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, 2008 as contained in our annual report on Form 10-K filed with the SEC on March 16, 2009. This quarterly report, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout this report, and particularly in this Item 2, the forward-looking statements are based upon our current expectations, estimates and projections and reflect our beliefs and assumptions based upon information available to us at the date of this report. In some cases, you can identify these statements by words such as "may," "might," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue," and other similar terms. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements. These forward-looking statements include, but are not limited to, statements relating to our future financial performance, the ability to grow our business, increase our revenue, manage expenses, generate additional cash, achieve and maintain profitability, develop and commercialize existing and new products and applications, and improve the performance of our worldwide sales and distribution network, and 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. We caution you to not 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 March 31, 2009.

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, from where we conduct our manufacturing, warehousing, research, regulatory, sales, service, marketing and administrative activities. 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 applications, 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 to their system 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 has 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 demand for our products and consumer demand for the applications they offer.

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

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

Our U.S. revenue decreased 49% and our international revenue decreased 12% in the first quarter of 2009, compared to the first quarter of 2008. U.S. revenue decreased 22% and international revenue increased 25% in the first quarter of 2008 from the first quarter of 2007. We believe that the decline in U.S. and international revenue from the first quarter in 2008 to the first quarter in 2009, were primarily attributable to the global recession that is causing our prospective customers to delay their purchase decisions. We also believe that those prospects who do not have established medical offices are finding it more difficult to obtain credit financing. International revenue accounted for 56% of our total revenue for the three months ended March 31, 2009, compared with 43% in the same period in 2008.

Service revenue increased 20% to $3.3 million for the first quarter of 2009, compared to the first quarter of 2008. Service contract amortization is the primary component of our total service revenue. Due to an increasing installed base of customers, our revenue from contract amortization has consistently increased. However, our deferred service revenue balance declined by $1.1 million, to $10.6 million as of March 31, 2009, compared to December 31, 2008. This decline was primarily attributable to: (i) a decrease in unit sales volume in the U.S. that historically included an element of deferred revenue for a service contract beyond our standard warranty terms; (ii) a reconfiguring of our service contract offering which resulted in a reduction of our average service contract pricing in the first quarter of 2009; and (iii) a shift by customers towards purchasing quarterly, rather than annual, service contracts. With the reconfiguring of our service contracts, we expect that in the long term our service amortization will decline, which will be offset by an increase in revenue derived from handpiece sales that were previously included in the service contract amortization.

Our gross margin decreased to 59% in the first quarter of 2009, compared to 62% in the first quarter of 2008. The decrease in gross margin in the first quarter of 2009, compared to the same period in 2008, was due primarily to lower revenue volume that reduced the leverage of our manufacturing and service department expenses, lower average selling prices of our products, partially offset by reduced expenses resulting from improved product reliability.

Our sales and marketing expenses as a percentage of net revenue increased to 49% in the first quarter of 2009, compared to 48% in the first quarter of 2008. In absolute dollars, sales and marketing expenses decreased by $3.3 million to $7.0 million in the first quarter of 2009, compared to same period in 2008. The decrease in total dollars in the first quarter of 2009, compared to the same period in 2008, was primarily caused by reduced personnel expenses in the United States due to lower sales commissions, resulting from lower revenue, and lower headcount.

Our research and development (R&D) expenses as a percentage of net revenue increased to 12% in the first quarter of 2009, compared to 8% in the first quarter of 2008. The increase in expenses as a percentage of net revenue was due primarily to lower revenue in the first quarter of 2009, compared to the same period in 2008. In absolute dollars, R&D expenses remained relatively flat in the first quarter of 2009, compared to the same period in 2008.

Our general and administrative (G&A) expenses as a percentage of net revenue increased to 17% in the first quarter of 2009, compared to 14% in the first quarter of 2008. The increase in expenses as a percentage of net revenue was due primarily to lower revenue in the first quarter of 2009, compared to the same period in 2008. In absolute dollars, G&A expenses decreased by $421,000 to $2.5 million in the first quarter of 2009, compared to the same period in 2008, due primarily to lower personnel and legal expenses.

We are a defendant in a Telephone Consumer Protection Act class action lawsuit. See Part II, Item I - Legal Proceedings below. We have included in our Condensed Consolidated Statement of Operations $850,000 for the estimated cost of the tentative settlement, net of administrative expenses and amounts that may be recoverable from our insurance carrier, of this litigation matter.

In response to the current economic environment, we reduced our company-wide workforce by approximately 12% in April, 2009. This reduction impacted all departments and functions. Due to the timing of this reduction in headcount, and because there are non-recurring charges associated with it, we expect our second quarter operating expenses to be similar to those in the first quarter of 2009. Starting from the third quarter of 2009, we expect our operating expenses to decline, compared to the first quarter of 2009, as we will experience the full impact of our cost cutting measures.

At March 31, 2009, we had recognized deferred tax assets of $11.0 million relating to other temporary differences between the financial reporting and tax bases of assets and liabilities, and tax credit carryforwards. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified and judgment must be used in considering the relative impact of positive and negative evidence. We believe that it is more likely than not that we will be able to generate sufficient future taxable income to realize the carrying value of these deferred tax assets. We review the deferred tax asset and valuation allowance on a quarterly basis and consider whether positive and negative evidence exists to effect the realization of deferred tax assets. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified and judgment must be used in considering the relative impact of positive and negative evidence. Future changes is this evidence could have a significant impact of

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 future performance depends on our ability to compete successfully. Additionally, our future performance is dependent upon 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 execute on the aforementioned initiatives, our business would be adversely affected. A detailed discussion of these and other factors that could impact our future performance are provided in Part II, Item 1A "Risk Factors" section below.

Critical Accounting Policies and Estimates.

The preparation of our Condensed Consolidated Financial Statements and related disclosures in conformity with generally accepted accounting principles in the United States, or GAAP, requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates, judgments and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. We periodically review our estimates and make adjustments when facts and circumstances dictate. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. Critical accounting estimates, as defined by the Securities and Exchange Commission (SEC), are those that are most important to the portrayal of our financial condition and results of operations and require our management's most difficult and subjective judgments and estimates of matters that are inherently uncertain. The accounting policies that we consider to be critical, subjective, and requiring judgment 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, 2008 filed with SEC on March 16, 2009. There have been no significant changes to the accounting policies and estimates disclosed in our Form 10-K.

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 1 "Summary of Significant Accounting Policies - Recent Accounting Pronouncement" in the Notes to Condensed Consolidated Financial Statements in Part I, Item I 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 total revenue.



                                                Three Months Ended
                                                     March 31,
                                               2009            2008
             Operating Ratio:
             Net revenue                          100 %           100 %
             Cost of revenue                       41 %            38 %

             Gross profit                          59 %            62 %

             Operating expenses:
             Sales and marketing                   49 %            48 %
             Research and development              12 %             8 %
             General and administrative            17 %            14 %
             Litigation settlement                  6 %            -  %

             Total operating expenses              84 %            70 %

             Loss from operations                 (25 )%           (8 )%
             Interest and other income, net         4 %             4 %

             Loss before income taxes             (21 )%           (4 )%
             Benefit from income taxes             (8 )%           (1 )%

             Net loss                             (13 )%           (3 )%