##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                    to
 Commission File Number 000-51623
 Cynosure, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    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)
 þ o
  o þ o
 o þ
  Class
    
    Number of SharesClass A Common Stock, $0.001 par value
    
    
    7,019,115Class B Common Stock, $0.001 par value
    
    
    4,152,071




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##### 



Cynosure, Inc.
 Table of Contents
 Page No.PART I  Financial InformationItem 1.Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4.Controls and Procedures
    
    
    29PART II  Other InformationItem 1.Legal Proceedings
    
    
    30Item 1A.Risk Factors
    
    
    31Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 6.Exhibits
    
    
    45SIGNATURES
    
    
    46EX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO
  2




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##### Table of Contents



Cynosure, Inc.
 
 Consolidated Balance Sheets
 (Unaudited)
 (In thousands, except per share data)
 September 30,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    8,121
    
    
    $
    64,646Marketable securities
    
    
    53,235
    
    
    
    Accounts receivable, net
    
    
    17,618
    
    
    
    13,552Amounts due from related parties (Note 12)
    
    
    8
    
    
    
    72Inventories
    
    
    17,976
    
    
    
    14,140Prepaid expenses and other current assets
    
    
    3,154
    
    
    
    737Deferred income taxes
    
    
    5,838
    
    
    
    1,804Total current assets
    
    
    105,950
    
    
    
    94,951Property and equipment, net
    
    
    4,974
    
    
    
    4,424Other assets
    
    
    513
    
    
    
    793Total assets
    
    $
    111,437
    
    
    $
    100,168Liabilities and Stockholders EquityCurrent liabilities:Short-term loan
    
    $
    165
    
    
    $
    161Accounts payable
    
    
    4,778
    
    
    
    3,509Amounts due to related party (Note 12)
    
    
    263
    
    
    
    960Accrued expenses
    
    
    8,210
    
    
    
    7,173Accrued royalty settlement (Note 3)
    
    
    10,000
    
    
    
    Deferred revenue
    
    
    2,393
    
    
    
    3,626Capital lease obligation
    
    
    412
    
    
    
    295Total current liabilities
    
    
    26,221
    
    
    
    15,724Capital lease obligation, net of current portion
    
    
    1,031
    
    
    
    814Deferred revenue, net of current portion
    
    
    305
    
    
    
    123Other noncurrent liability
    
    
    101
    
    
    
    42Minority interest in consolidated subsidiary
    
    
    360
    
    
    
    314Commitments and contingencies (Note 10)Stockholders equity:Preferred stock, $0.001 par valueAuthorized  5,000 sharesIssued  none
    
    
    
    
    
    
    Class A and Class B common stock, $0.001 par valueAuthorized  70,000 sharesIssued  11,170 and 11,065 shares as of
September 30, 2006 and December 31, 2005,
respectively
    
    
    11
    
    
    
    11Additional paid-in capital
    
    
    79,860
    
    
    
    79,070Retained earnings
    
    
    4,291
    
    
    
    6,470Deferred stock-based compensation
    
    
    
    
    
    
    (1,426
    )Accumulated other comprehensive loss
    
    
    (456
    )
    
    
    (687
    )Treasury stock, 36 shares, at cost
    
    
    (287
    )
    
    
    (287
    )Total stockholders equity
    
    
    83,419
    
    
    
    83,151Total liabilities and stockholders equity
    
    $
    111,437
    
    
    $
    100,168
  3




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##### Table of Contents



Cynosure, Inc.
 
 Consolidated Statements of Operations
 (Unaudited, in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    18,556
    
    
    $
    15,041
    
    
    $
    53,826
    
    
    $
    40,121Cost of revenues (1)
    
    
    7,442
    
    
    
    7,092
    
    
    
    23,015
    
    
    
    18,724Gross profit
    
    
    11,114
    
    
    
    7,949
    
    
    
    30,811
    
    
    
    21,397Operating expenses (1):Sales and marketing
    
    
    6,372
    
    
    
    4,153
    
    
    
    17,979
    
    
    
    12,419Research and development
    
    
    1,207
    
    
    
    802
    
    
    
    3,455
    
    
    
    2,331General and administrative
    
    
    2,041
    
    
    
    1,362
    
    
    
    6,218
    
    
    
    3,747Royalty settlement (Note 3)
    
    
    10,000
    
    
    
    
    
    
    
    10,000
    
    
    
    Total operating expenses
    
    
    19,620
    
    
    
    6,317
    
    
    
    37,652
    
    
    
    18,497(Loss) income from operations
    
    
    (8,506
    )
    
    
    1,632
    
    
    
    (6,841
    )
    
    
    2,900Interest income (expense), net
    
    
    680
    
    
    
    5
    
    
    
    2,063
    
    
    
    (40
    )Other income (expense), net
    
    
    215
    
    
    
    38
    
    
    
    621
    
    
    
    (243
    )(Loss) income before (benefit from) provision for
income taxes and minority interest
    
    
    (7,611
    )
    
    
    1,675
    
    
    
    (4,157
    )
    
    
    2,617(Benefit from) provision for income taxes
    
    
    (3,370
    )
    
    
    546
    
    
    
    (2,019
    )
    
    
    929Minority interest in net income of subsidiary
    
    
    6
    
    
    
    23
    
    
    
    41
    
    
    
    58Net (loss) income
    
    $
    (4,247
    )
    
    $
    1,106
    
    
    $
    (2,179
    )
    
    $
    1,630Basic net (loss) income per share
    
    $
    (0.38
    )
    
    $
    0.18
    
    
    $
    (0.20
    )
    
    $
    0.26Diluted net (loss) income per share
    
    $
    (0.38
    )
    
    $
    0.15
    
    
    $
    (0.20
    )
    
    $
    0.22Basic weighted average common shares outstanding
    
    
    11,107
    
    
    
    6,242
    
    
    
    11,061
    
    
    
    6,232Diluted weighted average common shares outstanding
    
    
    11,107
    
    
    
    7,578
    
    
    
    11,061
    
    
    
    7,348
 
 (1)
    
    Stock-based compensation is attributable to the following categories: Cost of revenues
    
    $
    53
    
    
    $
    24
    
    
    $
    79
    
    
    $
    37Sales and marketing
    
    
    200
    
    
    
    29
    
    
    
    441
    
    
    
    248Research and development
    
    
    262
    
    
    
    11
    
    
    
    388
    
    
    
    16General and administrative
    
    
    305
    
    
    
    41
    
    
    
    703
    
    
    
    62Total stock-based compensation
    
    $
    820
    
    
    $
    105
    
    
    $
    1,611
    
    
    $
    363
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##### Table of Contents



Cynosure, Inc.
 
 Consolidated Statements of Cash Flow
 (Unaudited, in thousands)
 Nine Months EndedSeptember 30,2006
    
    
    2005Operating activities:Net (loss) income
    
    $
    (2,179
    )
    
    $
    1,630Reconciliation of net (loss) income to net cash
(used in) provided by operating activities:Depreciation and amortization
    
    
    1,725
    
    
    
    1,284Stock-based compensation expense
    
    
    1,611
    
    
    
    363Accretion of discounts on marketable securities
    
    
    (601
    )
    
    
    Deferred income taxes
    
    
    (4,036
    )
    
    
    Minority interest in consolidated subsidiary
    
    
    41
    
    
    
    64Gain on sale of investment
    
    
    (118
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,771
    )
    
    
    (2,148
    )Due from related party
    
    
    64
    
    
    
    122Inventories
    
    
    (3,542
    )
    
    
    (3,711
    )Net book value of demonstration inventory sold
    
    
    144
    
    
    
    315Prepaid expenses and other current assets
    
    
    (2,415
    )
    
    
    (191
    )Accounts payable
    
    
    1,233
    
    
    
    1,405Due to related party
    
    
    (706
    )
    
    
    1,218Accrued expenses
    
    
    1,094
    
    
    
    1,454Accrued royalty settlement
    
    
    10,000
    
    
    
    Deferred revenue
    
    
    (1,113
    )
    
    
    343Other noncurrent liability
    
    
    59
    
    
    
    Net cash (used in) provided by operating activities
    
    
    (2,510
    )
    
    
    2,148Investing activities:Purchases of property and equipment
    
    
    (1,758
    )
    
    
    (2,075
    )Proceeds from the sales and maturities of securities
    
    
    119,025
    
    
    
    250Purchases of marketable securities
    
    
    (171,275
    )
    
    
    Increase in other assets
    
    
    (13
    )
    
    
    (200
    )Net cash used in investing activities
    
    
    (54,021
    )
    
    
    (2,025
    )Financing activities:Payments on short term loan and note payable to related party
    
    
    
    
    
    
    5Tax benefits related to stock options
    
    
    291
    
    
    
    Proceeds from exercise of stock options
    
    
    340
    
    
    
    Proceeds from sale of common stock
    
    
    
    
    
    
    1,485Repurchase of common stock
    
    
    
    
    
    
    (1,485
    )Deferred financing costs
    
    
    
    
    
    
    (1,254
    )Payments received on stockholder notes
    
    
    
    
    
    
    3Payments of initial public offering costs
    
    
    (38
    )
    
    
    Payments on capital lease obligation
    
    
    (275
    )
    
    
    (94
    )Net cash provided by (used in) financing activities
    
    
    318
    
    
    
    (1,340
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (312
    )
    
    
    568Net decrease in cash and cash equivalents
    
    
    (56,525
    )
    
    
    (649
    )Cash and cash equivalents, beginning of the period
    
    
    64,646
    
    
    
    4,028Cash and cash equivalents, end of the period
    
    $
    8,121
    
    
    $
    3,379Supplemental cash flow informationCash paid for interest
    
    $
    90
    
    
    $
    60Cash paid for income taxes
    
    $
    2,780
    
    
    $
    Supplemental noncash investing and financing activitiesAssets acquired under capital lease
    
    $
    604
    
    
    $
    544Deferred compensation associated with stock option grants to employees
    
    $
    
    
    
    $
    1,690Proceeds from the sale of investment held in escrow
    
    $
    
    
    
    $
    250
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Cynosure, Inc.
 
 Notes to Consolidated Financial Statements
 Note 1  Interim Consolidated Financial Statements
  Note 2  Stock-Based Compensation
  Accounting for Stock
Issued to Employees Accounting for Stock-Based Compensation Share-Based Payment
  6




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Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005(in thousands except per share data)Net income as reported
    
    $
    1,106
    
    
    $
    1,630Add: Stock-based employee
compensation expense included
in determination of net income,
net of related tax effects
    
    
    69
    
    
    
    103Less: Stock-based employee
compensation determined under
the fair value based method,
net of related tax effects
    
    
    (204
    )
    
    
    (472
    )Net income  pro forma
    
    $
    971
    
    
    $
    1,261Income per common equivalent share:Basic  as reported
    
    $
    0.18
    
    
    $
    0.26Diluted  as reported
    
    $
    0.15
    
    
    $
    0.22Basic  pro forma
    
    $
    0.15
    
    
    $
    0.20Diluted  pro forma
    
    $
    0.13
    
    
    $
    0.17
  Nine Months EndedSeptember 30,2006Risk-free interest rate
    
    5.00%Expected dividend yield
    
    Expected lives
    
    5.8 yearsExpected volatility
    
    82%
  7




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Weighted-AverageWeighted-
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Per Share
    
    
    Average
    
    
    Contractual
    
    
    Intrinsicof Shares
    
    
    Exercise Price
    
    
    Exercise Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2005
    
    
    1,821
    
    
    $
    3.00-$15.00
    
    
    $
    3.46Granted
    
    
    424
    
    
    
    12.59-17.45
    
    
    
    15.91Exercised
    
    
    (104
    )
    
    
    3.00-4.50
    
    
    
    3.26
    
    
    
    
    
    
    $
    1,021Forfeited
    
    
    (39
    )
    
    
    3.00-17.45
    
    
    
    8.05Outstanding at September 30, 2006
    
    
    2,102
    
    
    $
    3.00-$17.45
    
    
    $
    5.90
    
    
    
    8.42
    
    
    $
    18,075Exercisable at September 30, 2006
    
    
    817
    
    
    $
    3.00-$17.45
    
    
    $
    3.62
    
    
    
    8.07
    
    
    $
    8,887Vested and expected to vest at September
30, 2006(1)
    
    
    2,089
    
    
    $
    3.00-$17.45
    
    
    $
    5.90
    
    
    
    
    
    
    $
    17,983Available for grant at September 30, 2006
    
    
    148
 
 (1)
    
    This represents the number of vested options as of September 30, 2006 plus the number of
unvested options expected to vest as of September 30, 2006 based on the unvested outstanding
options at September 30, 2006 adjusted for the estimated annual forfeiture rate of 1.0%.  Weighted-AverageOptions
    
    Remaining
    
    OptionsOutstanding
    
    Contractual Term
    
    ExercisableRange of Exercise Prices$3.00  $4.50
    
    
    1,668
    
    
    
    8.10
    
    
    
    794$12.59  $15.00
    
    
    202
    
    
    
    9.71
    
    
    
    0$15.84  $17.45
    
    
    232
    
    
    
    9.60
    
    
    
    232,102
    
    
    
    8.42
    
    
    
    817
 Note 3  Royalty Settlement
 PhotoLight Acclaim 7000 PhotoSilk Plus
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Note 4  Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Raw materials
    
    $
    1,275
    
    
    $
    2,579Work in process
    
    
    1,064
    
    
    
    2,259Finished goods
    
    
    15,637
    
    
    
    9,302$
    17,976
    
    
    $
    14,140
 Note 5  Marketable Securities
 Accounting for Certain
Investments in Debt and Equity Securities
  Market
    
    
    Amortized
    
    
    Unrealized
    
    
    UnrealizedValue
    
    
    Cost
    
    
    Gains
    
    
    LossesCorporate bonds
    
    $
    13,269
    
    
    $
    13,268
    
    
    $
    7
    
    
    $
    6State and municipal bonds
    
    
    37,308
    
    
    
    37,307
    
    
    
    2
    
    
    
    1Equity securities
    
    
    278
    
    
    
    270
    
    
    
    8
    
    
    
    Certificates of deposit
    
    
    2,380
    
    
    
    2,381
    
    
    
    
    
    
    
    1$
    53,235
    
    
    $
    53,226
    
    
    $
    17
    
    
    $
    8
  MaturitiesTotal
    
    
    Less Than One Year
    
    
    One to Two YearsCorporate bonds
    
    $
    13,269
    
    
    $
    12,455
    
    
    $
    814State and municipal bonds
    
    
    37,308
    
    
    
    35,265
    
    
    
    2,043Equity securities
    
    
    278
    
    
    
    
    
    
    
    Certificates of deposit
    
    
    2,380
    
    
    
    2,380
    
    
    
    $
    53,235
    
    
    $
    50,100
    
    
    $
    2,857
  Note 6  Warranty Costs
  9




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September 30,2006(in thousands)Warranty accrual, beginning of period
    
    $
    2,265Charged to costs and expenses relating to new sales
    
    
    2,428Costs incurred
    
    
    (2,200
    )Warranty accrual, end of period
    
    $
    2,493
 Note 7  Segment Information
 Disclosures about
Segments of an Enterprise and Related Information
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)United States
    
    $
    9,152
    
    
    $
    9,077
    
    
    $
    28,355
    
    
    $
    21,362Europe
    
    
    4,130
    
    
    
    2,229
    
    
    
    13,067
    
    
    
    8,227Asia / Pacific
    
    
    3,068
    
    
    
    1,777
    
    
    
    6,943
    
    
    
    4,819Other
    
    
    2,206
    
    
    
    1,958
    
    
    
    5,461
    
    
    
    5,713Total
    
    $
    18,556
    
    
    $
    15,041
    
    
    $
    53,826
    
    
    $
    40,121
 10




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##### Table of Contents



September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)United States
    
    $
    84,697
    
    
    $
    86,323Europe
    
    
    205
    
    
    
    (1,812
    )Asia / Pacific
    
    
    (82
    )
    
    
    (264
    )Eliminations
    
    
    (1,401
    )
    
    
    (1,096
    )Total
    
    $
    83,419
    
    
    $
    83,151
  September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)United States
    
    $
    5,867
    
    
    $
    5,488Europe
    
    
    191
    
    
    
    278Asia / Pacific
    
    
    102
    
    
    
    124Eliminations
    
    
    (673
    )
    
    
    (673
    )Total
    
    $
    5,487
    
    
    $
    5,217
  Note 8  Net (Loss) Income Per Common Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Basic weighted
average number of
shares outstanding
    
    
    11,107
    
    
    
    6,242
    
    
    
    11,061
    
    
    
    6,232Potential common
shares pursuant to
stock options
    
    
    
    
    
    
    1,336
    
    
    
    
    
    
    
    1,116Diluted weighted
average number of
shares outstanding
    
    
    11,107
    
    
    
    7,578
    
    
    
    11,061
    
    
    
    7,348
  Note 9  Comprehensive (Loss) Income
  11




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Cumulative translation
adjustment, net of tax
    
    $
    92
    
    
    $
    (23
    )
    
    $
    226
    
    
    $
    (175
    )Unrealized gain on marketable
securities, net of tax
    
    
    36
    
    
    
    
    
    
    
    5
    
    
    
    Total other comprehensive income
(loss)
    
    
    128
    
    
    
    (23
    )
    
    
    231
    
    
    
    (175
    )Reported net (loss) income
    
    
    (4,247
    )
    
    
    1,106
    
    
    
    (2,179
    )
    
    
    1,630Total comprehensive (loss) income
    
    $
    (4,119
    )
    
    $
    1,083
    
    
    $
    (1,948
    )
    
    $
    1,455
 Note 10  Litigation
      12




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##### Table of Contents



Note 11  Sona MedSpa
    Note 12  Related Party Transactions
  Note 13  Investment in Solx, Inc.
  13




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##### Table of Contents



Accounting for Certain Investments in Debt and Equity Securities .
 Note 14  Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income
Taxes
 Fair Value Measurements
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-looking statements
  
    
    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;
 14




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##### Table of Contents




    
    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.
   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 Annual
Report on Form 10-K filed with the SEC on March 27, 2006. 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
   
    
    redesigning many of our existing products;
    
    introducing innovative new products and technologies;
    
    streamlining and rationalizing our manufacturing processes;
    
    reorganizing and expanding our research and development, sales and marketing and
distribution capabilities; and
    
    enhancing our customer service network.
  
    
    the Apogee Elitesystem, our flagship product for hair removal, in March 2004;
 15




---



##### Table of Contents




    
    the Cynergysystem, our flagship product for the treatment of vascular lesions, in October 2005;
    
    the TriActive LaserDermologysystem, our flagship product for the temporary reduction
of the appearance of cellulite, in February 2004;
    
    the Affirmsystem, our flagship product for anti-aging, including treatments for
wrinkles, skin texture, skin discoloration and skin tightening, in April 2006, which we
began delivery of during the third quarter of 2006; and
    
    the PhotoSilk Plussystem for skin rejuvenation through the treatment of shallow
vascular lesions and pigmented lesions which was introduced in 2005.
   CynosureSpa
 Apogee, Cynergy,
Acclaim Affirm
  PhotoLight Acclaim 7000 PhotoSilk Plus
  16




---



##### Table of Contents



Financial Operations Overview
 Revenues
   Percentage of RevenuesNine Months Ended September 30,2006
    
    2005RegionNorth America
    
    
    57
    %
    
    
    61
    %Europe
    
    
    24
    
    
    
    21Asia/Pacific
    
    
    13
    
    
    
    12Other
    
    
    6
    
    
    
    6Total
    
    
    100
    %
    
    
    100
    %
  Cost of Revenues
  Sales and Marketing Expenses
  Research and Development Expenses
  17




---



##### Table of Contents



General and Administrative Expenses
  Interest Income (Expense), net
  (Benefit from) Provision for Income Taxes
  Results of Operations
 THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
  Three Months EndedSeptember 30,2006
    
    
    2005As a % of
    
    
    
    
    
    
    As a % ofTotal
    
    
    
    
    
    
    Total
    
    
    $
    
    
    %Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Change
    
    
    ChangeRevenues
    
    $
    18,556
    
    
    
    100
    %
    
    $
    15,041
    
    
    
    100
    %
    
    $
    3,515
    
    
    
    23
    %Cost of revenues
    
    
    7,442
    
    
    
    40
    
    
    
    7,092
    
    
    
    47
    
    
    
    350
    
    
    
    5Gross profit
    
    
    11,114
    
    
    
    60
    
    
    
    7,949
    
    
    
    53
    
    
    
    3,165
    
    
    
    40Operating expensesSales and marketing
    
    
    6,372
    
    
    
    34
    
    
    
    4,153
    
    
    
    28
    
    
    
    2,219
    
    
    
    53Research and development
    
    
    1,207
    
    
    
    7
    
    
    
    802
    
    
    
    5
    
    
    
    405
    
    
    
    50General and administrative
    
    
    2,041
    
    
    
    11
    
    
    
    1,362
    
    
    
    9
    
    
    
    679
    
    
    
    50Royalty settlement
    
    
    10,000
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    Total operating expenses
    
    
    19,620
    
    
    
    106
    
    
    
    6,317
    
    
    
    42
    
    
    
    13,303
    
    
    
    211(Loss) income from operations
    
    
    (8,506
    )
    
    
    (46
    )
    
    
    1,632
    
    
    
    11
    
    
    
    (10,138
    )
    
    
    (621
    )Interest income, net
    
    
    680
    
    
    
    4
    
    
    
    5
    
    
    
    
    
    
    
    675
    
    
    
    13500Other income, net
    
    
    215
    
    
    
    1
    
    
    
    38
    
    
    
    
    
    
    
    177
    
    
    
    466(Loss) income before
(benefit from) provision for
income taxes and minority
interest
    
    
    (7,611
    )
    
    
    (41
    )
    
    
    1,675
    
    
    
    11
    
    
    
    (9,286
    )
    
    
    (554
    )(Benefit from) provision for
income taxes
    
    
    (3,370
    )
    
    
    (18
    )
    
    
    546
    
    
    
    4
    
    
    
    (3,916
    )
    
    
    (717
    )Minority interest in net
income of subsidiary
    
    
    6
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    (17
    )
    
    
    (74
    )Net (loss) income
    
    $
    (4,247
    )
    
    
    (23
    )%
    
    $
    1,106
    
    
    
    7
    %
    
    $
    (5,353
    )
    
    
    (484
    )%
 18




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##### Table of Contents



Revenues
  Three Months EndedSeptember 30,
    
    
    $
    
    
    %2006
    
    
    2005
    
    
    Change
    
    
    ChangeProduct sales in North America
    
    $
    9,430
    
    
    $
    9,183
    
    
    $
    247
    
    
    
    3
    %Product sales outside North America
    
    
    6,755
    
    
    
    3,453
    
    
    
    3,302
    
    
    
    96Original equipment manufacturer sales and revenue sharing
    
    
    301
    
    
    
    664
    
    
    
    (363
    )
    
    
    (55
    )Parts, accessories and service sales
    
    
    2,070
    
    
    
    1,741
    
    
    
    329
    
    
    
    19Total Revenues
    
    $
    18,556
    
    
    $
    15,041
    
    
    $
    3,515
    
    
    
    23
    %
 
    
    Revenues from the sale of products in North America increased due to an increase in the
number of product units sold, a higher average selling price due to a favorable change in
product mix and from the introduction of new products. The increase in North American
revenues resulted in part from the continued expansion of our North American sales
organization, including the hiring of 29 additional direct sales employees between December
31, 2004 and September 30, 2006. This increase was offset by a $1.9 million sale of 27
units, during the three months ended September 30, 2005, to a franchise for which there was
no such sale during the corresponding period ended September 30, 2006.
    
    The increase in revenues from sales of products outside of North America is mainly
attributable to increased sales to Europe, which increased by $2.1 million, or 194%, over
the 2005 period, resulting from a favorable change in product mix and our increased focus
on direct selling, for which we receive higher average selling prices as compared to sales
through distributors. The increase also resulted from the introduction of new products.
Additionally, revenues from sales of products outside of North America increased due to
increased sales of products to distributors in the Far East of $1.0 million, or 220%,
distributors in Japan of $0.3 million, or 85%, and distributors in the Middle East of $0.1
million, or 14%, over the 2005 period. These increases are also a result of a favorable
change in product mix and increased average selling prices.
    
    Revenues from original equipment manufacturer and other relationships and our revenue
sharing arrangement decreased primarily due to a $0.4 million decrease in revenues from our
revenue sharing arrangement with Sona MedSpa which was terminated in June 2006.
    
    Revenues from the sale of parts, accessories and services increased primarily as a
result of the increase in our product sales over the past two years.
 Cost of Revenues
 Three Months EndedSeptember 30,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeCost of revenues (in thousands)
    
    $
    7,442
    
    
    $
    7,092
    
    
    $
    350
    
    
    
    5
    %Cost of revenues (as a percentage of total revenues)
    
    
    40
    %
    
    
    47
    %
  19




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##### Table of Contents



Sales and Marketing
 Three Months EndedSeptember 30,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeSales and marketing (in thousands)
    
    $
    6,372
    
    
    $
    4,153
    
    
    $
    2,219
    
    
    
    53
    %Sales and marketing (as a percentage of total revenues)
    
    
    34
    %
    
    
    28
    %
 Affirm
 Research and Development
 Three Months EndedSeptember 30,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeResearch and development (in thousands)
    
    $
    1,207
    
    
    $
    802
    
    
    $
    405
    
    
    
    50
    %Research and development (as a percentage of total revenues)
    
    
    7
    %
    
    
    5
    %
 Affirm
 General and Administrative
 Three Months EndedSeptember 30,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeGeneral and administrative (in thousands)
    
    $
    2,041
    
    
    $
    1,362
    
    
    $
    679
    
    
    
    50
    %General and administrative (as a percentage of total revenues)
    
    
    11
    %
    
    
    9
    %
  Royalty Settlement
 PhotoLight Acclaim 7000 PhotoSilk Plus
 20




---



##### Table of Contents



Interest Income, net and Other Income, net
 Three Months EndedSeptember 30,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeInterest income, net (in thousands)
    
    $
    680
    
    
    $
    5
    
    
    $
    675
    
    
    
    13500
    %Other income net (in thousands)
    
    $
    215
    
    
    $
    38
    
    
    $
    177
    
    
    
    466
    %
  (Benefit from) Provision for Income Taxes
 Three Months EndedSeptember 30,
    
    $
    
    %2006
    
    2005
    
    Change
    
    Change(Benefit from) provision for income taxes (in thousands)
    
    $
    (3,370
    )
    
    $
    546
    
    
    $
    (3,916
    )
    
    
    (717
    )%(Benefit from) provision as a % of income before (benefit
from) provision for income taxes and minority interest
    
    
    44
    %
    
    
    33
    %
  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
  Nine Months EndedSeptember 30,2006
    
    
    2005As a % of
    
    
    
    
    
    
    As a % ofTotal
    
    
    
    
    
    
    Total
    
    
    $
    
    
    %Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Change
    
    
    ChangeRevenues
    
    $
    53,826
    
    
    
    100
    %
    
    $
    40,121
    
    
    
    100
    %
    
    $
    13,705
    
    
    
    34
    %Cost of revenues
    
    
    23,015
    
    
    
    43
    
    
    
    18,724
    
    
    
    47
    
    
    
    4,291
    
    
    
    23Gross profit
    
    
    30,811
    
    
    
    57
    
    
    
    21,397
    
    
    
    53
    
    
    
    9,414
    
    
    
    44Operating expensesSales and marketing
    
    
    17,979
    
    
    
    33
    
    
    
    12,419
    
    
    
    31
    
    
    
    5,560
    
    
    
    45Research and development
    
    
    3,455
    
    
    
    6
    
    
    
    2,331
    
    
    
    6
    
    
    
    1,124
    
    
    
    48General and administrative
    
    
    6,218
    
    
    
    12
    
    
    
    3,747
    
    
    
    9
    
    
    
    2,471
    
    
    
    66Royalty settlement
    
    
    10,000
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    Total operating expenses
    
    
    37,652
    
    
    
    70
    
    
    
    18,497
    
    
    
    46
    
    
    
    19,155
    
    
    
    104(Loss) income from operations
    
    
    (6,841
    )
    
    
    (13
    )
    
    
    2,900
    
    
    
    7
    
    
    
    (9,741
    )
    
    
    (336
    )Interest income (expense), net
    
    
    2,063
    
    
    
    4
    
    
    
    (40
    )
    
    
    
    
    
    
    2,103
    
    
    
    5,258Other income (expense), net
    
    
    621
    
    
    
    1
    
    
    
    (243
    )
    
    
    (1
    )
    
    
    864
    
    
    
    356(Loss) income before (benefit
from) provision for income
taxes and minority interest
    
    
    (4,157
    )
    
    
    (8
    )
    
    
    2,617
    
    
    
    7
    
    
    
    (6,774
    )
    
    
    (259
    )(Benefit from) provision for
income taxes
    
    
    (2,019
    )
    
    
    (4
    )
    
    
    929
    
    
    
    2
    
    
    
    (2,948
    )
    
    
    (317
    )Minority interest in net
income of subsidiary
    
    
    41
    
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    (17
    )
    
    
    (29
    )Net (loss) income
    
    $
    (2,179
    )
    
    
    (4
    )%
    
    $
    1,630
    
    
    
    4
    %
    
    $
    (3,809
    )
    
    
    (234
    )%
 21




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##### Table of Contents



Revenues
  Nine Months EndedSeptember 30,
    
    
    $
    
    
    %2006
    
    
    2005
    
    
    Change
    
    
    ChangeProduct sales in North America
    
    $
    27,561
    
    
    $
    20,501
    
    
    $
    7,060
    
    
    
    34
    %Product sales outside North America
    
    
    18,683
    
    
    
    11,688
    
    
    
    6,995
    
    
    
    60Original equipment manufacturer sales and revenue sharing
    
    
    875
    
    
    
    2,774
    
    
    
    (1,899
    )
    
    
    (68
    )Parts, accessories and service sales
    
    
    6,707
    
    
    
    5,158
    
    
    
    1,549
    
    
    
    30Total Revenues
    
    $
    53,826
    
    
    $
    40,121
    
    
    $
    13,705
    
    
    
    34
    %
 
    
    Revenues from the sale of products in North America increased due to an increase in the
number of product units sold, a higher average selling price due to a favorable change in
product mix and from the introduction of new products. The increase in North American
revenues resulted in part from the continued expansion of our North American sales
organization, including the hiring of 29 additional direct sales employees between December
31, 2004 and September 30, 2006. Revenues increased in the 2006 period, despite a $1.9
million sale of 27 units to a franchise, during the nine months ended September 30, 2005,
for which there was no corresponding sale during the same period in 2006.
    
    Revenues from sales of products outside of North America increased mainly attributable
to an increase in sales in Europe of $3.5 million, or 66%, over the 2005 period, resulting
from a favorable change in product mix and our increased focus on direct selling, for which
we receive higher average selling prices as compared to sales through distributors. The
increase also resulted from the introduction of new products. This increase is also due to
an increase in sales of products to distributors in Europe of $1.0 million, or 73%, Japan
of $0.5 million, or 60%, the Middle East of $0.7 million, or 34%, and the Far East of $1.3
million, or 98%, in the 2006 period as compared to the 2005 period.
    
    Revenues from original equipment manufacturer and other relationships and our revenue
sharing arrangement decreased primarily attributable to a $1.4 million decrease in revenues
from our revenue sharing arrangement with Sona MedSpa which was terminated in June 2006.
    
    Revenues from the sale of parts, accessories and services increased primarily as a
result of the increase in our product sales over the past two years.
 Cost of Revenues
 Nine Months EndedSeptember 30,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeCost of revenues (in thousands)
    
    $
    23,015
    
    
    $
    18,724
    
    
    $
    4,291
    
    
    
    23
    %Cost of revenues (as a percentage of total revenues)
    
    
    43
    %
    
    
    47
    %
  22




---



##### Table of Contents



Sales and Marketing
 Nine Months EndedSeptember 30,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeSales and marketing (in thousands)
    
    $
    17,979
    
    
    $
    12,419
    
    
    $
    5,560
    
    
    
    45
    %Sales and marketing (as a percentage of total revenues)
    
    
    33
    %
    
    
    31
    %
 Affirm
 Research and Development
 Nine Months EndedSeptember 30,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeResearch and development (in thousands)
    
    $
    3,455
    
    
    $
    2,331
    
    
    $
    1,124
    
    
    
    48
    %Research and development (as a percentage of total revenues)
    
    
    6
    %
    
    
    6
    %
 Affirm
 General and Administrative
 Nine Months EndedSeptember 30,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeGeneral and administrative (in thousands)
    
    $
    6,218
    
    
    $
    3,747
    
    
    $
    2,471
    
    
    
    66
    %General and administrative (as a percentage of total revenues)
    
    
    12
    %
    
    
    9
    %
  Royalty Settlement
 PhotoLight Acclaim 7000 PhotoSilk Plus
 Interest Income (Expense), net and Other Income (Expense), net
 Nine Months EndedSeptember 30,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeInterest income (expense), net (in thousands)
    
    $
    2,063
    
    
    $
    (40
    )
    
    $
    2,103
    
    
    
    5258
    %Other income (expense), net (in thousands)
    
    $
    621
    
    
    $
    (243
    )
    
    $
    864
    
    
    
    356
    %
  23




---



##### Table of Contents



(Benefit from) Provision for Income Taxes
 Nine Months EndedSeptember 30,
    
    $
    
    %2006
    
    2005
    
    Change
    
    Change(Benefit from) provision for income taxes (in thousands)
    
    $
    (2,019
    )
    
    $
    929
    
    
    $
    (2,948
    )
    
    
    (317
    )%(Benefit) provision as a % of income before (benefit from)
provision for income taxes and minority interest
    
    
    49
    %
    
    
    35
    %
  Liquidity and Capital Resources
     Cash Flows
  24




---



##### Table of Contents



Contractual Cash Obligations
 PhotoLight Acclaim 7000 PhotoSilk Plus
  Critical Accounting Policies and Estimates
   Revenue Recognition and Deferred Revenue
 Revenue Recognition in Financial
Statements,
 25




---



##### Table of Contents




    
    delivery has occurred;
    
    there is persuasive evidence of an agreement;
    
    the fee is fixed or determinable; and
    
    collection is reasonably assured.
  Revenue Arrangements with Multiple Deliverables
 Accounts Receivable and Concentration of Credit Risk
  Inventories and Allowance for Obsolescence
  Product Warranty Costs and Provisions
  26




---



##### Table of Contents



Stock-Based Compensation
  Accounting for Stock
Issued to Employees Accounting for Stock-Based Compensation Share-Based Payment
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2006(in thousands)Cost of revenues
    
    $
    53
    
    
    $
    79Sales and marketing
    
    
    200
    
    
    
    441Research and development
    
    
    262
    
    
    
    388General and administrative
    
    
    305
    
    
    
    703$
    820
    
    
    $
    1,611
   27




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##### Table of Contents



Nine Months EndedSeptember 30,2006Risk-free interest rate
    
    
    5.00
    %Expected dividend yield
    
    
    Expected lives
    
    5.8 yearsExpected volatility
    
    
    82
    %
   Income Taxes
 Accounting for Income Taxes
 Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income
Taxes
 28




---



##### Table of Contents



Fair Value Measurements
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Interest Rate Sensitivity.
 Foreign Currency Exchange.
 
 Item 4. Controls and Procedures
   29




---



##### Table of Contents



PART II  Other Information
 
 Item 1. Legal Proceedings
       30




---



##### Table of Contents



Item 1A. Risk Factors
  Risks Related to Our Business and Industry
 We have a history of operating losses, and we may not maintain profitability.
  If we fail to obtain Alexandrite rods or our air cooling system from our sole suppliers, our
ability to manufacture and sell our products and components would be impaired.
 Apogee SmartCool SmartCool SmartCool
 SmartCool SmartCool
 We compete against companies that have longer operating histories, more established products and
greater resources than we do, which may prevent us from achieving further market penetration or
improving operating results.
   
    
    product performance and design;
    
    ability to sell products tailored to meet the applications needs of clients and patients;
    
    quality of customer support;
 31




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##### Table of Contents




    
    product pricing;
    
    product safety;
    
    sales, marketing and distribution capabilities;
    
    success and timing of new product development and introductions; and
    
    intellectual property protection.
   If we do not continue to develop and commercialize new products and identify new markets for our
products and technology, we may not remain competitive, and our revenues and operating results
could suffer.
   
    
    develop or acquire new technologies that either add to or significantly improve our
current products;
    
    convince our target customers that our new products or product upgrades would be
attractive revenue-generating additions to their practices;
    
    sell our products to non-traditional customers, including primary care physicians,
gynecologists and other specialists;
    
    identify new markets and emerging technological trends in our target markets and react
effectively to technological changes; and
    
    maintain effective sales and marketing strategies.
 If our new products do not gain market acceptance, our revenues and operating results could
suffer.
   32




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##### Table of Contents



If demand for our aesthetic treatment systems by non-traditional physician customers and spas does
not develop as we expect, our revenues will suffer and our business will be harmed.
  We rely upon third party suppliers for the components and subassemblies of many of our products,
making us vulnerable to supply shortages and price fluctuations, which could harm our business.
 Apogee, Cynergy,
Acclaim VStar
 We sell our products in numerous international markets. Our operating results may suffer if we are
unable to manage our international operations effectively.
 .
  
    
    foreign certification and regulatory requirements;
    
    difficulties in staffing and managing our foreign operations;
    
    import and export controls; and
    
    political and economic instability.
 Revenue from our international sales could be adversely affected by fluctuations in currency
exchange rates, which would cause our operating results to suffer.
  We rely on third party distributors to market, sell and service a significant portion of our
products. If these distributors do not commit the necessary resources to effectively market, sell
and service our products or if our relationships with these distributors are disrupted, our
business and operating results may be harmed.
 33




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##### Table of Contents



Because we do not require training for users of our products, and sell our products to
non-physicians, there exists an increased potential for misuse of our products, which could harm
our reputation and our business.
  Product liability suits could be brought against us due to a defective design, material or
workmanship or due to misuse of our products. These lawsuits could be expensive and time consuming
and result in substantial damages to us and increases in our insurance rates.
  We may incur substantial expenses if our past practices are shown to have violated the Telephone
Consumer Protection Act.
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Our financial results may fluctuate from quarter to quarter, which makes our results difficult to
predict and could cause our results to fall short of expectations.
  
    
    continued availability of attractive equipment leasing terms for our customers, which
may be negatively influenced by interest rate increases;
    
    increases in the length of our sales cycle; and
    
    reductions in the efficiency of our manufacturing processes.
 If there is not sufficient demand for the procedures performed with our products, practitioner
demand for our products could decline, which would adversely affect our operating results.
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
    
    patient awareness of procedures and treatments;
    
    the cost, safety and effectiveness of the procedure and of alternative treatments;
    
    the success of our and our customers sales and marketing efforts to purchasers of these procedures; and
    
    consumer confidence, which may be affected by economic and other conditions. If there
is not sufficient demand for the procedures performed with our products, practitioner
demand for our products would be reduced, which would adversely affect our operating
results.
    
    If there is not sufficient demand for the procedures performed with our products,
practitioner demand for our products would be reduced, which would adversely affect our
operating results.
 Our business and operations are experiencing rapid growth. If we fail to effectively manage our
growth, our business and operating results could be harmed.
  
    
    implement appropriate operational, financial and management controls, systems and procedures;
    
    expand our manufacturing capacity and scale of production;
    
    expand our sales, marketing and distribution infrastructure and capabilities; and
    
    provide adequate training and supervision to maintain high quality standards.
 We may be unable to attract and retain management and other personnel we need to succeed.
  Any acquisitions that we make could disrupt our business and harm our financial condition.
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El.En. has substantial control over us. In addition, El.En. and our executive officers and
directors have the ability to control all matters submitted to stockholders for approval.
  Provisions in our corporate charter documents and under Delaware law may delay or prevent
attempts by our stockholders to change our management and hinder efforts to acquire a controlling
interest in us.
  
 
 
 
 
 
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Our stock price may be volatile.
  
    
    the success of competitive products or technologies;
    
    regulatory developments in the United States and foreign countries;
    
    developments or disputes concerning patents or other proprietary rights;
    
    the recruitment or departure of key personnel;
    
    variations in our financial results or those of companies that are perceived to be similar to us;
    
    market conditions in the our industry and issuance of new or changed securities
analysts reports or recommendations; and
    
    general economic, industry and market conditions.
 A significant portion of our total outstanding shares are restricted from immediate resale but
may be sold into the market at any time. This could cause the market price of our class A common
stock to drop significantly, even if our business is doing well.
  Risks Related to Our Relationship with El.En.
 El.En. has substantial control over us and could delay or prevent a change of control.
  
    
    to elect a majority of the members of our board of directors;
    
    to approve amendments to our bylaws adopted by our class A and class B stockholders,
voting as a single class; and
    
    to approve amendments to any provisions of our restated certificate of incorporation
relating to the rights of holders of common stock, the powers, election and classification
of the board of directors, corporate opportunities and the rights of holders of class A
common stock and class B common stock to elect and remove directors, act by written consent
and call special meetings of stockholders.
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El.En. and its subsidiaries market and sell products that compete with our products, and any
competition by El.En. could have a material adverse effect on our business.
 PhotoLight, PhotoSilk Plus TriActive LaserDermology
 Conflicts of interest may arise between us and El.En., and these conflicts might ultimately be
resolved in a manner unfavorable to us.
  
    
    the nature, timing, marketing, distribution and price of our products and El.En.s
products that compete with each other;
    
    intellectual property matters; and
    
    business opportunities that may be attractive to both El.En. and us.
  Our class A share price may decline because of future sales of our shares by El.En.
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
    
    up to 33% of the shares of our common stock that it beneficially owned on December 8,
2005, the date of the prospectus relating to our initial public offering, until June 9,
2007; and
    
    up to an additional 33% of the shares of our common stock that it beneficially owned on
December 8, 2005 during the period between June 9, 2007 and December 9, 2007.
  If El.En. sells the shares of our stock held by it and no longer has control over us, our
commercial relationship with El.En. may be adversely affected.
   Risks Related to Intellectual Property
 If we infringe or are alleged to infringe intellectual property rights of third parties, our
business could be adversely affected.
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If we are unable to obtain or maintain intellectual property rights relating to our technology
and products, the commercial value of our technology and products will be adversely affected and
our competitive position could be harmed.
  If we are unable to protect the confidentiality of our proprietary information and know-how, the
value of our technology and products could be adversely affected.
  Risks Related to Government Regulation
 If we fail to obtain and maintain necessary U.S. Food and Drug Administration clearances for our
products and indications or if clearances for future products and indications are delayed or not
issued, our business would be harmed.
   
    
    FDA, other regulatory authorities or an institutional review board may place a clinical trial on hold;
    
    patients may not enroll in clinical trials, or patient follow-up may not occur, at the rate we expect;
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
    
    patients may not comply with trial protocols;
    
    institutional review boards and third party clinical investigators may delay or reject our trial protocol;
    
    third party clinical investigators may decline to participate in a trial or may not
perform a trial on our anticipated schedule or consistent with the clinical trial protocol,
good clinical practices, or other FDA requirements;
    
    third party organizations may not perform data collection and analysis in a timely or
accurate manner;
    
    regulatory inspections of our clinical trials or manufacturing facilities may, among
other things, require us to undertake corrective action or suspend or terminate our
clinical trials, or invalidate our clinical trials;
    
    changes in governmental regulations or administrative actions; and
    
    the interim or final results of the clinical trials may be inconclusive or unfavorable
as to safety or effectiveness.
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After clearance or approval of our products, we are subject to continuing regulation by the FDA,
and if we fail to comply with FDA regulations, our business could suffer.
   
    
    untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
    
    repair, replacement, refunds, recall or seizure of our products;
    
    operating restrictions or partial suspension or total shutdown of production;
    
    refusing or delaying our requests for 510(k) clearance or premarket approval of new
products or new intended uses;
    
    withdrawing 510(k) clearance or premarket approvals that have already been granted; and
    
    criminal prosecution.
  Federal regulatory reforms may adversely affect our ability to sell our products profitably.
  We have modified some of our products without FDA clearance. The FDA could retroactively
determine that the modifications were improper and require us to stop marketing and recall the
modified products.
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If we fail to comply with the FDAs Quality System Regulation and laser performance standards,
our manufacturing operations could be halted, and our business would suffer.
  If we fail to comply with state laws and regulations, or if state laws or regulations change, our
business could suffer.
  We or our distributors may be unable to obtain or maintain international regulatory
qualifications or approvals for our current or future products and indications, which could harm
our business.
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New regulations may limit our ability to sell to non-physicians, which could harm our business.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 6. Exhibits
 Exhibit No.
    
    Description10.1
    
    Non-Exclusive License Agreement, dated November 6, 2006,
between Palomar Medical Technologies, Inc. and Cynosure,
Inc., incorporated by reference to the exhibits to the
Registrants current report on Form 8-K filed with the SEC
on November 7, 2006.31.1
    
    Certification of the Principal Executive Officer31.2
    
    Certification of the Principal Financial Officer32.1
    
    Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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Signatures
  Cynosure, Inc.

(Registrant)Date:
November 13, 2006
    
    By:
    
    /s/ Michael R. DavinMichael R. DavinChairman, President, Chief Executive OfficerDate:
November 13, 2006
    
    By:
    
    /s/ Timothy W. BakerTimothy W. Baker Executive Vice President,Chief Financial Officer and Treasurer
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Exhibit Index
 Exhibit No.
    
    Description10.1
    
    Non-Exclusive License Agreement, dated November 6, 2006,
between Palomar Medical Technologies, Inc. and Cynosure,
Inc., incorporated by reference to the exhibits to the
Registrants current report on Form 8-K filed with the SEC
on November 7, 2006.31.1
    
    Certification of the Principal Executive Officer31.2
    
    Certification of the Principal Financial Officer32.1
    
    Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 47