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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 March 31, 2008

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 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     ̈   |  | Smaller reporting company     ̈

(Do not check if a 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 May 5, 2008:



|                                       |  |                 
|-------------------------------------- |  | ----------------
|Class                                  |  | Number of Shares
|Class A Common Stock, $0.001 par value |  | 9,564,361       
|Class B Common Stock, $0.001 par value |  | 2,975,297       









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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 March 31, 2008 and December 31, 2007                          |  | 1       
|                                            |  | Consolidated Statements of Income for the Three Month Periods Ended March 31, 2008 and 2007     |  | 2       
|                                            |  | Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2008 and 2007 |  | 3       
|                                            |  | Notes to Consolidated Financial Statements                                                      |  | 4       
|Item 2.                                     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 11      
|Item 3.                                     |  | Quantitative and Qualitative Disclosures About Market Risk                                      |  | 17      
|Item 4.                                     |  | Controls and Procedures                                                                         |  | 18      
|                                            |  |                                                                                                 |  |         
|                                            |  |                                                                                                
|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                                                                                        |  | 20      
|SIGNATURES                                  |  | 21                                                                                             
|EXHIBIT INDEX                              
|                                           
|EX-31.1 Section 302 Certification of C.E.O.
|                                           
|EX-31.2 Section 302 Certification of C.F.O.
|                                           
|EX-32.1 Section 906 Certification of C.E.O.
|                                           
|EX-32.2 Section 906 Certification of C.F.O.



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##### Table of Contents

Cynosure, Inc.

Consolidated Balance Sheets

(Unaudited, in thousands)



|                                                                                           |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                           |  | March 31,2008 |         |   | December 31,2007 |  
|Assets                                                                                     | 
|Current assets:                                                                            |  |               |         |   |                  |   |         |  
|Cash and cash equivalents (Note 4)                                                         |  | $             | 39,152  |   |                  | $ | 39,011  |  
|Marketable securities (Notes 4 and 5)                                                      |  |               | 22,257  |   |                  |   | 47,086  |  
|Accounts receivable, net                                                                   |  |               | 30,906  |   |                  |   | 24,124  |  
|Amounts due from related party (Note 11)                                                   |  |               | 22      |   |                  |   | 8       |  
|Inventories                                                                                |  |               | 24,720  |   |                  |   | 22,442  |  
|Prepaid expenses and other current assets                                                  |  |               | 4,362   |   |                  |   | 4,425   |  
|Deferred income taxes                                                                      |  |               | 4,568   |   |                  |   | 4,161   |  
|                                                                                           |  |               |         |   |                  |   |         |  
|Total current assets                                                                       |  |               | 125,987 |   |                  |   | 141,257 |  
|                                                                                           |  |               |         |   |                  |   |         |  
|Property and equipment, net                                                                |  |               | 8,228   |   |                  |   | 7,146   |  
|Long-term investments (Notes 4 and 5)                                                      |  |               | 24,668  |   |                  |   |        |  
|Other assets                                                                               |  |               | 1,451   |   |                  |   | 1,441   |  
|                                                                                           |  |               |         |   |                  |   |         |  
|Total assets                                                                               |  | $             | 160,334 |   |                  | $ | 149,844 |  
|                                                                                           |  |               |         |   |                  |   |         |  
|                                                                                          
|Liabilities and Stockholders Equity                                                       | 
|Current liabilities:                                                                       |  |               |         |   |                  |   |         |  
|Accounts payable                                                                           |  | $             | 6,166   |   |                  | $ | 2,810   |  
|Amounts due to related party (Note 11)                                                     |  |               | 4,513   |   |                  |   | 2,311   |  
|Accrued expenses                                                                           |  |               | 16,613  |   |                  |   | 17,980  |  
|Deferred revenue                                                                           |  |               | 3,199   |   |                  |   | 3,939   |  
|Capital lease obligation                                                                   |  |               | 472     |   |                  |   | 485     |  
|                                                                                           |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                  |  |               | 30,963  |   |                  |   | 27,525  |  
|                                                                                           |  |               |         |   |                  |   |         |  
|Capital lease obligation, net of current portion                                           |  |               | 689     |   |                  |   | 794     |  
|Deferred revenue, net of current portion                                                   |  |               | 473     |   |                  |   | 421     |  
|Other noncurrent liability                                                                 |  |               | 240     |   |                  |   | 226     |  
|                                                                                           |  |              
|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  12,536 and 12,448 shares as of March 31, 2008 and December 31, 2007, respectively |  |               | 12      |   |                  |   | 12      |  
|Additional paid-in capital                                                                 |  |               | 103,857 |   |                  |   | 101,298 |  
|Retained earnings                                                                          |  |               | 25,202  |   |                  |   | 20,332  |  
|Accumulated other comprehensive loss                                                       |  |               | (815    | ) |                  |   | (477    | )
|Treasury stock, 36 shares, at cost                                                         |  |               | (287    | ) |                  |   | (287    | )
|                                                                                           |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                 |  |               | 127,969 |   |                  |   | 120,878 |  
|                                                                                           |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                 |  | $             | 160,334 |   |                  | $ | 149,844 |  
|                                                                                           |  |               |         |   |                  |   |         |  

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



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##### Table of Contents

Cynosure, Inc.

Consolidated Statements of Income

(Unaudited, in thousands, except per share data)



|                                                   |  |                             |        |      |   |       
|-------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                                   |  | Three Months EndedMarch 31,
|                                                   |  | 2008                        |        | 2007
|Revenues                                           |  | $                           | 36,763 |      | $ | 26,077
|Cost of revenues                                   |  |                             | 12,371 |      |   | 9,922 
|                                                   |  |                             |        |      |   |       
|Gross profit                                       |  |                             | 24,392 |      |   | 16,155
|                                                   |  |                            
|Operating expenses:                                |  |                             |        |      |   |       
|Sales and marketing                                |  |                             | 13,194 |      |   | 9,262 
|Research and development                           |  |                             | 1,812  |      |   | 1,723 
|General and administrative                         |  |                             | 3,487  |      |   | 2,295 
|                                                   |  |                             |        |      |   |       
|Total operating expenses                           |  |                             | 18,493 |      |   | 13,280
|                                                   |  |                             |        |      |   |       
|Income from operations                             |  |                             | 5,899  |      |   | 2,875 
|Interest income, net                               |  |                             | 801    |      |   | 505   
|Other income, net                                  |  |                             | 553    |      |   | 56    
|                                                   |  |                             |        |      |   |       
|Income before provision for income taxes           |  |                             | 7,253  |      |   | 3,436 
|Provision for income taxes                         |  |                             | 2,383  |      |   | 1,318 
|                                                   |  |                             |        |      |   |       
|Net income                                         |  | $                           | 4,870  |      | $ | 2,118 
|                                                   |  |                             |        |      |   |       
|Basic net income per share                         |  | $                           | 0.39   |      | $ | 0.19  
|                                                   |  |                             |        |      |   |       
|Diluted net income per share                       |  | $                           | 0.38   |      | $ | 0.17  
|                                                   |  |                             |        |      |   |       
|Basic weighted average common shares outstanding   |  |                             | 12,471 |      |   | 11,345
|                                                   |  |                             |        |      |   |       
|Diluted weighted average common shares outstanding |  |                             | 12,768 |      |   | 12,374
|                                                   |  |                             |        |      |   |       

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



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Cynosure, Inc.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)



|                                                                                                                                 |  |                             |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                 |  | Three Months EndedMarch 31, |        
|                                                                                                                                 |  | 2008                        |         |   | 2007 |  
|Operating activities:                                                                                                            |  |                             |         |   |      |   |         |  
|Net income                                                                                                                       |  | $                           | 4,870   |   |      | $ | 2,118   |  
|Reconciliation of net income to net cash provided by operating activities:                                                       |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                                                                    |  |                             | 858     |   |      |   | 620     |  
|Stock-based compensation expense                                                                                                 |  |                             | 1,687   |   |      |   | 1,350   |  
|Accretion of discounts on marketable securities                                                                                  |  |                             | 102     |   |      |   | 49      |  
|Deferred income taxes                                                                                                            |  |                             | (26     | ) |      |   | 29      |  
|Changes in operating assets and liabilities:                                                                                     |  |                             |         |   |      |   |         |  
|Accounts receivable                                                                                                              |  |                             | (6,200  | ) |      |   | (487    | )
|Due from related party                                                                                                           |  |                             | (16     | ) |      |   | (12     | )
|Inventories                                                                                                                      |  |                             | (1,741  | ) |      |   | (1,627  | )
|Net book value of demonstration inventory sold                                                                                   |  |                             | 63      |   |      |   | 122     |  
|Prepaid expenses and other current assets                                                                                        |  |                             | 94      |   |      |   | 1,681   |  
|Accounts payable                                                                                                                 |  |                             | 3,300   |   |      |   | (906    | )
|Due to related party                                                                                                             |  |                             | 2,198   |   |      |   | 1,079   |  
|Accrued expenses                                                                                                                 |  |                             | (1,895  | ) |      |   | 218     |  
|Deferred revenue                                                                                                                 |  |                             | (529    | ) |      |   | 142     |  
|Other noncurrent liability                                                                                                       |  |                             | 15      |   |      |   | 17      |  
|                                                                                                                                 |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                                                                        |  |                             | 2,780   |   |      |   | 4,393   |  
|                                                                                                                                 |  |                            
|Investing activities:                                                                                                            |  |                             |         |   |      |   |         |  
|Purchases of property and equipment                                                                                              |  |                             | (1,954  | ) |      |   | (1,141  | )
|Proceeds from the sales and maturities of marketable securities                                                                  |  |                             | 20,995  |   |      |   | 15,151  |  
|Purchases of marketable securities                                                                                               |  |                             | (21,995 | ) |      |   | (21,510 | )
|Increase in other noncurrent assets                                                                                              |  |                             | 11      |   |      |   |        |  
|                                                                                                                                 |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                                                                            |  |                             | (2,943  | ) |      |   | (7,500  | )
|                                                                                                                                 |  |                            
|Financing activities:                                                                                                            |  |                             |         |   |      |   |         |  
|Payment on short term loan                                                                                                       |  |                             |        |   |      |   | (168    | )
|Proceeds from exercise of stock options                                                                                          |  |                             | 411     |   |      |   | 1,297   |  
|Tax benefits related to stock options                                                                                            |  |                             | 465     |   |      |   | 769     |  
|Payments on capital lease obligation                                                                                             |  |                             | (117    | ) |      |   | (101    | )
|                                                                                                                                 |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                                                                        |  |                             | 759     |   |      |   | 1,797   |  
|                                                                                                                                 |  |                            
|Effect of exchange rate changes on cash and cash equivalents                                                                     |  |                             | (455    | ) |      |   | (87     | )
|                                                                                                                                 |  |                             |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                                             |  |                             | 141     |   |      |   | (1,397  | )
|Cash and cash equivalents, beginning of the period                                                                               |  |                             | 39,011  |   |      |   | 13,690  |  
|                                                                                                                                 |  |                             |         |   |      |   |         |  
|Cash and cash equivalents, end of the period                                                                                     |  | $                           | 39,152  |   |      | $ | 12,293  |  
|                                                                                                                                 |  |                             |         |   |      |   |         |  
|Supplemental cash flow information                                                                                               |  |                             |         |   |      |   |         |  
|Cash paid for interest                                                                                                           |  | $                           | 34      |   |      | $ | 38      |  
|                                                                                                                                 |  |                             |         |   |      |   |         |  
|Cash paid for taxes                                                                                                              |  | $                           | 2,356   |   |      | $ |        |  
|                                                                                                                                 |  |                             |         |   |      |   |         |  
|Supplemental noncash investing and financing activities                                                                          |  |                             |         |   |      |   |         |  
|Net unrealized loss on marketable securities, net of $374 deferred income tax benefit, for the three months ended March 31,
2008 |  | $                           | 685     |   |      | $ |        |  
|                                                                                                                                 |  |                             |         |   |      |   |         |  
|Assets acquired under capital lease                                                                                              |  | $                           |        |   |      | $ | 66      |  
|                                                                                                                                 |  |                             |         |   |      |   |         |  

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



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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, 2007. 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 three months ended March 31, 2008 may not be indicative of the results that may be expected for the year ended December 31, 2008, or any other period.

Note 2  Stock-Based Compensation

Cynosure recorded stock-based compensation expense of $1.7
million and $1.4 million and related tax benefits of $545,000 and $408,000 for the three months ended March 31, 2008 and 2007, respectively. Cynosure capitalized $65,000 and $33,000 of stock-based compensation expense as part of inventory
during the three months ended March 31, 2008 and 2007, 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 EndedMarch 31,
|                                       |  | 2008                        |       | 2007
|                                       |  | (In thousands)             
|Cost of revenues                       |  | $                           | 129   |      | $ | 98   
|Sales and marketing                    |  |                             | 710   |      |   | 327  
|Research and development               |  |                             | 250   |      |   | 465  
|General and administrative             |  |                             | 598   |      |   | 460  
|                                       |  |                             |       |      |   |      
|Total stock-based compensation expense |  | $                           | 1,687 |      | $ | 1,350
|                                       |  |                             |       |      |   |      

Cash received from option exercises was $411,000 and $1.3 million during the three months
ended March 31, 2008 and 2007, respectively. Cynosure recognized $465,000 and $769,000 in actual tax benefits during the three months ended March 31, 2008 and 2007, respectively. Actual tax benefits are primarily the result of
disqualifying dispositions of incentive stock options exercised which result in a reduction of income taxes payable.

Cynosure granted
174,250 and 283,250 stock options during the three months ended March 31, 2008 and 2007, respectively. Cynosure has elected to use the Black-Scholes model to determine the weighted average fair value of options, rather than a binomial model.
The weighted-average fair value of the options granted during the three months ended March 31, 2008 and 2007 was $14.09 and $14.73 using the following assumptions:



|                          |  |                             |   |  |           |  
|------------------------- |  | --------------------------- | - |  | --------- | -
|                          |  | Three Months EndedMarch 31, |  
|                          |  | 2008                        |   |  | 2007      |  
|Risk-free interest rate   |  | 2.19                        | % |  | 4.77      | %
|Expected dividend yield   |  |                            |   |  |          |  
|Expected lives            |  | 5.8 years                   |   |  | 5.8 years |  
|Expected volatility       |  | 64                          | % |  | 70        | %
|Estimated forfeiture rate |  | 5                           | % |  | 1         | %



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Option-pricing models require the input of various subjective assumptions, including the options
expected life and the price volatility of the underlying stock. Due to Cynosures initial public offering in December 2005, Cynosure believes there is not adequate information on the volatility of its own shares. As such, Cynosures
estimated expected stock price volatility is based on a weighted average of its own historical volatility and of the average volatilities of other guideline companies in the same industry. Cynosure believes this is more reflective and a better
indicator of the expected future volatility, than using an average of a comparable market index or of a single comparable company in the same industry. Cynosures expected term of options granted in the three months ended March 31, 2008
and 2007 was derived from the short-cut method described in SECs Staff Accounting Bulletin (SAB) No. 107. 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.

During the year ended December 31, 2007, Cynosure applied an estimated annual forfeiture rate of 1% in determining the expense recorded in the consolidated statements of income. Upon review of its actual rate of
forfeitures since the adoption of SFAS 123(R) and in consideration of managements expectations for future forfeitures, Cynosure changed its estimated annual forfeiture rate in the fourth quarter of 2007 from 1% to 5%. This change in estimate
was applied retrospectively and Cynosure recorded a cumulative catch-up adjustment during the quarter ended December 31, 2007.

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:



|                |  |                |        |                  |   |       
|--------------- |  | -------------- | ------ | ---------------- | - | ------
|                |  | March 31,2008  |        | December 31,2007
|                |  | (in thousands)
|Raw materials   |  | $              | 1,217  |                  | $ | 1,467 
|Work in process |  |                | 997    |                  |   | 395   
|Finished goods  |  |                | 22,506 |                  |   | 20,580
|                |  |                |        |                  |   |       
|                |  | $              | 24,720 |                  | $ | 22,442
|                |  |                |        |                  |   |       

Note 4  Fair Value

Effective January 1, 2008, Cynosure adopted FASB Statement No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally
accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 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 under SFAS 157 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



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In accordance with SFAS 157, the following table represents Cynosures fair value hierarchy for its
financial assets (cash equivalents, marketable securities and long-term investments) measured at fair value as of March 31, 2008 (in thousands):



|                          |  |         |        |         |   |         |  |       |        |  |   |       
|------------------------- |  | ------- | ------ | ------- | - | ------- |  | ----- | ------ |  | - | ------
|                          |  | Level 1 |        | Level 2 |   | Level 3 |  | Total
|Money market funds        |  | $       | 27,809 |         |   |        |  |       |       |  | $ | 27,809
|State and municipal bonds |  |         |       |         |   | 22,249  |  |       |       |  |   | 22,249
|Equity securities         |  |         | 8      |         |   |         |  |       |        |  |   | 8     
|Auction rate securities   |  |         |       |         |   |        |  | $     | 24,668 |  |   | 24,668
|                          |  |         |        |         |   |         |  |       |        |  |   |       
|Total                     |  | $       | 27,817 |         | $ | 22,249  |  | $     | 24,668 |  | $ | 74,734
|                          |  |         |        |         |   |         |  |       |        |  |   |       

Level 3 assets consist of tax exempt certificates with an auction reset feature (auction rate
securities) whose underlying assets are generally student loans, which are substantially backed by the federal government. In February 2008, auctions began to fail for these securities and each auction since then has failed, with one exception.
Based on the overall failure rate of these auctions, the frequency of the failures, and the underlying maturities of the securities, a portion of which are greater than 30 years, Cynosure has classified auction rate securities as long-term assets on
its consolidated balance sheet. These investments were valued at fair value as of March 31, 2008. Given the current failures in the auction markets to provide quoted market prices of the securities, as well as the lack of any correlation of
these instruments to other observable market data, Cynosure valued these securities using a discounted cash flow methodology with the most significant input categorized as Level 3. Significant inputs that went into the model were the credit quality
of the issuer, the percentage and types of guarantees (such as Federal Family Education Loan Program  FFELP), the probability of the auction succeeding or the security being called, the estimated period to liquidation, and an illiquidity
discount factor. Based on these inputs, discounts from par ranged from 3% to 12% with a weighted average discount across the portfolio of 4%. Changes in the assumptions of Cynosures model based on dynamic market conditions could have a
significant impact on the valuation of these securities, which may lead Cynosure to record an impairment charge for these securities in the future.

The following table provides a summary of changes in fair value of Cynosures Level 3 financial assets for the three months ended March 31, 2008 (in thousands):



|                                                                   |  |                       |        |  
|------------------------------------------------------------------ |  | --------------------- | ------ | -
|                                                                   |  | AuctionRateSecurities |       
|Balance at December 31, 2007                                       |  | $                     | 29,300 |  
|Unrealized loss included in other accumulated comprehensive income |  |                       | (1,107 | )
|Net settlements                                                    |  |                       | (3,525 | )
|                                                                   |  |                       |        |  
|Balance at March 31, 2008                                          |  | $                     | 24,668 |  
|                                                                   |  |                       |        |  

Note 5  Marketable Securities and Long-Term Investments

Cynosure accounts for investments as available-for-sale securities in accordance with SFAS No. 115,Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115). Under SFAS 115, securities purchased to be held for indefinite periods of time and not intended at the time of purchase to be held until maturity are classified as available-for-sale securities with any unrealized
gains and losses reported as a separate component of accumulated other comprehensive loss. Cynosure continually evaluates whether any marketable investments have been impaired and, if so, whether such impairment is temporary or other than temporary.

The following table summarizes Cynosures investments as of March 31, 2008, all of which are classified as available-for-sale
(in thousands):



|                                      |  |              |        |               |   |                 |  |                  |    |  |   |        |  
|------------------------------------- |  | ------------ | ------ | ------------- | - | --------------- |  | ---------------- | -- |  | - | ------ | -
|                                      |  | Market Value |        | AmortizedCost |   | UnrealizedGains |  | UnrealizedLosses |   
|Short-term investments:               |  |              |        |               |   |                 |  |                  |    |  |   |        |  
|State and municipal bonds             |  | $            | 22,249 |               | $ | 22,162          |  | $                | 87 |  |   |       |  
|Equity securities                     |  |              | 8      |               |   | 8               |  |                  |   |  |   |       |  
|                                      |  |              |        |               |   |                 |  |                  |    |  |   |        |  
|Total short-term investments          |  | $            | 22,257 |               | $ | 22,170          |  | $                | 87 |  |   |       |  
|                                      |  |              |        |              
|Long-term investments:                |  |              |        |               |   |                 |  |                  |    |  |   |        |  
|Auction rate securities               |  | $            | 24,668 |               | $ | 25,775          |  | $                |   |  | $ | (1,107 | )
|                                      |  |              |        |               |   |                 |  |                  |    |  |   |        |  
|Total short and long-term investments |  | $            | 46,925 |               | $ | 47,945          |  | $                | 87 |  | $ | (1,107 | )
|                                      |  |              |        |               |   |                 |  |                  |    |  |   |        |  



6



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##### Table of Contents

As of March 31, 2008, Cynosures debt securities mature as follows (in thousands):



|                          |  |       |        |                    |   |                   |  |                      |       |  |   |       
|------------------------- |  | ----- | ------ | ------------------ | - | ----------------- |  | -------------------- | ----- |  | - | ------
|                          |  |       |        | Maturities        
|                          |  | Total |        | Less Than One Year |   | One to Five Years |  | More than five years
|State and municipal bonds |  | $     | 22,249 |                    | $ | 18,597            |  | $                    | 3,652 |  | $ |      
|Auction rate securities   |  |       | 24,668 |                    |   |                  |  |                      |      |  |   | 24,668
|                          |  |       |        |                    |   |                   |  |                      |       |  |   |       
|Total debt securities     |  | $     | 46,917 |                    | $ | 18,597            |  | $                    | 3,652 |  | $ | 24,668
|                          |  |       |        |                    |   |                   |  |                      |       |  |   |       

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 three months ended March 31, 2008, which is a component of accrued expenses in the consolidated balance sheets:



|                                                    |  |                |       |  
|--------------------------------------------------- |  | -------------- | ----- | -
|                                                    |  | March 31,2008  |      
|                                                    |  | (in thousands) |      
|Warranty accrual, beginning of period               |  | $              | 3,094 |  
|Charged to costs and expenses relating to new sales |  |                | 749   |  
|Costs incurred                                      |  |                | (701  | )
|                                                    |  |                |       |  
|Warranty accrual, end of period                     |  | $              | 3,142 |  
|                                                    |  |                |       |  

Note 7  Segment Information

In accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information (SFAS 131), operating segments are
identified 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, as defined under SFAS 131, 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 EndedMarch 31,
|               |  | 2008                        |        | 2007
|               |  | (in thousands)             
|United States  |  | $                           | 23,540 |      | $ | 14,079
|Europe         |  |                             | 7,023  |      |   | 6,999 
|Asia / Pacific |  |                             | 3,779  |      |   | 2,552 
|Other          |  |                             | 2,421  |      |   | 2,447 
|               |  |                             |        |      |   |       
|Total          |  | $                           | 36,763 |      | $ | 26,077
|               |  |                             |        |      |   |       

Net assets by geographic area are as follows:



|               |  |                |         |   |                  |   |         |  
|-------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|               |  | March 31,2008  |         |   | December 31,2007 |  
|               |  | (in thousands) |        
|United States  |  | $              | 123,446 |   |                  | $ | 118,074 |  
|Europe         |  |                | 7,641   |   |                  |   | 6,116   |  
|Asia / Pacific |  |                | 1,109   |   |                  |   | 837     |  
|Eliminations   |  |                | (4,227  | ) |                  |   | (4,149  | )
|               |  |                |         |   |                  |   |         |  
|Total          |  | $              | 127,969 |   |                  | $ | 120,878 |  
|               |  |                |         |   |                  |   |         |  



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##### Table of Contents

Long-lived assets by geographic area are as follows:



|               |  |                |       |                  |   |      
|-------------- |  | -------------- | ----- | ---------------- | - | -----
|               |  | March 31,2008  |       | December 31,2007
|               |  | (in thousands)
|United States  |  | $              | 8,796 |                  | $ | 7,829
|Europe         |  |                | 684   |                  |   | 589  
|Asia / Pacific |  |                | 199   |                  |   | 169  
|               |  |                |       |                  |   |      
|Total          |  | $              | 9,679 |                  | $ | 8,587
|               |  |                |       |                  |   |      

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

Note 8  Net Income Per Common Share

Basic net income per share was determined by dividing net income by the weighted average common shares outstanding during the period. Diluted net income
per share was determined by dividing net income 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.

A reconciliation of basic and diluted shares is as follows:



|                                                   |  |                             |  |       
|-------------------------------------------------- |  | --------------------------- |  | ------
|                                                   |  | Three Months EndedMarch 31,
|                                                   |  | 2008                        |  | 2007  
|                                                   |  | (in thousands)             
|Basic weighted average common shares outstanding   |  | 12,471                      |  | 11,345
|Potential common shares pursuant to stock options  |  | 297                         |  | 1,029 
|                                                   |  |                             |  |       
|Diluted weighted average common shares outstanding |  | 12,768                      |  | 12,374
|                                                   |  |                             |  |       

During the three months ended March 31, 2008 and 2007 approximately 465,000 and 273,000
shares, respectively, were excluded from the calculation of diluted weighted average common shares outstanding as the effect would have been anti-dilutive.

Note 9  Comprehensive Income (Loss)

Comprehensive income (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 March 31, 2008 and December 31, 2007 are as follows:



|                                                              |  |                |      |   |                  |   |      |  
|------------------------------------------------------------- |  | -------------- | ---- | - | ---------------- | - | ---- | -
|                                                              |  | March 31,2008  |      |   | December 31,2007 |  
|                                                              |  | (in thousands) |     
|Unrealized (loss) gain on marketable securities, net of taxes |  | $              | (659 | ) |                  | $ | 26   |  
|Cumulative translation adjustment                             |  |                | (156 | ) |                  |   | (503 | )
|                                                              |  |                |      |   |                  |   |      |  
|Total accumulated other comprehensive loss                    |  | $              | (815 | ) |                  | $ | (477 | )
|                                                              |  |                |      |   |                  |   |      |  

The components of total comprehensive income for the three month periods ended March 31, 2008
and 2007 are as follows:



|                                                |  |                             |       |   |      |   |       |  
|----------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                                |  | Three Months EndedMarch 31, |      
|                                                |  | 2008                        |       |   | 2007 |  
|                                                |  | (in thousands)              |      
|Cumulative translation adjustment               |  | $                           | 347   |   |      | $ | (5    | )
|Unrealized (loss) gain on marketable securities |  |                             | (685  | ) |      |   | 2     |  
|                                                |  |                             |       |   |      |   |       |  
|Total other comprehensive loss                  |  |                             | (338  | ) |      |   | (3    | )
|Reported net income                             |  |                             | 4,870 |   |      |   | 2,118 |  
|                                                |  |                             |       |   |      |   |       |  
|Total comprehensive income                      |  | $                           | 4,532 |   |      | $ | 2,115 |  
|                                                |  |                             |       |   |      |   |       |  



8



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##### Table of Contents

Note 10  Litigation

In May 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. Although Cynosure is continuing to investigate the number of facsimiles transmitted during the period for which the plaintiff in the lawsuit seeks class certification and the number of these facsimiles that were
unsolicited within the meaning of the TCPA, Cynosure expects the number of unsolicited facsimiles to be very large. Cynosure is vigorously defending the lawsuit and has filed initial briefs and motions with the court. Cynosure is not
able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

In January 2006, Gentle Laser Solutions, Inc., Liberty Bell Med Spa, Inc. and Kevin T. Campbell filed suit against Cynosure and one of its former directors, along with Sona International Inc. Sona Lasers Centers, Inc.
and various other individuals, in the Superior Court of New Jersey. The matter was later removed to the United States District Court in the District of New Jersey. The suit alleges fraud, breach of contract and other causes of action in connection
with the plaintiffs acquisition of franchises from the Sona entities. The plaintiffs and Sona have settled the plaintiffs claims against Sona. Cynosure has moved to dismiss the plaintiffs claims against the Company. Cynosure
is not able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

On January 9, 2008, Cynosure commenced a lawsuit in the U.S. District Court for the District of Massachusetts against CoolTouch Inc. for
infringement of U.S. Patent No. 6,206,873 (873 patent). Cynosures complaint alleges that CoolTouchs CoolLipo infringes on the 873 patent and seeks damages and injunctive relief. On January 31, 2008,
CoolTouch answered Cynosures complaint, denying liability and alleging that the 873 patent is not infringed and is invalid, and also asserted counterclaims against Cynsorure in the same court alleging patent infringement by Cynosure.
CoolTouchs counterclaim alleges that Cynosures Affirm product infringes U.S. Patent Nos. 7,122,029 and 6,451,007, and that Cynosures Smartlipo product infringes U.S. Patent No. 7,217,265, and seeks damages
in an unspecified amount, as well as injunctive relief. Cynosure is vigorously prosecuting its claims against CoolTouch and defending against CoolTouchs counterclaims. Cynosure is not able to estimate the amount or range of loss that could
result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

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
March 31, 2008, El. En. S.p.A. (El.En.) owned 24% of Cynosures outstanding common stock. Purchases of inventory from El.En. during the three months ended March 31, 2008 and 2007 were approximately $3.2 million and
$1.5 million, respectively. As of March 31, 2008 and December 31, 2007, amounts due to related party for these purchases were approximately $4.5 million and $2.3 million, respectively. Amounts due from El.En. as of March 31,
2008 and December 31, 2007 were $22,000 and $8,000, respectively, which represent services performed by Cynosure.



9



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##### Table of Contents

Note 12  Income Taxes

Effective January 1, 2007, Cynosure adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FAS 109, Accounting for Income Taxes (FIN
48). At March 31, 2008, there are no 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 2003.

Note 13  Recent Accounting Pronouncements

In
December 2007, the FASB issued Statement No. 141(R), Applying the Acquisition Method (SFAS 141(R)), which replaces FASB Statement No. 141, Business Combinations. SFAS 141(R) retains the fundamental requirements in
Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141(R) defines the acquirer
as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. Statement 141 did not define the acquirer, although it included guidance on
identifying the acquirer, as does SFAS 141(R). SFAS 141(R)s scope is broader than that of Statement 141, which applied only to business combinations in which control was obtained by transferring consideration. By applying the same method of
accountingthe acquisition methodto all transactions and other events in which one entity obtains control over one or more other businesses, SFAS 141(R) improves the comparability of the information about business combinations provided in
financial reports. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Cynosure does not expect
that the adoption of SFAS 141(R) will have a material impact on its financial position or results of operations upon adoption.

In December
2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (SFAS 160), which applies to all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary.SFAS 160 amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 160 is required to be applied
prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements, which are required to be applied retrospectively for all periods presented. Cynosure does not expect that
the adoption of SFAS 160 will have a material impact on its financial position or results of operations.

In February 2007, the FASB issued
Statement No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain
other items at fair value. Cynosure adopted SFAS 159 on January 1, 2008 and elected not to measure any additional financial instruments or other items at fair value. Adoption of SFAS 159 did not have a material impact on Cynosures financial
position or results of operations.



10



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##### Table of Contents

|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, 2007, 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 13, 2008. 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, 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 current products are designed
to be easily upgradeable to add additional energy sources and handpieces, which provides 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 sell 16 different aesthetic treatment systems and have focused our development and marketing efforts on offering leading, or flagship, products for each of the major aesthetic procedure categories that we address.
Our flagship products are:



| |  |  | the Apogee Elite system for hair removal;
| | - |  | -----------------------------------------



| |  |  | the Cynergy system for the treatment of vascular lesions;
| | - |  | ---------------------------------------------------------



| |  |  | the TriActive LaserDermologysystem for the temporary reduction of the appearance of cellulite;
| | - |  | ----------------------------------------------------------------------------------------------



11



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##### Table of Contents

| |  |  | the Affirmsystem for anti-aging, including treatments for wrinkles, skin texture, skin discoloration and skin tightening; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | the Smartlipo and Smartlipo MPXsystems for LaserBodySculptingSMfor the removal of unwanted fat; and
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the Accoladesystem, which we introduced in January 2008, for the removal of benign pigmented lesions, including pigmented lesions known as Nevus of Ota and
Nevus of Ito, as well as multi-colored tattoos.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We generate revenues primarily from sales of our products and parts and
accessories and, to a lesser extent, from services, including product warranty revenues. During the three months ended March 31, 2008 and 2007, we derived approximately 96% of our revenues from sales of our products and 4% of our revenues from
service. 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, four European countries, Japan and China and use distributors to
sell our products in other countries where we do not have a direct presence. During the three months ended March 31, 2008, we derived 32% and during the same period in 2007, we derived 41% of our revenues from sales outside North America. As of
March 31, 2008, we had 73 sales employees in North America, 28 sales employees in four European countries, Japan and China and distributors in 52 countries.

The following table provides revenue data by geographical region for the three months ended March 31, 2008 and 2007:



|              |  |                            |   |  |      |  
|------------- |  | -------------------------- | - |  | ---- | -
|              |  | Percentage of Revenues     |  
|              |  | Three-MonthsEndedMarch 31, |  
|Region        |  | 2008                       |   |  | 2007 |  
|North America |  | 68                         | % |  | 59   | %
|Europe        |  | 19                         |   |  | 27   |  
|Asia/Pacific  |  | 10                         |   |  | 10   |  
|Other         |  | 3                          |   |  | 4    |  
|              |  |                            |   |  |      |  
|Total         |  | 100                        | % |  | 100  | %
|              |  |                            |   |  |      |  

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

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 March 31, 2008 and 2007, respectively (in
thousands, except for percentages):



|                                         |  |                             |        |                        |         |   |         |   |                        |  |     |   |  |   |        |  |     |  
|---------------------------------------- |  | --------------------------- | ------ | ---------------------- | ------- | - | ------- | - | ---------------------- |  | --- | - |  | - | ------ |  | --- | -
|                                         |  | Three Months EndedMarch 31, |        |                        | $Change |   | %Change |  
|                                         |  | 2008                        |        |                        | 2007    |   |         |  
|                                         |  | Amount                      |        | As a % ofTotalRevenues |         |   | Amount  |   | As a % ofTotalRevenues |  |     |  
|Revenues                                 |  | $                           | 36,763 |                        | 100     | % |         | $ | 26,077                 |  | 100 | % |  | $ | 10,686 |  | 41  | %
|Cost of revenues                         |  |                             | 12,371 |                        | 34      |   |         |   | 9,922                  |  | 38  |   |  |   | 2,449  |  | 25  |  
|                                         |  |                             |        |                        |         |   |         |   |                        |  |     |   |  |   |        |  |     |  
|Gross profit                             |  |                             | 24,392 |                        | 66      |   |         |   | 16,155                 |  | 62  |   |  |   | 8,237  |  | 51  |  
|Operating expenses                       |  |                             |        |                        |         |   |         |   |                        |  |     |   |  |   |        |  |     |  
|Sales and marketing                      |  |                             | 13,194 |                        | 36      |   |         |   | 9,262                  |  | 36  |   |  |   | 3,932  |  | 42  |  
|Research and development                 |  |                             | 1,812  |                        | 5       |   |         |   | 1,723                  |  | 7   |   |  |   | 89     |  | 5   |  
|General and administrative               |  |                             | 3,487  |                        | 9       |   |         |   | 2,295                  |  | 9   |   |  |   | 1,192  |  | 52  |  
|                                         |  |                             |        |                        |         |   |         |   |                        |  |     |   |  |   |        |  |     |  
|Total operating expenses                 |  |                             | 18,493 |                        | 50      |   |         |   | 13,280                 |  | 51  |   |  |   | 5,213  |  | 39  |  
|                                         |  |                             |        |                        |         |   |         |   |                        |  |     |   |  |   |        |  |     |  
|Income from operations                   |  |                             | 5,899  |                        | 16      |   |         |   | 2,875                  |  | 11  |   |  |   | 3,024  |  | 105 |  
|Interest income, net                     |  |                             | 801    |                        | 2       |   |         |   | 505                    |  | 2   |   |  |   | 296    |  | 59  |  
|Other income, net                        |  |                             | 553    |                        | 2       |   |         |   | 56                     |  |    |   |  |   | 497    |  | 888 |  
|                                         |  |                             |        |                        |         |   |         |   |                        |  |     |   |  |   |        |  |     |  
|Income before provision for income taxes |  |                             | 7,253  |                        | 20      |   |         |   | 3,436                  |  | 13  |   |  |   | 3,817  |  | 111 |  
|Provision for income taxes               |  |                             | 2,383  |                        | 7       |   |         |   | 1,318                  |  | 5   |   |  |   | 1,065  |  | 81  |  
|                                         |  |                             |        |                        |         |   |         |   |                        |  |     |   |  |   |        |  |     |  
|Net income                               |  | $                           | 4,870  |                        | 13      | % |         | $ | 2,118                  |  | 8   | % |  | $ | 2,752  |  | 130 | %
|                                         |  |                             |        |                        |         |   |         |   |                        |  |     |   |  |   |        |  |     |  



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##### Table of Contents

Revenues

Revenues in the three months ended March 31, 2008 exceeded revenues in the three months ended March 31, 2007 by $10.7 million or 41%. The increase in revenues was attributable to a number of factors (in
thousands, except for percentages):



|                                                          |  |                             |        |         |   |         |  |   |        |  |    |  
|--------------------------------------------------------- |  | --------------------------- | ------ | ------- | - | ------- |  | - | ------ |  | -- | -
|                                                          |  | Three Months EndedMarch 31, |        | $Change |   | %Change | 
|                                                          |  | 2008                        |        | 2007    |   |        
|Product sales in North America                            |  | $                           | 23,611 |         | $ | 14,179  |  | $ | 9,432  |  | 67 | %
|Product sales outside North America                       |  |                             | 9,225  |         |   | 8,770   |  |   | 455    |  | 5  |  
|Original equipment manufacturer sales and revenue sharing |  |                             | 373    |         |   | 274     |  |   | 99     |  | 36 |  
|Parts, accessories and service sales                      |  |                             | 3,554  |         |   | 2,854   |  |   | 700    |  | 25 |  
|                                                          |  |                             |        |         |   |         |  |   |        |  |    |  
|Total Revenues                                            |  | $                           | 36,763 |         | $ | 26,077  |  | $ | 10,686 |  | 41 | %
|                                                          |  |                             |        |         |   |         |  |   |        |  |    |  



| |  |  | Revenues from the sale of products in North America increased by approximately $9.4 million, or 67%, over the 2007 period, due to an increase in the number of
product units sold, a higher average selling price across all of our flagship products as well as a favorable change in product mix from new products introduced in the past year.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revenues from sales of products outside of North America increased by approximately $0.5 million, or 5%, over the 2007 period, due to an increase in sales by our
Asian distributors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revenues from original equipment manufacturer sales and revenue sharing increased by approximately $0.1 million, or 36%, over the 2007 period, due to an increase in
revenue sharing revenues generated by our European subsidiaries.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revenues from the sale of parts, accessories and services increased by approximately $0.7 million, or 25%, over the 2007 period, primarily as a result of an
increase in revenues generated from the sale of disposable components, related to our Affirm and Smartliposystems that were introduced in the past year. The increase also related to an increase in revenues generated from service
contracts and the sale of parts, over the 2007 period, both of which are related to the overall increase in volume of sales during the past three years.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost of Revenues



|                                                     |  |                             |        |   |         |   |         |   |  |   |       |  |    |  
|---------------------------------------------------- |  | --------------------------- | ------ | - | ------- | - | ------- | - |  | - | ----- |  | -- | -
|                                                     |  | Three Months EndedMarch 31, |        |   | $Change |   | %Change |  
|                                                     |  | 2008                        |        |   | 2007    |   |         |  
|Cost of revenues (in thousands)                      |  | $                           | 12,371 |   |         | $ | 9,922   |   |  | $ | 2,449 |  | 25 | %
|Cost of revenues (as a percentage of total revenues) |  |                             | 34     | % |         |   | 38      | % |  |   |       |  |    |  

The increase in the cost of revenues was primarily attributable to an increase in direct labor,
overhead and material costs associated with increased sales of our products. Our cost of revenues decreased as a percentage of revenues to 34% for the three months ended March 31, 2008, from 38% for the three months ended March 31, 2007,
resulting in an increase in our gross margin of 4%, quarter over quarter. The improvement in gross margins is primarily the result of higher average selling prices of our products, a favorable change in product mix and increased contribution from
direct sales.

Sales and Marketing



|                                                        |  |                             |        |   |         |   |         |   |  |   |       |  |    |  
|------------------------------------------------------- |  | --------------------------- | ------ | - | ------- | - | ------- | - |  | - | ----- |  | -- | -
|                                                        |  | Three Months EndedMarch 31, |        |   | $Change |   | %Change |  
|                                                        |  | 2008                        |        |   | 2007    |   |         |  
|Sales and marketing (in thousands)                      |  | $                           | 13,194 |   |         | $ | 9,262   |   |  | $ | 3,932 |  | 42 | %
|Sales and marketing (as a percentage of total revenues) |  |                             | 36     | % |         |   | 36      | % |  |   |       |  |    |  

Sales and marketing expenses increased primarily due to an increase of $2.0 million in
personnel costs and travel expenses associated with the expansion of our North American direct sales organization, which includes an increase of $1.0 million in commission expense, and $0.6 million in personnel costs and travel expenses
associated with our international subsidiaries. Promotional costs increased $0.7 million, primarily due to an increased number of clinical workshops, trade shows and other promotional efforts. Sales and marketing expenses also increased due to
an increase in stock-based compensation of approximately $0.4 million and a $0.2 million increase in clinical marketing and development related expenses.



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##### Table of Contents

Research and Development



|                                                             |  |                             |       |   |         |   |         |   |  |   |    |  |   |  
|------------------------------------------------------------ |  | --------------------------- | ----- | - | ------- | - | ------- | - |  | - | -- |  | - | -
|                                                             |  | Three Months EndedMarch 31, |       |   | $Change |   | %Change |  
|                                                             |  | 2008                        |       |   | 2007    |   |         |  
|Research and development (in thousands)                      |  | $                           | 1,812 |   |         | $ | 1,723   |   |  | $ | 89 |  | 5 | %
|Research and development (as a percentage of total revenues) |  |                             | 5     | % |         |   | 7       | % |  |   |    |  |   |  

Research and development expenses increased primarily due to an increase in personnel costs of
$0.3 million, due to increased headcount, offset by a decrease in stock-based compensation of $0.2 million.

General and Administrative



|                                                               |  |                             |       |   |         |   |         |   |  |   |       |  |    |  
|-------------------------------------------------------------- |  | --------------------------- | ----- | - | ------- | - | ------- | - |  | - | ----- |  | -- | -
|                                                               |  | Three Months EndedMarch 31, |       |   | $Change |   | %Change |  
|                                                               |  | 2008                        |       |   | 2007    |   |         |  
|General and administrative (in thousands)                      |  | $                           | 3,487 |   |         | $ | 2,295   |   |  | $ | 1,192 |  | 52 | %
|General and administrative (as a percentage of total revenues) |  |                             | 9     | % |         |   | 9       | % |  |   |       |  |    |  

General and administrative expenses increased primarily due to an increase in personnel costs of
$0.5 million and $0.1 million in personnel costs associated with our international subsidiaries, as well as an increase in stock-based compensation of $0.1 million. General and administrative expenses also increased due to an increase in
legal and professional service related costs of $0.5 million, $0.2 million of which relates to a reduction in legal expense during the three months ended March 31, 2007 due to a legal settlement resulting in reimbursement for legal expenses of
$0.2 million.

Interest Income, net and Other Income, net



|                                    |  |                             |     |         |   |         |  |   |     |  |     |  
|----------------------------------- |  | --------------------------- | --- | ------- | - | ------- |  | - | --- |  | --- | -
|                                    |  | Three Months EndedMarch 31, |     | $Change |   | %Change | 
|                                    |  | 2008                        |     | 2007    |   |        
|Interest income, net (in thousands) |  | $                           | 801 |         | $ | 505     |  | $ | 296 |  | 59  | %
|Other income, net (in thousands)    |  | $                           | 553 |         | $ | 56      |  | $ | 497 |  | 888 | %

The increase in interest income, net resulted from an overall increase in our total investment
portfolio of $21.3 million or 40% from $53.4 million as of March 31, 2007 to $74.7 million as of March 31, 2008. The increase in other income, net is a result of greater foreign currency remeasurement gains in the first quarter of 2008
compared to the foreign currency remeasurement gains in the first quarter of 2007.

Provision for Income Taxes



|                                                               |  |                             |       |   |         |   |         |   |  |   |       |  |    |  
|-------------------------------------------------------------- |  | --------------------------- | ----- | - | ------- | - | ------- | - |  | - | ----- |  | -- | -
|                                                               |  | Three Months EndedMarch 31, |       |   | $Change |   | %Change |  
|                                                               |  | 2008                        |       |   | 2007    |   |         |  
|Provision for income taxes (in thousands)                      |  | $                           | 2,383 |   |         | $ | 1,318   |   |  | $ | 1,065 |  | 81 | %
|Provision (as a % of income before provision for income taxes) |  |                             | 33    | % |         |   | 38      | % |  |   |       |  |    |  

The increase in our provision for income taxes is primarily attributable to the $3.9 million
increase in our income before provision for income taxes from $3.4 million in 2007 to $7.3 million in 2008. The decrease in our provision as a percentage of income before provision for income taxes is primarily due to a lower projected
effective tax rate for the year, due to a change in the jurisdictional mix of pre-tax income and lower statutory tax rates in Spain and China as compared with the prior year.

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 March 31, 2008, our
cash, cash equivalents, marketable securities and long-term investments were $86.1 million. Our cash and cash equivalents of $39.1 million are highly liquid investments with maturity of 90 days or less at date of purchase and consist
of time deposits and investments in money market funds with commercial banks and financial institutions. Our marketable securities of $22.3 million consist primarily of investments in various state and municipal government obligations, all of
which mature by September 1, 2009. Our long-term investments of $24.7 million consist primarily of tax exempt certificates with an auction reset feature (auction rate securities), whose underlying assets are generally student loans, which
are substantially backed by the federal government.



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##### Table of Contents

In February 2008, auctions began to fail for auction rate securities and each auction since then has
failed. Based on the overall failure rate of these auctions, the frequency of the failures, and the underlying maturities of the securities, a portion of which are greater than 30 years, we have classified auction rate securities as long-term assets
on our consolidated balance sheet. These investments were valued at fair value as of March 31, 2008. See Note 4 to our consolidated financial statements.

All of our auction rate securities are currently rated at AAA, the highest rating, by a rating agency. If the issuers are unable to successfully close future auctions or refinance their debt in the near term and their
credit ratings deteriorate, we may, in the future, be required to record an impairment charge on these investments. Based on our expected operating cash flows and our other sources of cash, we do not anticipate the current lack of liquidity on these
investments will affect our ability to execute our current business plan.

We expect to continue to generate positive cash flows from
operations in the future. 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 expect our capital expenditures over the next 12 months generally to be consistent with our capital expenditures during the prior 12 months.

We believe that our current cash, cash equivalents and marketable securities, 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 $2.8 million for the three months ended March 31, 2008. This resulted primarily from net income
for the period of $4.9 million, increased by approximately $2.5 million in depreciation and amortization and stock-based compensation expense and increased by approximately $0.1 million in deferred income tax benefits and accretion of
discounts on marketable securities. Net changes in working capital items decreased cash from operating activities by approximately $4.7 million principally related to an increase in accounts receivable due to an increase in sales, inventory for
anticipated future sales and a decrease in accrued expenses, offset by an increase in accounts payable and amounts due to related party. Net cash used in investing activities was $2.9 million for the three months ended March 31, 2008,
which consisted primarily of the net purchase of $1.0 million of marketable securities and $2.0 million used for fixed asset purchases. Net cash provided by financing activities during the three months ended March 31, 2008 was
$0.8 million, principally relating to proceeds from and tax benefits related to stock option exercises.

Net cash provided by
operating activities was $4.4 million for the three months ended March 31, 2007. This resulted primarily from net income for the period of $2.1 million, increased by approximately $2.0 million in depreciation and stock-based
compensation expense and increased by approximately $0.1 million in deferred income tax benefits and accretion of discounts on marketable securities. Net changes in working capital items increased cash from operating activities by approximately
$0.2 million principally related to a decrease in prepaid expenses and other current assets of $1.7 million related to a refund of $1.9 million of estimated tax payments and an increase in amounts due to related party of $1.1 million,
offset by an increase in inventory for anticipated future sales and a decrease in accounts payable. Net cash used in investing activities was $7.5 million for the three months ended March 31, 2007, which consisted primarily of the net
purchase of $6.4 million of marketable securities and $1.1 million used for fixed asset purchases. Net cash provided by financing activities during the three months ended March 31, 2007 was $1.8 million, principally relating to
proceeds from option exercises and tax benefits related to stock options.

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 the Annual Report on our Form 10-K fiscal year 2007. There have been no material changes to our critical accounting policies as of March 31, 2008.



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##### Table of Contents

Recent Accounting Pronouncements

In December 2007, the FASB issued Statement No. 141(R), Applying the Acquisition Method (SFAS 141(R)), which replaces FASB Statement
No. 141, Business Combinations. SFAS 141(R) retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and
for an acquirer to be identified for each business combination. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the
acquirer achieves control. Statement 141 did not define the acquirer, although it included guidance on identifying the acquirer, as does SFAS 141(R). SFAS 141(R)s scope is broader than that of Statement 141, which applied only to business
combinations in which control was obtained by transferring consideration. By applying the same method of accountingthe acquisition methodto all transactions and other events in which one entity obtains control over one or more other
businesses, SFAS 141(R) improves the comparability of the information about business combinations provided in financial reports. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning
of the first annual reporting period beginning on or after December 15, 2008. We do not expect that the adoption of SFAS 141(R) will have a material impact on our financial position or results of operations.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51 (SFAS 160), which applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more
subsidiaries or that deconsolidate a subsidiary.SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 160 is required to be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure
requirements, which are required to be applied retrospectively for all periods presented. We do not expect that the adoption of SFAS 160 will have a material impact on our financial position or results of operations.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment
of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. We adopted SFAS 159 on January 1, 2008 and elected not to measure any additional financial
instruments or other items at fair value. Adoption of SFAS 159 did not have a material impact on our financial position or results of operations.



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##### Table of Contents

|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 state and municipal government obligations, some of which are auction rate securities, and money market funds. The securities, other than money market funds, 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 income (loss). All investments other than auction rate securities mature by
September 1, 2009. 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 (excluding acquisitions or mergers). We do not utilize derivative financial instruments to manage our interest rate risks.

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



|                               |  |               |        |   |         |   |        |         |  |   |            |   |  |   |        |  
|------------------------------ |  | ------------- | ------ | - | ------- | - | ------ | ------- |  | - | ---------- | - |  | - | ------ | -
|                               |  | March 31,2008 |        |   | FY 2008 |   |        | FY 2009 |  |   | Thereafter |  
|Investments (at fair value)    |  | $             | 46,917 |   |         | $ | 16,557 |         |  | $ | 5,692      |   |  | $ | 24,668 |  
|Weighted average interest rate |  |               | 5.36   | % |         |   | 5.04   | %       |  |   | 4.86       | % |  |   | 5.68   | %

As of March 31, 2008, we held approximately $24.7 million of auction rate securities,
classified as long-term assets, whose underlying assets are generally student loans, which are substantially backed by the federal government. In February 2008, auctions began to fail for these securities and each auction since then has failed.
Effective January 1, 2008, we determine the fair market values of our financial instruments based on the fair value hierarchy established in SFAS 157, which requires an entity to maximize the use of observable inputs (Level 1 and Level 2
inputs) and minimize the use of unobservable inputs (Level 3 inputs) when measuring fair value. Given the current failures in the auction markets to provide quoted market prices of the securities as well as the lack of any correlation of these
instruments to other observable market data, we valued these securities using a discounted cash flow methodology with the most significant input categorized as Level 3. Significant inputs that went into the model were the credit quality of the
issuer, the percentage and types of guarantees (such as Federal Family Education Loan Program  FFELP), the probability of the auction succeeding or the security being called, the estimated period to liquidation, and an illiquidity discount
factor. Based on these inputs, discounts from par ranged from 3% to 12% with a weighted average discount across the portfolio of 4%. Changes in the assumptions of our model based on dynamic market conditions could have a significant impact on the
valuation of these securities, which may lead us in the future to record an impairment charge for these securities.

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 42% of our total international
revenues during the three months ended March 31, 2008. Substantially all of the remaining 58% were sales in euros, British pounds, Japanese yen and Chinese yuan. 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. Therefore, we believe that the potential loss that would result from an increase or decrease in the exchange rate is immaterial to our business and net assets.



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##### Table of Contents

|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 March 31, 2008. 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 March 31, 2008, 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

During the three months ended March 31, 2008, we implemented a new financial software system which we expect will enhance our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Other than this system implementation, there was no change in our internal control over financial reporting that occurred during the quarter ended March 31,
2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART II  Other Information



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

In May 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 (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. Although we are
continuing to investigate the number of facsimiles transmitted during the period for which the plaintiff in the lawsuit seeks class certification and the number of these facsimiles that were unsolicited within the meaning of the TCPA, we
expect the number of unsolicited facsimiles to be very large. We are vigorously defending the lawsuit and have filed initial briefs and motions with the court. We are not able to estimate the amount or range of loss that could result from an
unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

In January 2006, Gentle Laser Solutions,
Inc., Liberty Bell Med Spa, Inc. and Kevin T. Campbell filed suit against us and one of our former directors, along with Sona International Inc. Sona Lasers Centers, Inc. and various other individuals, in the Superior Court of New Jersey. The matter
was later removed to the United States District Court in the District of New Jersey. The suit alleges fraud, breach of contract and other causes of action in connection with the plaintiffs acquisition of franchises from the Sona entities. The
plaintiffs and Sona have settled the plaintiffs claims against Sona. We have moved to dismiss the plaintiffs claims against us. We are not able to estimate the amount or range of loss that could result from an unfavorable outcome
of the lawsuit as the matter is still in the early stages of the proceedings.

On January 9, 2008, we commenced a lawsuit in the U.S.
District Court for the District of Massachusetts against CoolTouch Inc. for infringement of U.S. Patent No. 6,206,873 (873 patent). Our complaint alleges that CoolTouchs CoolLipo infringes on the 873 patent and
seeks damages and injunctive relief. On January 31, 2008, CoolTouch answered our complaint, denying liability and alleging that the 873 patent is not infringed and is invalid, and also asserted counterclaims against us in the same court
alleging patent infringement. CoolTouchs counterclaim alleges that our Affirm product infringes U.S. Patent Nos. 7,122,029 and 6,451,007, and that our Smartlipo product infringes U.S. Patent No. 7,217,265, and seeks
damages in an unspecified amount, as well as injunctive relief. We are vigorously prosecuting our claims against CoolTouch and defending against CoolTouchs counterclaims. We are not able to estimate the amount or range of loss that could
result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.

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 our 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 its consolidated financial position, results of operations or cash flows.



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##### Table of Contents

|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, 2007 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 March 31, 2008, there have been no any material changes to the risk factors disclosed in our annual report on Form 10-K for the fiscal year
ended December 31, 2007, 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 December 13, 2005, we completed an initial public offering of 5,750,000 shares of our class A common stock at a price to the public of $15.00 per share. We sold 4,750,000 shares of the class A common stock, including an
over-allotment option of 750,000 shares, and El.En., the selling shareholder in the offering, sold 1,000,000 of the shares. The offer and sale of all of the shares in the initial public offering were registered under the Securities Act of 1933, as
amended, pursuant to a registration statement on Form S-1 (File No. 333-127463), which was declared effective by the SEC on November 8, 2005. We received aggregate net proceeds of approximately $64.0 million, after deducting underwriting
discounts and commission of approximately $5.0 million and expenses of the offering of approximately $2.3 million. None of the underwriting discounts and commissions or offering expenses were incurred or paid to directors or officers of ours or
their associates or to persons owning 10 percent or more of our common stock or to any affiliates of ours. From the effective date of the registration statement through March 31, 2008, we used approximately $18.4 million for general
corporate purposes, with the remaining $82.4 million in proceeds invested in cash and cash equivalents, marketable securities and long-term investments.



|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 Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|            | 
|32.2        |  | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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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: May 9, 2008 |  | By:            |  | /s/ Michael R. Davin                                           
|                  |  |                |  | Michael R. Davin                                               
|                  |  |                |  | Chairman, President, Chief Executive Officer                   
|                  |  |               
|Date: May 9, 2008 |  | By:            |  | /s/ Timothy W. Baker                                           
|                  |  |                |  | Timothy W. Baker                                               
|                  |  |                |  | Executive Vice President, Chief Financial Officer and
Treasurer



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##### Table of Contents

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 Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|            | 
|32.2        |  | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



22