Caution Regarding Forward-Looking Statements

The following discussion should be read in conjunction with the attached financial statements and notes thereto, and with our audited financial statements and notes thereto for the fiscal year ended December 31, 2007 as contained in our annual report on Form 10-K filed with the SEC on March 13, 2008. This quarterly report, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements relating to the ability to grow our business, increase our revenue, manage expenses, generate additional cash, return to profitability, develop and commercialize existing and new products and applications, and improve the performance of our worldwide sales and distribution network, and to the outlook regarding long term prospects. These forward-looking statements involve risks and uncertainties. The cautionary statements set forth below and those contained in Part II, Item 1A - "Risk Factors" commencing on page 19, identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. The reader is cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis and expectations only as of the date of this report. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q.

Introduction

The Management's Discussion and Analysis, or MD&A, is organized as follows:

• Executive Summary. This section provides a general description and history of our business, a brief discussion of our product lines and the opportunities, trends, challenges and risks we focus on in the operation of our business.

• Critical Accounting Policies and Estimates. This section describes the key accounting policies that are affected by critical accounting estimates.

• Recent Accounting Pronouncements. This section describes the issuance and effect of new accounting pronouncements that may be applicable to us.

• Results of Operations. This section provides our analysis and outlook for the significant line items on our Consolidated Statements of Operations.

• Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments that existed as of September 30, 2008.

Executive Summary

Company Description. We are a global medical device company engaged in the design, development, manufacture, marketing and servicing of laser and other light-based aesthetics systems for practitioners worldwide. We offer products on three platforms-CoolGlide, Xeo and Solera- for use by physicians and other qualified practitioners to allow our customers to offer safe and effective aesthetic treatments to their customers.

Our corporate headquarters and U.S. operations are located in Brisbane, California. We conduct our manufacturing, warehousing, research, regulatory, sales, service, marketing and administrative activities from this facility. In the United States, we market, sell and service our products primarily through direct sales and service employees and through a distribution relationship with PSS World Medical Shared Services, Inc., a wholly owned subsidiary of PSS World Medical, or PSS, which has over 700 sales representatives serving physician offices throughout the United States. In addition, we also sell certain items, like Titan hand piece refills and marketing brochures, through the internet.

International sales are generally made through direct sales employees and through a worldwide distributor network in over 30 countries. Outside the United States, we have a direct sales presence in Australia, Canada, France, Japan, Spain, Switzerland and the United Kingdom.

Products. Our revenue is derived from the sale of Products, Upgrades, Service and Titan hand piece refills. Product revenue represents the sale of a system which consists of one or more hand pieces and a console that incorporates a universal graphic user interface, a laser and/or other light-based module, control system software and high voltage electronics. However, depending on the application, the laser or other light-based module is sometimes contained in the hand piece, such as with our Pearl and Pearl Fractional products, instead of in the console. We offer our customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications as their practice grows. This enables customers to upgrade their systems whenever they want and provides us with a source of recurring revenue, which we classify as Upgrade revenue. Service revenue relates to amortization of pre-paid service contract revenue and receipts for services on out-of-warranty products. Titan hand piece refill revenue is associated with our Titan hand piece, which requires replacement of the optical source after a set number of pulses have been used.

Significant Business Trends. We believe that our ability to grow revenue has been, and will continue to be, primarily dependent on the following:

• Investments made in our global sales and marketing infrastructure.

• Continuing introduction of new aesthetic products and applications.

• Continuing customer demands for our products.

• Marketing to physicians in the core dermatology and plastic surgeon specialties as well as outside those specialties.

• Generating service and Titan hand piece refill revenue from our growing installed base of customers.

For the three and nine months ended September 30, 2008, compared to the same periods in 2007, our U.S. revenue decreased by 46% and 30%, respectively. We believe that the current market conditions may be causing our non-core physician prospects to defer a purchasing decision at this time, even though most of these physicians may not be limited by credit barriers. Further, we believe that a segment of our business - those aesthetic practices that operate in settings that are not medical offices - are being particularly affected by the economic environment and may be finding it more difficult to obtain credit financing. This may be resulting in them delaying their purchase decisions. Also, FDA clearance for our Pearl product was received in early 2007, which allowed us to begin shipping our Pearl product in June 2007 and provided significant Upgrade revenue for the third quarter of 2007. In contrast, our Pearl Fractional product started shipping at the end of the third quarter of 2008, which resulted in lower Upgrade revenue in that period.

For the three and nine months ended September 30, 2008, compared to the same period in 2007, our international revenue decreased by 8% and increased by 18%, respectively. The decrease in international revenue for the three months ended September 30, 2008, compared to the same period in 2007, was primarily due to difficult economic conditions. The increase in the first nine months of international revenue, compared to the same period in 2007, was primarily attributable to the continuing investments in developing our global infrastructure. These efforts resulted in increased revenue from several of our geographic locations, including Europe and emerging global markets.

For the three and nine months ended September 30, 2008, our gross margin declined to 59% and 61%, respectively, compared to 66% in the same periods of 2007. This decrease in gross margin was primarily attributable to:

• Higher service and Titan refill revenue, as a percentage of total revenue, which have a lower gross margin than our Product and Upgrade revenue categories;

• Increased level of international distributor business, which has slightly lower gross margins than our direct business; and

• Lower than expected overall revenue, which reduced the leverage of our manufacturing and service department expenses and was dilutive to our gross margin percentage in the short term.

Sales and marketing expenses for the three months ended September 30, 2008, compared to the same period in 2007, decreased by $2.5 million, primarily due to reduced marketing and sales costs in North America, resulting from a reduction in head count and lower sales commission expenses. Sales and marketing expense for the nine months ended September 30, 2008, compared to the same period in 2007, remained flat. As a percentage of revenue, sales and marketing expenses for the three and nine months ended September 30, 2008, increased to 42% and 44%, respectively, compared to 38% in the same periods in 2007. This increase in sales and marketing expenses as a percentage of revenue was primarily attributable to lower than-expected U.S. revenue.

Our general and administrative expenses for the three and nine months ended September 30, 2008, compared to the same periods in 2007, decreased 16% and 5%, respectively, but increased slightly as a percentage of revenue due to lower levels of revenue.

Factors that May Impact Future Performance

Our industry is impacted by numerous competitive, regulatory and other significant factors. Our industry is highly competitive and our success depends on our ability to compete successfully. Additionally, the growth of our business relies on our ability to continue to develop new products and innovative technologies, obtain regulatory clearances for our products, protect the proprietary technology of our products and our manufacturing processes, manufacture our products cost effectively, and successfully market and distribute our products in a profitable manner. If we fail to compete effectively, fail to continue to develop new products and technologies, fail to obtain regulatory clearances, fail to protect our intellectual property, fail to produce our products cost effectively, or fail to market and distribute our products in a profitable manner, our business could suffer. A detailed discussion of these and other factors that could impact our future performance are provided in Part II, Item 1A "Risk Factors" section in this Form 10-Q.

Critical Accounting Policies and Estimates.

The accounting policies that we consider to be critical, subjective, or requiring complex judgments in their application are summarized in "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with SEC on March 13, 2008. There have been no significant changes during the nine months ended September 30, 2008 to the items that we disclosed as our critical accounting policies and estimates in our Annual Report on Form 10-K for the year ended December 31, 2007, except for the items discussed below.

Fair Value Measurements

With effect from January 1, 2008, we adopted the fair value measurement provisions of Statement of Financial Accounting Standards, or SFAS, No. 157 "Fair Value Measurements". This statement does not require any new fair value measurements. More specifically, SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy, which ranks the quality and reliability of the information used to determine fair value. SFAS No. 157 was effective January 1, 2008 for financial assets and liabilities and will be effective January 1, 2009 for non-financial assets and liabilities. For details on the adoption of SFAS No. 157 for financial assets and liabilities, see Note 1 "Summary of Significant Accounting Policies" to our Condensed Consolidated Financial Statements. We are currently evaluating the effect, if any, of the adoption of this statement for non-financial assets and liabilities on our financial condition and results of operations.

At September 30, 2008, total financial assets measured and recognized at fair value were $109.4 million and of these assets, $11.0 million, or 10%, were financial assets that were measured and recognized using significant unobservable inputs (Level 3). These assets were AAA to Aa3 rated municipal bonds, with an auction interest rate reset feature, known as auction rate securities (ARS). There were no non-financial assets or liabilities measured at fair value as of September 30, 2008.

The ARS held in our investment portfolio, were guaranteed either by the Federal Family Education Loan Program (FFELP) or the Maine Education Loan Authority (MELA), and were issued for the purpose of financing student loans. ARS have historically traded at par and are redeemable at par plus accrued interest at the option of the issuer. Interest is typically paid at the end of each auction period. Until February 2008, the market for our ARS portfolio was highly liquid. Starting in February 2008, a substantial number of auctions "failed," meaning that there was not enough demand to sell all of the securities that holders desired to sell at auction. The immediate effect of a failed auction is that such holders cannot sell the securities at auction and the interest rate on the security generally resets to a maximum interest rate. In the case of funds invested by us in ARS which are the subject of a failed auction, we may not be able to access the funds without a loss of principal, unless a future auction of these investments are successful or the issuers redeem the securities. As of September 30, 2008, all of our ARS investment balance is classified as long term investments because of our belief that it could take more than one year before they are readily marketable. In addition, we also modified our current investment strategy and increased our investments in more liquid money market funds.

Given observable ARS market information was not available to determine the fair value of our ARS portfolio, we compared the fair value of our securities to a model using the discount rate adjustment technique as well as transaction data and bid-ask spread data for other similar illiquid securities from a secondary market. In determining the fair value using the discount rate adjustment technique, there were several significant assumptions, including:

• Projected interest income (2.85% to 4.08%) and principal payments through the legal maturity of the securities.

• Market risk adjusted discount rate, which was based on the one month 'London Inter-Bank Offered Rate' of 3.93% as of September 30, 2008, adjusted for an expected yield premium of approximately 200 basis points to compensate for the current lack of liquidity resulting from failing auctions for such securities.

While our valuation model was based on both Level 2 (credit quality and interest rates) and Level 3 inputs, we determined that the Level 3 inputs were the most significant to the overall fair value measurement, particularly the estimates of risk adjusted discount rates. For definitions of Level 2 and Level 3 inputs see 'Note 1 Summary of Significant Accounting Policies' of the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q. Based on the results of our fair value measurement, the net carrying value of our ARS as of September 30, 2008 was $11.0 million, which was classified as "Long term investments" on our Condensed Consolidated Balance Sheet.

The valuation of the ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact the valuation of our ARS portfolio in the future include: changes to credit ratings of the securities, as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity.

We determine if an investment is other-than-temporarily impaired by performing quarterly reviews of our portfolio of investments. If the cost of an investment exceeds its fair value, in making the judgment of whether there has been an other-than-temporary impairment, we consider available quantitative and qualitative evidence, including, among other factors, our intent and ability to hold the investment to maturity, the duration and extent to which the fair value is less than cost, specific adverse conditions related to the financial health of and business outlook for the investee and rating agency actions. Once a decline in fair value is determined to be other-than-temporary, we record an impairment charge to our statement of operations and a new cost basis in the investment is established.

Since February 2008, due to the lack of liquidity experienced in the global credit and capital markets, and specifically in the ARS market, our ARS have experienced failed auctions and the estimated market values continue to decline. As a result, as of September 30, 2008 we concluded that the previously unrealized loss on our ARS investments was other-than-temporary and therefore recognized approximately $2.4 million as an impairment of long term investments, with a corresponding decrease in 'Accumulated Other Comprehensive Loss,' during the third quarter ended September 30, 2008.

The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, liquidity and ongoing strength and quality of credit markets. If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to record additional impairment charges in future quarters.

We continue to monitor the market for ARS and consider its impact, if any, on the fair value of our ARS investments.

Recent Accounting Pronouncements

For a full description of recent accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition see 'Note 2 Summary of Significant Accounting Policies - Recent Accounting Pronouncement' of the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

Results of Operations

The following table sets forth selected consolidated financial data for the
periods indicated, expressed as a percentage of net revenue.



                                                   Three Months Ended            Nine Months Ended
                                                     September 30,                 September 30,
                                                 2008             2007          2008            2007
Consolidated Statement of Operations-
Operating Ratios:
Net revenue                                         100 %            100 %         100 %         100 %
Cost of revenue                                      41 %             34 %          39 %          34 %

Gross margin                                         59 %             66 %          61 %          66 %

Operating expenses:
Sales and marketing                                  42 %             38 %          44 %          38 %
Research and development                             10 %              6 %           9 %           7 %
General and administrative                           13 %             11 %          13 %          12 %

Total operating expenses                             65 %             55 %          66 %          57 %

Income (loss) from operations                        (6 )%            11 %          (5 )%          9 %
Interest and other income, net                        3 %              4 %           4 %           4 %
Other-than-temporary impairment on long
term investments                                    (12 )%             0 %          (3 )%          0 %

Income (loss) before income taxes                   (15 )%            15 %          (4 )%         13 %
Provision (benefit) for income taxes                 (1 )%             4 %           0 %           4 %

Net income (loss)                                   (14 )%            11 %          (4 )%          9 %