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 27, 2009, our accounts receivable balance of $34.1 million is reported net of allowances for doubtful accounts of $2.8 million. We believe our reported allowances at June 27, 2009, 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 27, 2009, our inventory of $27.6 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 27, 2009, 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 such costs are probable and can be reasonably estimated.

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 12).

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. Refer to Note 12 of our Consolidated Financial Statements for additional financial information about income taxes.

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 and South Plainfield, New Jersey 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 consists of sales from our subsidiaries in the United Kingdom, Germany, France, Italy, Spain, Japan, and Australia, as well as sales of products shipped directly to international locations from the United States. During the fiscal years ended June 27, 2009, June 28, 2008, and June 30, 2007, international revenue represented 67%, 62%, and 56% 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 27, 2009, June 28, 2008, and June 30, 2007 contained 52 weeks each, respectively.

Discontinued Operations

On March 6, 2007, we acquired Inolase (2002) Ltd. ("Inolase") a non-public company engaged in the development and manufacture of proprietary pneumatic skin flattening PSF devices for the aesthetic light-based treatment industry as well as the development of intellectual property related to medical devices and light sources.

In the fiscal quarter ended December 27, 2008, in connection with our plan to focus on our core products, we initiated a plan to close the Inolase subsidiary. Accordingly, we classified the operating results of this business as discontinued operations in the statements of operations.

The Company determined that there was no future cash value inherent to its Inolase subsidiary and, accordingly, shut down this reporting unit as its fair value was zero. As part of that process the Company recognized a 100% impairment loss associated with the goodwill, other intangible assets, inventory, and fixed assets. The components of the loss recognized during the year ended 2009 are as follows:

                                                   In thousands
                 Goodwill                          $      10,596
                 Patents & Developed Technology            5,162
                 Inventory                                 1,681
                 Fixed Assets, net                           237

                                                   $      17,676

The Company also recorded restructuring charges of approximately $0.4 million at December 27, 2008 associated with future occupancy costs, minimum termination benefits, and professional service fees. During the six-month period ended June 27, 2009 we recognized certain residual revenues, incurred ongoing operating expenses, and made required adjustments to income taxes in the ordinary course of business.

As of June 27, 2009, the Company had no assets or liabilities held in connection with the disposal of Inolase other than the accrual for future occupancy costs and residual professional fees of approximately $0.1 million.

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 27,     June 28,     June 30,
                                                    2009         2008         2007
   Revenue Mix:
      Lasers and other products                        64.3 %       71.3 %       76.1 %
      Product-related services                         35.7 %       28.7 %       23.9 %

      Total revenue                                   100.0 %      100.0 %      100.0 %

   Gross profit:
      Lasers and other product                         29.3 %       37.6 %       42.8 %
      Product-related services                          8.9 %        7.1 %        7.5 %

      Total gross profit                               38.2 %       44.7 %       50.3 %

   Operating expenses:
      Selling, general & administrative                44.2 %       46.4 %       35.7 %
      Research and development                          9.0 %        6.9 %       11.8 %

      Total operating expenses                         53.2 %       53.3 %       47.5 %

   (Loss) income from operations                      -15.0 %       -8.6 %        2.8 %
   Other income, net                                    0.1 %       -0.1 %        4.4 %

   (Loss) income from continuing operations           -14.9 %       -8.8 %        7.1 %
   before income taxes
   (Benefit from) Provision for income taxes           -5.8 %       -4.1 %        2.4 %

   (Loss) income from continuing operations            -9.1 %       -4.7 %        4.7 %
   Loss from discontinued operations, net of          -10.0 %       -1.5 %       -0.5 %
   income taxes

   Net (loss) income                                  -19.1 %       -6.2 %        4.2 %

Fiscal Year Ended June 27, 2009 Compared to Fiscal Year Ended June 28, 2008

Revenue. Revenue for the year ended June 27, 2009 was $116.6 million as compared to $146.6 million in the prior fiscal year. The decrease is primarily related to the current global economic slowdown which has resulted in decreased sales volume as well as a year-over-year decrease in the average selling price of our units. The economic turmoil impacted all geographic areas of our business.

Domestic revenue was impacted the most significantly and decreased approximately $16.0 million or 29%. Domestic revenue accounted for 33% of the worldwide total compared to approximately 38% the year earlier. International revenue decreased approximately $14.0 million over the prior year and accounted for approximately 67% of total revenue for fiscal 2009 as compared to approximately 62% for fiscal 2008. This $14.0 million decrease, inclusive of an approximate $0.7 million decreases in sales in Latin America, which represents approximately a 15% decrease in sales for that region. Sales in Europe decreased approximately $11.7 million, or 21%, as compared to fiscal year 2008. Sales in our Asia Pacific area declined approximately $1.2 million or 2%.

Product-related service revenue decreased approximately 1% to $41.6 million in fiscal year 2009 from $42.0 million in fiscal year 2008. We believe this is primarily related to the economic situation which has reduced unit sales as well as actual usage of the existing units which, in turn, results in fewer sales of consumable and spare parts.

Gross Profit. Gross profit decreased approximately $21.0 million to $44.6 million, or 38.2% of revenue, in fiscal year 2009 from $65.5 million, or 44.7% of revenue, in fiscal year 2008. The decrease in gross profit results from a combination of factors such as the continuing shift in our revenue mix from domestic sales to more international. International sales increased to approximately 67% of our overall business in fiscal 2009 as compared to approximately 62% in fiscal year 2008. International sales typically have lower gross margins since a greater proportion of that volume is sold through distributors as compared to domestic sales which are primarily sold through our direct sales force. Average selling price of our units have decreased from year to year as a result of the economic situation and extreme competitive pressures. The price decrease has ranged from 3% to 5% over the product lines. Our product related services portion of our revenue increased to 35% of our overall revenue in the current fiscal year as compared to 33% in fiscal year 2008. The product-related services typically carry a lower gross profit than our product revenue. We also encountered certain product reliability problems during fiscal year 2009 that resulted in increased service-related costs, thus eroding such margins further. We believe we have identified the causes of these problems and have been implementing the necessary solutions and will continue to do so in future periods.

Research and Development Expense. Research and development spending increased approximately $0.5 million to $10.6 million in fiscal year 2009 as compared to $10.1 million for fiscal year 2008. The slight increase was attributable primarily to the increased amortization expense of approximately $1.0 million related to the write-off of certain R&D-related intangibles, offset by lower expenses in all other areas. As a percentage of revenue, research and development expenses were approximately 9.1% and 6.9% for fiscal years 2009 and 2008, respectively.

Selling, General and Administrative Expense. Selling, general and administrative expense decreased to approximately $51.5 million or 44.2% of revenue during fiscal year 2008 as compared to $68.1 million or 46.4% during fiscal year 2008. Approximately $7.8 million of this $16.6 million is attributable to decreased legal primarily related to the completion of one lawsuit with Palomar and the temporary stay of the other patent litigation. Selling related expenses were down approximately $4.2 million directly related to the lower sales activity. Overall marketing related expenses were down approximately $2.1 million as a result of a cut back on all marketing related programs throughout the world due to the slowdown in the global economy.

Other Income/Expense. Other expense, relating primarily to net exchange losses, was approximately $0.4 million for the fiscal year ended June 27, 2009, as compared to approximately $1.8 million for the same period ended June 28, 2008. The decrease in other expense is primarily due to the recognition of a $1.9 million net loss on the impairment of our holdings of common shares of OccuLogix, Inc. in the comparable fiscal period offset by miscellaneous other income.

The decrease in interest income earned during the fiscal year ended 2009, as compared to the fiscal year ended 2008, relates directly to a decrease in market interest rates combined with an overall decrease in cash and cash equivalents and in marketable securities. Refer to Note 18 of our Consolidated Financial Statements for additional financial information about other income.

Income Taxes. The provision for income taxes results from a combination of activities of both the domestic and foreign subsidiaries. The Company recorded a 39% effective tax rate for the fiscal year ended 2009 compared to a 45% effective tax rate for the fiscal year ended 2008. The provision for income taxes for the year ended June 27, 2009 includes the effect of the changing mix of foreign and

U.S. pre-tax income (loss), the re-instatement of the research and experimentation credit, and other permanent items.

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

Revenue. Revenue for the year ended June 28, 2008 was $146.6 million as compared to $147.8 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 $8.2 million over the prior year and accounted for approximately 62% of total revenue for fiscal 2008 as compared to approximately 56% for fiscal 2007. The increase of $8.2 million was net of an approximate $6.4 million decreases in sales in Latin America, which represents approximately a 58% decrease in sales for that region. Sales in Europe increased approximately 31%, representing a $13.2 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 19% to $42.0 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.

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