All statements, trend analysis and other information contained in the following discussion relative to markets for our products and trends in revenue, gross margins and anticipated expense levels, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and other similar expressions, constitute forward-looking statements. These forward-looking statements are subject to business and economic risks and uncertainties, and our actual results of operations may differ materially from those contained in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item1A. "Risk Factors" as well as other risks and uncertainties referenced in this Annual Report on Form 10-K.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, receivables valuation, valuation of investments, inventory valuation, depreciable lives of fixed assets, valuation of goodwill and acquired intangibles, income taxes, stock-based compensation, and accrued warranties. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies and the related judgments and estimates affect the preparation of our consolidated financial statements.

Revenue Recognition. We generally recognize revenue upon shipment of product to customers and the fulfillment of all contractual terms and conditions, pursuant to the guidance provided by SAB No. 104, "Revenue Recognition." Credit is not extended to customers and revenue is not recognized until collectibility is reasonably assured. Revenue from the sale of service contracts is deferred and recognized on a straight-line basis over the contract period. Revenue from service administered by us that is not covered by a service contract is recognized as the services are provided. In certain instances, we may sell products together with extended warranties or maintenance contracts. The revenue recognized per element is determined by allocating the total sales price to each element, based on the relative fair values in accordance with Emerging Issues Task Force ("EITF") 00-21, "Revenue Arrangements with Multiple Deliverables." Separately priced extended warranty and maintenance products are accounted for over the life of the contract. Unearned revenue is reported on the balance sheet as deferred revenue.

Allowance for Doubtful Accounts. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of customers when determining or modifying their credit limits. We regularly evaluate the collectibility of our trade receivable balances based on a combination of factors. When a customer's account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation to us, such as in the case of a bankruptcy filing, deterioration in the customer's operating results or financial position or other material events impacting their business, we record a specific allowance to reduce the related receivable to the amount we expect to recover given all information presently available. We will also provide a general reserve based on the aging of the accounts and notes receivable based on historical experiences of write-offs.

As of June 28, 2008, our accounts receivable balance of $43.3 million is reported net of allowances for doubtful accounts of $2.3 million. We believe our reported allowances at June 28, 2008, are adequate. If the financial conditions of those customers were to deteriorate, however, resulting in their inability to make payments, we may need to record additional allowances that would result in additional selling, general and administrative expenses being recorded for the period in which such determination is made.

Inventory Reserves. As a designer and manufacturer of high technology equipment, we are exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices, and the availability of key components from our suppliers. Our policy is to establish inventory reserves when conditions exist that suggest that our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products and market conditions. We regularly evaluate the ability to realize the value of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new product introductions. Purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value. As of June 28, 2008, our inventory of $33.1 million is stated net of inventory reserves of $2.4 million. If actual demand for our products deteriorates, or market conditions are less favorable than those that we project, additional inventory reserves may be required.

Fair Value of Financial Instruments. Carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the short term nature of these instruments. Held-to-maturity marketable securities, which are generally comprised of short-duration certificates of deposit or government-backed bonds, are valued at amortized cost which approximates market value. Available-for-sale securities are marked-to-market on a quarterly basis and the associated change is reflected as a component of other comprehensive income (loss), net of tax.

Product Warranties. Our products are sold with warranty provisions that require us to remedy deficiencies in quality or performance of our products over a specified period of time at no cost to our customers. Our policy is to establish warranty reserves at levels that represent our estimate of the costs that will be incurred to fulfill those warranty requirements at the time that revenue is recognized. We believe that our recorded liability at June 28, 2008, is adequate to cover our future cost of materials, labor and overhead for the servicing of our products sold through that date. If actual product failures

or material or service delivery costs differ from our estimates, our warranty liability would need to be revised accordingly.

Stock based compensation. Effective July 3, 2005, we implemented the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 revised ("SFAS No. 123R") and Staff Accounting Bulletin 107 ("SAB 107") for all share-based compensation that was not vested as of July 2, 2005. We adopted SFAS No. 123R using a modified prospective application, as permitted under SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application, we were required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Compensation cost is recognized over the period that an employee provides service in exchange for the award.

The fair value of each option/stock appreciation rights ("SARs") award is estimated on the date of grant using the Black-Scholes option-pricing model incorporating various assumptions. Expected volatility is determined using both current and historical implied volatilities of the underlying stock which is obtained from public data sources. The expected life of the options is based on historical observations adjusted for the estimated exercise dates of unexercised options/SARS. Additionally, separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The average risk-free interest rate is based on the U.S. treasury security rate with a term to maturity that approximates the option's expected life as of the grant date. The forfeiture rate is based on historical experience as well as future expectations. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Contingencies. We are subject to proceedings, lawsuits and other claims. We assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. We record charges for the costs we anticipate incurring in connection with litigation and claims against us when we can reasonably estimate these costs.

Restructuring. We record restructuring charges incurred in connection with consolidation or relocation of operations, exited business lines, or shutdowns of specific sites. These restructuring charges, which reflect our commitment to a termination or exit plan that will begin within twelve months, are based on estimates of the expected costs associated with site closure, legal matters, contract terminations, or other costs directly related to the restructuring. If the actual cost incurred exceeds the estimated cost, an additional charge to earnings will result. If the actual cost is less than the estimated cost, a credit to earnings will be recognized.

Income Taxes. The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. In estimating future tax consequences, all expected future events are considered other than enactments of changes in tax laws or rates. Valuation allowances are established as necessary to reduce deferred tax assets in the event that realization of the assets is considered unlikely (see Note 11).

On July 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, ("FIN 48"), "Accounting for Uncertainty in Income Taxes", as discussed more fully below.

FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also

provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

FIN 48 prescribes a two-step process to determine the amount of tax benefit to be recognized. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period (see Note 11).

Overview

We research, develop, manufacture, market, sell, distribute, and service lasers and light-based products used to perform aesthetic and cosmetic procedures. We sell our lasers and light-based products principally to medical practitioners. We market our products directly and through a network of distributors to end users. Our traditional customer base includes plastic and cosmetic surgeons and dermatologists. More recently, we have expanded our sales to a broader group of practitioners consisting of general practitioners and certain specialists including obstetricians, gynecologists, and general and vascular surgeons. We generate our revenue from the sale of lasers, light-based devices, and other products, and product-related services.

We distribute products worldwide through our direct sales force and independent distributors.

We assemble substantially all of our products in our Wayland, Massachusetts, South Plainfied, New Jersey, and Netanya, Israel facilities in the quarter in which they are shipped, and backlog has not been significant. We experience some seasonal reduction of our product sales in our first fiscal quarter due to the summer holiday schedule of physicians and their patients.

Our products are generally covered by a standard warranty, with an option to purchase extended warranty contracts at the time of product sale or service contracts after the time of sale. Distributor sales generally include a parts warranty only. The anticipated cost associated with the standard warranty coverage is accrued at the time of shipment as a cost of sales. Any costs associated with product installation are also recognized as costs of sales. Both such anticipated and actual costs have no associated revenue and therefore reduce the gross profit from product-related service revenue.

Product-related service revenue consists of revenue from maintenance and repair services and the sale of spare parts and consumables. We derive revenue from extended service contracts, which are typically for a 12 or 24-month period, and the revenue is initially deferred and recognized over the life of the service contract. In addition, we provide on-site service worldwide on a time-and-materials basis directly or through our distributors.

International revenue, consisting of sales from our subsidiaries in the United Kingdom, Germany, France, Italy, Spain, Japan, Israel and Australia, and sales consisting of products shipped from the United States directly to international locations from the United States during the fiscal years ended June 28, 2008, June 30, 2007, and July 1, 2006 represented 62%, 56%, and 54% of total sales, respectively.

Our fiscal year consists of the 52 or 53-week period ending on the Saturday closest to June 30 of each year. The years ended June 28, 2008, June 30, 2007, and July 1, 2006 contained 52 weeks each, respectively.

Results of Operations

The following tables set forth selected financial data for the periods indicated, expressed as a percentage of total revenue.

                                                          For the Year Ended
                                                   June 28,     June 30,    July 1,
                                                     2008         2007        2006
    Revenue Mix:
       Lasers and other products                        71.6 %       76.2 %     81.5 %
       Product-related services                         28.4 %       23.8 %     18.5 %

       Total revenue                                   100.0 %      100.0 %    100.0 %

    Gross profit:
       Lasers and other product                         37.5 %       43.0 %     44.9 %
       Product-related services                          7.6 %        7.5 %      4.5 %

       Total gross profit                               45.1 %       50.5 %     49.4 %

    Operating expenses:
       Selling, general & administrative                47.0 %       36.0 %     29.7 %
       Research and development                          8.6 %       12.2 %      5.9 %

       Total operating expenses                         55.6 %       48.2 %     35.6 %

    (Loss) income from operations                      -10.5 %        2.3 %     13.8 %
    Other income, net                                    0.0 %        4.3 %      1.2 %

    (Loss) income before income taxes                  -10.5 %        6.6 %     15.0 %
    (Benefit from) Provision for income taxes           -4.4 %        2.4 %      5.0 %

    Net (loss) income                                   -6.1 %        4.2 %     10.0 %

Fiscal Year Ended June 28, 2008 Compared to Fiscal Year Ended June 30, 2007

Revenue. Revenue for the year ended June 28, 2008 was $148.2 million as compared to $148.6 million in the prior fiscal year. The slight decrease is primarily related to the slowdown in our domestic market that is related to the current economic conditions which has been offset by growth in our international operations as well as our service area.

International revenue increased approximately $8.3 million over the prior year and accounted for approximately 62% of total revenue for fiscal 2008 as compared to approximately 56% for fiscal 2007. This $8.3 million increase, was net of an approximate $6.3 million decreases in sales in Latin America, which represents approximately a 56% decrease in sales for that region. Sales in Europe increased approximately 31%, representing a $13.3 million increase in Europe as compared to fiscal year 2007. Sales in our Asia Pacific area also had strong growth of approximately $3.9 million.

Product-related service revenue increased approximately 16% to $42.2 million in fiscal year 2008 from $35.3 million in fiscal year 2007. This increase was consistent with the increase in systems sold over the past few years and increase in renewal contracts.

Gross Profit. Gross profit decreased approximately $8.3 million to $66.8 million, or 45.1% of revenue, in fiscal year 2008 from $75.1 million, or 50.5% of revenue, in fiscal year 2007. The decrease in gross profit results from a shift in our revenue mix from domestic sales to more international.

International sales increased to approximately 62% of our overall business in fiscal 2008 as compared to approximately 56% in fiscal year 2007. International sales typically have lower gross margins since a greater proportion of that volume is sold through distributors as compared to domestically which are primarily sold through our direct sales force. Our product related services portion of our revenue increased to 28% of our overall revenue in the current fiscal year as compared to 24% in fiscal year 2007. The product-related services typically carry a lower gross profit than our product revenue. We also encountered certain product reliability problems during fiscal year 2008 that resulted in increased service-related costs, thus eroding such margins further. We believe we have identified the causes of these problems and will be implementing the necessary solutions in future periods.

Research and Development Expense. Research and development spending decreased approximately $5.4 million to $12.7 million in fiscal year 2008 as compared to $18.1 million for fiscal year 2007. The decrease was attributable primarily to the completion of approximately $5.7 million of outsourced project-related work which was part of the new-product introduction initiative in the prior fiscal year. As a percentage of revenue, research and development expenses were approximately 8.6% and 12.2% for fiscal years 2008 and 2007, respectively.

Selling, General and Administrative Expense. Selling, general and administrative expense increased to approximately $69.6 million or 47.0% of revenue during fiscal year 2008 as compared to $53.6 million or 36.0% during fiscal year 2007. Of the $16.0 million increase legal expenses represent approximately $8.9 million primarily related to our current lawsuits and approximately $2.0 million was due to higher personnel expense for increased headcount and salary increases.

Other Income/Expense. Other expense was approximately $1.6 million for the fiscal year ended June 28, 2008, as compared to other income of approximately $3.7 million for the same period ended June 30, 2007. The decrease is primarily due to the Company having recognized a $3.5 million gain on the initial exchange of common stock of Solx, Inc. for cash and common stock of OccuLogix, Inc. during the fiscal year ended 2007, as compared to the recognition of a $2.5 million loss on the other-than-temporary impairment of our holdings of common shares of OccuLogix, Inc. during the fiscal year 2008 (see Note 16).

The decrease in interest income earned during the fiscal year ended 2008, as compared to the fiscal year ended 2007, is related to a decrease in market interest rates combined with an overall decrease in cash and cash equivalents and in marketable securities.

Income Taxes. The provision for income taxes results from a combination of activities of both the domestic and foreign subsidiaries. The Company recorded a 42% effective tax rate for the fiscal year ended 2008 compared to a 36% effective tax rate for the fiscal year ended 2007. The provision for income taxes for the year ended June 28, 2008 includes the effect of the changing mix of foreign and U.S. pre-tax income (loss), the expiration of the research and experimentation credit, and other permanent items.

Fiscal Year Ended June 30, 2007 Compared to Fiscal Year Ended July 1, 2006

Revenue. Revenue for the year ended June 30, 2007 was $148.6 million as compared to $149.5 million in the prior fiscal year. The slight decrease is primarily related to a decrease in volume of our legacy products and the inability to ship all the announced new products.

International revenue increased approximately $3.5 million over the prior year and accounted for approximately 56% of total revenue for fiscal 2007 as compared to approximately 54% for fiscal 2006. This $3.5 million increase, was net of an approximate $4.2 million decreases in sales in Latin America, which represents approximately a 28% decrease in sales for that region. Sales in Europe increased approximately 22%, representing a $7.7 million increase in Europe as compared to the fiscal 2006.

Product-related service revenue increased approximately 28% to $35.3 million in fiscal 2007 from $27.6 million in fiscal 2006. This increase was consistent with the increase in systems sold over the past few years and increase in renewal contracts.

Gross Profit. Gross profit increased approximately $1.2 million to $75.1 million, or 50.5% of revenue, in fiscal 2007 from $73.8 million, or 49.4% of revenue, in fiscal 2006. The increase in gross profit was primarily driven by improvements in the overall product-related service area. These improvements were the result of the staffing efficiencies that were achieved through the world-wide service organization and the increased service contracts.

Research and Development Expense. Research and development spending increased approximately $9.2 million to $18.1 million in fiscal 2007 as compared to $8.9 million for fiscal 2006. The increase was attributable primarily to $6.3 million of higher outsourced project-related work utilized to expedite the completion of the new product introduction cycle, $1.1 million of increased project materials expenditures related to the same, and $0.9 million related to increased personnel expenses including share-based compensation. As a percentage of revenue, research and development expenses were approximately 12.2% and 5.9% for fiscal 2007 and 2006, respectively.

Selling, General and Administrative Expense. Selling, general and administrative expense increased to approximately $53.6 million or 36.0% of revenue during fiscal 2007 as compared to $44.3 million or 30% during fiscal 2006. Of the $9.3 million increase, $3.9 million was due to higher personnel expense for increased headcount, higher commission expense due to increased commissionable revenue, and stock-based compensation. The increase is also attributable to a $0.8 million increase in marketing-related expenses such as customer-related work-shops, advertising, trade shows, and an increase of $2.9 million due to an increase in legal and professional fees.

Other Income/Expense. Total other income increased approximately $4.7 million for the fiscal 2007 to $6.4 million, from approximately $1.7 million for the fiscal 2006. This increase is primarily attributable to the recognition of a $3.5 million gain on the exchange of common stock of Solx Inc. for cash and common stock of Occulogix Inc. (NasdaqGM: OCCX). The gain was a result of the acquisition of Solx Inc., a privately-held company, by Occulogix Inc., a publicly traded company. The Company held 19.99% of the outstanding common stock of Solx Inc. on an as-converted basis, prior to the merger. As a result of the acquisition of Solx, Inc., the Company received approximately $1.0 million in cash plus approximately 1.3 million shares of common stock in Occulogix Inc.

Income Taxes. The provision for income taxes results from a combination of activities of both the domestic and foreign subsidiaries. The Company recorded a 36% effective tax rate for the year ended June 30, 2007 compared to a 33% effective tax rate for the year ended July 1, 2006. The provision for income taxes for the year ended July 1, 2006, includes a tax provision calculated for taxable income generated at the foreign subsidiaries at rates below that of the United States statutory tax rate.

Liquidity and Capital Resources

Our cash and cash equivalents, and marketable securities at June 28, 2008 totaled approximately $36.7 million as compared to approximately $51.2 million at June 30, 2007. We continue to have no long-term debt. We believe that the combination of existing cash and cash equivalents, and marketable securities on hand, along with cash to be generated by future operations and amounts available under our line of credit, will be sufficient to meet our ongoing operating and capital expenditure requirements for the foreseeable future. However, we cannot be sure that we will not require additional capital beyond the amounts currently . . .