Cost of revenues consists primarily of the cost of purchasing components and sub-systems, assembling, packaging, shipping and testing components at our facility, direct labor and associated overhead and beginning in 2007, amortization of intangible assets acquired in the Laserscope acquisition, and the addition of the field service organization in the U.S. in support of the Laserscope aesthetics products.
Research and development expenses consist primarily of personnel costs, materials to support new product development and research support provided to clinicians at medical institutions developing new applications which utilize our products. Research and development costs have been expensed as incurred.
Sales, general and administrative expenses consist primarily of costs of personnel, sales commissions, travel expenses, advertising and promotional expenses, facilities cost, legal and accounting fees, insurance and other expenses not allocated to other departments. Results of Operations
The following table sets forth certain operating data as a percentage of revenues for the periods included.

                                                        Three Months Ended                         Six Months Ended
                                                June 28, 2008        June 30, 2007        June 28, 2008         June 30, 2007
Revenues                                              100.0 %               100.0 %               100.0 %              100.0 %
Cost of revenues                                       58.7                  56.8                  58.5                 57.6

Gross Margin                                           41.3                  43.2                  41.5                 42.4
Operating expenses:
Research and development                                7.7                  10.4                   8.3                 11.9
Selling, general and administrative                    35.6                  49.5                  37.3                 56.9

Total operating expenses                               43.3                  59.9                  45.6                 68.8

Loss from operations                                   (2.0 )               (16.7 )                (4.1 )              (26.4 )
Legal settlement                                        6.2                  16.4                   3.3                  9.0
Interest and other expense, net                        (1.7 )                (2.0 )                (1.5 )               (1.5 )

Income (loss) before income tax                         2.5                  (2.3 )                (2.3 )              (18.9 )
Provision for income taxes                             (0.4 )                 0.0                  (0.2 )                0.0

Net income (loss)                                       2.1                  (2.3 )                (2.5 )              (18.9 )

Revenues.
Total revenue decreased by 15.3% to $12.9 million for the three months ended June 28, 2008 from $15.2 million for the same three month period in 2007 and decreased 12.3% to $24.4 million for the six months ended June 28, 2008 from $27.8 million for the same six month period in 2007.
For the comparable three month periods; ophthalmology revenues in total decreased $0.2 million or 2.6%. Domestic ophthalmology system revenues decreased $0.1 million to $1.5 million; international ophthalmology system revenues decreased $0.4 million to $1.9 million; aggregate ophthalmology recurring revenues consisting of disposables and service increased $0.4 million to $4.4 million and revenues from Original Equipment Manufactures (OEMs) were down $0.1 million to $0.4 million. Ophthalmology recurring revenues represented 54.0% of our aggregate ophthalmology business in 2008 compared to 47.7% in 2007. Aesthetics revenues in total decreased $2.1 million or 30.8% to $4.8 million. International aesthetics system revenues decreased $0.8 million to $2.2 million, domestic aesthetics system revenues decreased $1.6 million to $0.7 million and aggregate service revenues increased $0.3 million to $1.8 million. The decrease in our aesthetics revenues is primarily due to the difficulties incurred in the U.S. distribution channel during 2007 including turnover in the sales force. In fiscal year 2008, we are rebuilding our U.S. aesthetics sales force. In addition, the decrease in aesthetics revenue was due to the overall softening of the aesthetics market in general.

For the comparable six month periods; ophthalmology revenues in total increased $0.1 million or 0.8%. Domestic ophthalmology system revenues increased $0.2 million to $2.7 million; international ophthalmology system revenues decreased $0.5 million to $3.6 million; aggregate ophthalmology recurring revenues consisting of disposables and service increased $0.5 million to $8.6 million and revenues from OEM's were down $0.1 million to $0.8 million. Ophthalmology recurring revenues represented 54.6% of our aggregate ophthalmology business compared to 51.3%. Aesthetics revenues in total decreased $3.5 million or 29.0% to $8.7 million; international aesthetics system revenues decreased $1.3 million to $4.1 million; domestic aesthetics system revenues decreased $2.8 million to $0.9 million, and aggregate service revenues increased $0.6 million to $3.6 million. The decrease in our aesthetics revenues is primarily due to the difficulties incurred in the U.S. distribution channel during 2007 including turnover in the sales force. In fiscal year 2008, we are rebuilding our U.S. aesthetics sales force. In addition, the decrease in aesthetics revenue was due to the overall softening of the aesthetics market in general.
Gross Profit.
Gross profit decreased to $5.3 million for the three months ended June 28, 2008 from $6.6 million for the same period in 2007. Gross profit decreased to $10.1 million for the six months ended June 28, 2008 from $11.8 million. The decrease in gross profit for both periods was primarily the result of decreased revenues as gross margins remained comparable between all periods.
Gross margin represented 41.3% of revenues for the three months ended June 28, 2008 and 43.2% of revenues for the comparable period in 2007. Gross margin represented 41.5% of revenues for the six months ended June 28, 2008 and 42.4% of revenues for the comparable period in 2007.
Gross margins as a percentage of sales will continue to fluctuate due to changes in the relative proportions of domestic and international sales, the product mix of sales, costs associated with future product introductions and total unit volume changes that lead to greater or lesser production efficiencies and a variety of other factors. See Item 1A. "Risk Factors - Factors That May Affect Future Results - "Our Operating Results May Fluctuate from Quarter to Quarter and Year to Year."
Research and Development.
Research and development expenses decreased by 37.2% to $1.0 million from $1.6 million for the three months ended June 28, 2008 compared to the same period in 2007, and decreased by 39.0% to $2.0 million from $3.3 million for the six months ended June 28, 2008 compared to the same period in 2007. The primary reasons for the decreases were reduced salary and related costs resulting from the reduction in headcount and reduced material costs incurred on product development. In the future, upon reaching financial stability, we expect to target our research and development spending level to approximate 10% of our revenues to maintain a consistent level of new product introductions. Selling, General and Administrative
Selling, general and administrative expenses decreased in the three months ended June 28, 2008 by 39.2% to $4.6 million from $7.5 million compared to the same period in 2007. Selling expenses decreased $1.1 million due to lower salary and related costs due to reduced headcount and lower commissions as a result of lower sales for the comparable periods. Marketing expenses decreased $1.8 million primarily due to reduced spending on aesthetics related marketing programs and lower salary and related costs due to reduced headcount. General and administrative expenses remained constant.
Selling, general and administrative expenses decreased in the six months ended June 28, 2008 by 42.4% to $9.1 million from $15.8 million compared to the same period in 2007. Selling expenses decreased $2.4 million due to lower salary and related costs due to reduced headcount and lower commissions as a result of lower sales for the comparable periods. Marketing expenses decreased $2.7 million primarily due to reduced spending on aesthetics related marketing programs and lower salary and related costs due to reduced headcount. General and administrative expenses decreased $1.6 million due to a reduction in legal fees and accounting fees incurred in the current year. The legal fees in 2007 were primarily in support of litigation which was resolved in 2007 and the accounting fees were in support of the acquisition. Legal settlement, Interest and Other expense, net.
The legal settlement relates to monies received from Synergetics associated with a settlement of legal claims for patent infringement. The settlement called for an initial payment of $2.5 million which was received in the second quarter of 2007 and five subsequent annual payments of $0.8 million. The first annual payment of $0.8 million was received in the second quarter of 2008. Interest and Other expense relates to interest incurred on the bank debt outstanding in the respective periods offset by interest earned on cash deposits.

Income Taxes.
Significant components affecting the effective tax rate include pre-tax net loss, changes in valuation allowance, federal and state R&D tax credits, income from tax-exempt securities, the state composite tax rate and recognition of certain deferred tax assets subject to valuation allowance. For the three month periods ending June 28, 2008 and June 30, 2007, a tax provision of $51 thousand and $0, respectively, were recorded. For the six month periods ending June 28, 2008 and June 30, 2007, a tax provision of $51 thousand and $0, respectively, were recorded.
Liquidity and Capital Resources.
Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing or to raise capital.
As of June 28, 2008 we had cash and cash equivalents of $4.1 million and working capital of $8.9 million. The Company used $1.5 million in operations in the six months ended June 28, 2008 which included repaying $3.3 million of the outstanding liability to AMS. Our remaining contractual obligations to AMS amount to $1.5 million plus interest and $0.4 million of non-cancelable purchase orders relating to future deliveries - See Note 6 of Notes to Consolidated Financial Statements in this report for more information regarding the AMS Settlement.
Management is of the opinion that the Company's credit facility with Wells Fargo Bank provides sufficient liquidity to operate for the next 12 months; that the covenants contained in the credit facility with Wells Fargo Bank are reasonable; and management expects to be able to meet these covenants based on its operating plan for 2008. However, recent operating results indicate that there is significant risk in achieving the operating plan, particularly for the remaining period where the Company is obligated to make payments to AMS. If the Company is not able to perform according to the Company's operating plan for 2008 and is unable to maintain compliance with its debt covenants, Wells Fargo Bank would be entitled to exercise its remedies which include declaring all outstanding obligations due and payable, and disposing of the collateral if obligations are not paid.
Item 3. Quantitative and Qualitative Disclosure about Market Risk Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We transact the majority of our business in U.S. dollars and therefore changes in foreign currency rates will not have a significant impact on our income statement or cash flows. However, increases in the value of the U.S. dollar against any local currencies could cause our products to become relatively more expensive to customers in a particular country or region, leading to reduced revenue or profitability in that country or region. As we continue to expand our international sales, our non-U.S. dollar denominated revenue and our exposure to gains and losses on international currency transactions may increase. In January 2007 we acquired two European subsidiaries as part of our acquisition of the assets of the aesthetics business of Laserscope and in the three month period ending June 28, 2008 we signed an agreement which transfers the responsibility for sales and service of our aesthetics products in the UK to an independent distributor along with a transfer of associated assets. These entities do and did transact business in their geographies in their local currency. We currently do not engage in transactions to hedge against the risk of the currency fluctuation, but we may do so in the future. The Company's credit facility with Wells Fargo Bank has a variable interest rate and therefore the Company's interest expense will increase or decrease depending upon the prime interest rate. The facility expires in March 2011 and the ability of the Company to acquire a new facility, should one be required, will depend upon the state of the financial credit markets at that time.
Item 4T. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures Our management evaluated, with the participation of its Chief Executive Officer (CEO) and its Chief Financial Officer (CFO), the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13A-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 (the '34 Act), as of the end of the period covered by this report. Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in our reports filed under the '34 Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal control procedures, which are designed with the objective of providing reasonable assurance that our transactions are properly authorized, recorded and reported, and our assets are safeguarded against unauthorized or improper use, are intended to permit the preparation of our financial statements in conformity with generally accepted accounting principles. To the extent that elements of our internal controls over financial reporting are included within our disclosure controls and procedures, they are included in the scope of our quarterly controls evaluation.

Based on that evaluation, and as a result of the material weakness in our internal controls over financial reporting discussed below, the CEO and CFO concluded that as of the end of the period covered by this report, the Company's disclosure controls and procedures were not effective.
A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management determined that the staffing levels in the finance function are inadequate and that this represented a control deficiency in the operation of our internal controls and processes over financial reporting that they considered to be a material weakness at June 28, 2008, because the control deficiency resulted in more than a remote likelihood that a material misstatement could occur in our quarterly financial statements and not be prevented or detected.
During the three months ended June 28, 2008 the Company enhanced the current resources of the Company's finance function by adding a financial controller. The Company anticipates that the additional resources added during the first six months of 2008 will remediate the material weakness described above during the course of fiscal 2008.
Even if we are to successfully remediate the material weakness described above, because of inherent limitations, our disclosure controls and procedures may not prevent or detect misstatements or material omissions. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
(b) Changes in Internal Controls There were no changes in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.