cash provided by investing activities was $4.7 million for the six months ended June 30, 2009, which consisted primarily of the net proceeds from the sale of marketable securities of $5.4
million offset by $0.5 million used for fixed asset purchases. Net cash used in financing activities during the six months ended June 30, 2009 was $0.2 million, principally relating to payments on capital lease obligations.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations set forth above are based on our financial statements,
which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those that relate to revenue recognition, allowances for doubtful accounts, inventories, warranty obligations, stock-based compensation and income taxes. We base
our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities, and
the reported amounts of revenues and expenses, that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A discussion of our critical accounting policies and the
related judgments and estimates affecting the preparation of our consolidated financial statements is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no material changes to our critical
accounting policies as of June 30, 2010.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

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

Interest Rate Sensitivity. We maintain an investment portfolio consisting mainly of money market funds, state and municipal bonds,
U.S. government agencies and treasuries and, as of June 30, 2010, auction rate securities at full par value. The securities, other than money market funds and auction rate securities, are classified as available-for-sale and consequently are
recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive (loss) income. All investments mature by July 31, 2011. These available-for-sale securities are
subject to interest rate risk and will fall in value if market interest rates increase, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. We currently have the ability and intent to hold our
fixed income investments until maturity. We do not utilize derivative financial instruments to manage our interest rate risks.



18



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##### Table of Contents

The following table provides information about our investment portfolio in
available-for-sale debt securities. For investment securities, the table presents principal cash flows (in thousands) and weighted average interest rates by expected maturity dates.



|                               |  |                    |        |   |                 |   |        |                 |  |   |        |  
|------------------------------ |  | ------------------ | ------ | - | --------------- | - | ------ | --------------- |  | - | ------ | -
|                               |  | As
ofJune 30, 2010 |        |   | Maturing in2010 |   |        | Maturing in2011 | 
|Investments (at fair value)    |  | $                  | 64,719 |   |                 | $ | 20,576 |                 |  | $ | 44,143 |  
|Weighted average interest rate |  |                    | 0.39   | % |                 |   | 0.29   | %               |  |   | 0.44   | %

Foreign Currency Exchange. A
significant portion of our operations is conducted through operations in countries other than the United States. Revenues from our international operations that were recorded in U.S. dollars represented approximately 37% of our total international
revenues during the six months ended June 30, 2010. Substantially all of the remaining 63% were sales in euros, British pounds, Japanese yen, Chinese yuan and South Korean won. Since we conduct our business in U.S. dollars, our main exposure,
if any, results from changes in the exchange rate between these currencies and the U.S. dollar. Our functional currency is the U.S. dollar. Our policy is to reduce exposure to exchange rate fluctuations by having most of our assets and liabilities,
as well as most of our revenues and expenditures, in U.S. dollars, or U.S. dollar linked. We have not historically engaged in hedging activities relating to our non-U.S. dollar operations. We sell inventory to our subsidiaries in U.S.
dollars. These amounts are recorded at our local subsidiaries in local currency rates in effect on the transaction date. Therefore, we may be exposed to exchange rate fluctuations that occur while the debt is outstanding which we recognize
as unrealized gains and losses in our statements of operations. Upon settlement of these debts, we may record realized foreign exchange gains and losses in our statements of operations. We may incur negative foreign currency translation charges
as a result of changes in currency exchange rates.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of
our disclosure controls and procedures as of June 30, 2010. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means
controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2010, our principal executive officer and principal financial officer have concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over
Financial Reporting

There was no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II  Other Information



|Item 1. | Legal Proceedings
|------- | -----------------

In
2005, Dr. Ari Weitzner, individually and as putative representative of a purported class, filed a complaint against us under the federal Telephone Consumer Protection Act, or the TCPA in Massachusetts Superior Court in Middlesex County seeking
monetary damages, injunctive relief, costs and attorneys fees. The complaint alleges that we violated the TCPA by sending unsolicited advertisements by facsimile to the plaintiff and other recipients without the prior express invitation or
permission of the recipients. Under the TCPA, recipients of unsolicited facsimile advertisements are entitled to damages of up to $500 per facsimile for inadvertent violations and up to $1,500 per facsimile for knowing or willful violations. Based
on discovery in this matter, the plaintiff alleges that approximately three million facsimiles were sent on our behalf by a third party to approximately 100,000 individuals. On February 6, 2008, several months after the close of discovery, the
plaintiff served a motion for class certification, which we opposed on numerous factual and legal grounds, including that a nationwide class action may not be maintained in a Massachusetts state court by Dr. Weitzner, a New York resident;
individual issues predominate over common issues; a class action is not superior to other methods



19



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##### Table of Contents

of resolving TCPA claims; and Dr. Weitzner is an inadequate class representative. We also believe we have many merits defenses, including that the faxes in question do not constitute
advertising within the meaning of the TCPA and many recipients had an established business relationship with us and are thereby deemed to have consented to the receipt of facsimile communications. The Court held a hearing on the
plaintiffs class certification motion on June 17, 2008, but no decision on the motion has been rendered. On July 14, 2010, the Court issued an order dismissing this matter without prejudice for Dr. Weitzners failure to
prosecute the case; however, we believe that the plaintiff is likely to file a motion requesting that the Court vacate the dismissal order. We are not currently able to estimate the amount or range of loss that could result from an unfavorable
outcome of this lawsuit.

On July 16, 2008, we commenced a declaratory judgment action in the U.S. District Court for the
District of Massachusetts requesting a declaration that Dr. Weitzners and the putative class claims are covered under our general liability insurance policies. On August 11, 2008, our insurance company filed an Answer and
Counterclaim against us seeking a declaration that our policy does not provide coverage for Dr. Weitzners claims. On August 19, 2008, we filed a reply to the Counterclaim. The insurance company filed a Motion for Summary Judgment on
December 15, 2008, and we cross moved for Summary Judgment on January 15, 2009. The court held a hearing on the motions on February 26, 2009, and on April 8, 2009 rendered a decision that our liability insurer is obligated to
provide us with a defense to the Weitzner action and, if necessary, indemnify us for the putative class claims. Thereafter, our liability insurer filed a motion for reconsideration, which we opposed. The court denied the insurers motion on
May 13, 2009. On January 7, 2010, the court entered an Order for Judgment consistent with its April 8, 2009 decision that the insurer is obligated to defend us against the putative class claims and to indemnify us for any single
damages, attorneys fees or costs. Per agreement of the parties, we were awarded $0.4 million in fees and costs for the period through July 1, 2009. The insurer filed a Notice of Appeal of the judgment on January 27, 2010. The
insurers appeal is currently pending before the U.S. First Circuit Court of Appeals.

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



|Item 1A. | Risk Factors
|-------- | ------------

Investing
in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2009 in addition to the other information included in this
quarterly report. If any of the risks actually occurs, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall.

As of June 30, 2010, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009, although we may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.



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

On July 28, 2009, our Board of Directors authorized the repurchase of up to $10 million of our Class A common stock from time to
time on the open market or in privately negotiated transactions under a stock repurchase program. The program will terminate on August 31, 2010, unless our Board of Directors discontinues it sooner or extends it further. During the three months
ended June 30, 2010, we repurchased no shares of our Class A common stock under this program. As of June 30, 2010, we had repurchased an aggregate of 11,014 shares under the program. Following the end of the second quarter of 2010, we
repurchased 29,823 shares of our Class A common stock at an aggregate cost of approximately $285,000 and at a weighted average price of $9.53 per share under this program.



20



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##### Table of Contents

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

(a) Exhibits



|            |  |                                                                                                           
|----------- |  | ----------------------------------------------------------------------------------------------------------
|Exhibit
No. |  | Description                                                                                               
|            | 
|31.1        |  | Certification of the Principal Executive Officer                                                          
|            | 
|31.2        |  | Certification of the Principal Financial Officer                                                          
|            | 
|32.1        |  | Certification of the Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|            | 
|32.2        |  | Certification of the Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



21



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##### Table of Contents

Signatures

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



|                     |  |                |  |                                                                
|-------------------- |  | -------------- |  | ---------------------------------------------------------------
|                     |  | Cynosure, Inc.
|                     |  | (Registrant)  
|                     |  |               
|Date: August 6, 2010 |  | By:            |  | /S/    MICHAEL R.
DAVIN                                        
|                     |  |                |  | Michael R. Davin                                               
|                     |  |                |  | Chairman, President, Chief Executive Officer                   
|                     |  |               
|Date: August 6, 2010 |  | By:            |  | /S/    TIMOTHY W.
BAKER                                        
|                     |  |                |  | Timothy W. Baker                                               
|                     |  |                |  | Executive Vice President, Chief Financial Officer and Treasurer



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EXHIBIT INDEX



|            |  |                                                                                                           
|----------- |  | ----------------------------------------------------------------------------------------------------------
|Exhibit
No. |  | Description                                                                                               
|            | 
|31.1        |  | Certification of the Principal Executive Officer                                                          
|            | 
|31.2        |  | Certification of the Principal Financial Officer                                                          
|            | 
|32.1        |  | Certification of the Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|            | 
|32.2        |  | Certification of the Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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