Cutera

CUTERA, INC.
2009 PROXY STATEMENT & 2008 ANNUAL REPORT

Dear Stockholders,

2008 was a challenging year for our industry, as the global recession continued to affect customer purchasing
decisions. Despite the impact of this economic downturn, we continued our history of introducing innovative
products and technologies, increased our international business, generated $4 million in operating cash and ended
the year with $106.8 million, or approximately $8.34 per outstanding share, in cash and marketable securities,
with no debt.

In the second half of 2008, we introduced our latest product, Pearl Fractional, as part of a multi-application
system to new customers and as an upgrade to our installed base. Pearl Fractional uses proprietary YSGG
technology and is designed to treat wrinkles and deep dermal imperfections by removing damaged tissue and
producing new collagen, with minimal patient downtime. Our clinical results with this new product are
continuing to exceed our expectations, and we remain excited about the opportunities that it presents to
practitioners and their patients.

Our international revenue in 2008 grew by 11%, with success coming from many of our overseas markets,
including Australia and Japan. Throughout the year, we focused on building global brand recognition by
increasing sales and marketing activities, adding new sales- and service people to our international subsidiaries,
appointing new distributors in expansion territories, and obtaining regulatory clearance to market our new Pearl
Fractional product in many of our overseas markets.

Even through these uncertain economic times, Cutera has maintained its position as a leading provider of lasers
and light-based aesthetic equipment. While the near term prospects for our industry are difficult to predict, we
believe that our worldwide distribution network, solid cash position, diverse portfolio of products, and various
research and development projects underway will offer continuing, long-term growth opportunities for our
company. On behalf of Cutera’s Board of Directors and executive team, I would like to thank our stockholders,
employees and customers for their continuing confidence, loyalty and support.

Sincerely,

Kevin Connors
President and Chief Executive Officer

NOTICE OF
2009 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 20, 2009
10:00 A.M. Pacific Time

To our Stockholders:

You are cordially invited to attend the 2009 Annual Meeting of Stockholders of Cutera, Inc. (the “Company”). The
meeting will be held at our principal executive offices located at 3240 Bayshore Blvd., Brisbane, California 94005-1021 on
May 20, 2009 at 10:00 a.m. Pacific Time, for the following purposes:

1.

2.
3.

4.

5.

To elect two Class II directors to each serve for a three-year term that expires at the 2012 Annual Meeting of
Stockholders and until their successors have been duly elected and qualified;
To approve the Option Exchange Program for our employees;
To approve the Option Exchange Program for our Executive Officers and the independent members of our
Board of Directors;
To ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm
(the “Independent Registered Public Accounting Firm”) for the fiscal year ending December 31, 2009; and
To transact such other business as may properly come before the Annual Meeting, including any motion to
adjourn to a later date to permit further solicitation of proxies, if necessary, or before any adjournment thereof.

The foregoing items of business are more fully described in the proxy statement accompanying this Notice of Annual

Meeting.

To help conserve resources and reduce printing and distribution costs, we will be mailing a notice to our stockholders,
instead of a paper copy of this proxy statement and our 2008 Annual Report, with instructions on how to access our proxy
materials over the Internet, including this proxy statement, our 2008 Annual Report and a form of proxy card or voting
instruction card. The notice will also contain instructions on how each of those stockholders can receive a paper copy of our
proxy materials.

The meeting will begin promptly at 10:00 a.m., local time, and check-in will begin at 9:30 a.m., local time. Only holders
of record of shares of our common stock (NASDAQ: CUTR) at the close of business on March 24, 2009 will be entitled to
notice of, and to vote at, the meeting and any postponements or adjournments of the meeting.

For a period of at least 10 days prior to the meeting, a complete list of stockholders entitled to vote at the meeting will
be available and open to the examination of any stockholder for any purpose relating to the Annual Meeting during normal
business hours at our principal executive offices located at 3240 Bayshore Blvd., Brisbane, California 94005-1021.

By order of the Board of Directors,

Brisbane, California
March 30, 2009

Kevin P. Connors
President and Chief Executive Officer

YOUR VOTE IS IMPORTANT!

REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY VOTE BY
TELEPHONE, OR IF AVAILABLE, ELECTRONICALLY, OR, IF YOU RECEIVED PER YOUR REQUEST A
PAPER COPY OF OUR PROXY MATERIALS, COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED
PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE. NO ADDITIONAL POSTAGE IS
NECESSARY IF THE PROXY CARD IS MAILED IN THE UNITED STATES OR CANADA. YOU MAY REVOKE
YOUR PROXY AT ANY TIME BEFORE IT IS VOTED AT THE MEETING.

TABLE OF CONTENTS

QUESTIONS AND ANSWERS REGARDING THIS SOLICITATION AND VOTING AT THE

ANNUAL MEETING

Why am I receiving these proxy materials? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Why did I receive a notice in the mail regarding the Internet availability of the proxy materials

instead of a paper copy of the proxy materials? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What is the purpose of the Annual Meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Who is entitled to attend the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Who is entitled to vote at the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How many shares must be present or represented to conduct business at the meeting (that is, what

constitutes a quorum)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What items of business will be voted on at the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How does the Board recommend that I vote? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What shares can I vote at the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What is the difference between holding shares as a stockholder of record and as a beneficial

owner? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How can I vote my shares without attending the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How can I vote my shares in person at the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Can I change my vote? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Is my vote confidential? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What vote is required to approve each item and how are votes counted? . . . . . . . . . . . . . . . . . . . . . . . .
What is a “broker non-vote”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How are “broker non-votes” counted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How are abstentions counted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What happens if additional matters are presented at the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Who will serve as inspector of election? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What should I do in the event that I receive more than one set of proxy/voting materials? . . . . . . . . . .
Who is soliciting my vote and who will bear the costs of this solicitation? . . . . . . . . . . . . . . . . . . . . . .
Where can I find the voting results of the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What is the deadline to propose actions for consideration at next year’s Annual Meeting of

stockholders or to nominate individuals to serve as directors? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

STOCK OWNERSHIP

Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 16(a) Beneficial Ownership Reporting Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CORPORATE GOVERNANCE AND BOARD MATTERS

Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Committees of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Meetings Attended by Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Nomination Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Family Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications with the Board by Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

REPORT OF THE AUDIT COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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PROPOSAL ONE—ELECTION OF DIRECTORS

Classes of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Directors’ Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors Whose Terms Extend Beyond the 2009 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PROPOSAL TWO AND THREE—APPROVAL OF THE OPTION EXCHANGE PROGRAM FOR
OUR EMPLOYEES, AND FOR OUR EXECUTIVE OFFICERS AND THE INDEPENDENT
MEMBERS OF OUR BOARD OF DIRECTORS

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option Exchange Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Objectives of the Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits of the Option Exchange Program to Eligible Participants . . . . . . . . . . . . . . . . . . . . . . . . . . .
Details of the Option Exchange Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Directors’ Recommendation for Proposal Two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Directors’ Recommendation for Proposal Three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PROPOSAL FOUR—RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

Board of Directors’ Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit and Non-Audit Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NAMED EXECUTIVE OFFICERS AND EXECUTIVE COMPENSATION

Named Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internal Revenue Code Section 162(m) and Limitations on Executive Compensation . . . . . . . . . . . . . .
Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grants of Plan-Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Incentive Awards Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options Exercised and Stock Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

COMPENSATION COMMITTEE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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PROXY STATEMENT
FOR
2009 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 20, 2009

The Board of Directors of Cutera, Inc., a Delaware corporation, is soliciting the enclosed proxy from you. The
proxy will be used at our 2009 Annual Meeting of Stockholders to be held on Tuesday, May 20, 2009, beginning at
10:00 a.m., Pacific Time, which is the local time, at our principal executive offices located at 3240 Bayshore Blvd.,
Brisbane, California 94005-1021, and at any postponements or adjournments thereof. This proxy statement contains
important information regarding the meeting. Specifically, it identifies the matters upon which you are being asked
to vote, provides information that you may find useful in determining how to vote and describes the voting
procedures.

In this proxy statement: the terms “we”, “our”, “Cutera” and the “Company” each refer to Cutera, Inc.; the
term “Board” means our Board of Directors; the term “proxy materials” means this proxy statement, the
enclosed proxy card, and our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the
U.S. Securities and Exchange Commission (the “SEC”) on March 16, 2009; and the term “Annual Meeting”
means our 2009 Annual Meeting of Stockholders.

We are sending the Notice of Internet Availability of Proxy Materials on or about April 6, 2009, to all

stockholders of record at the close of business on March 24, 2009 (the “Record Date”).

QUESTIONS AND ANSWERS REGARDING THIS SOLICITATION
AND VOTING AT THE ANNUAL MEETING

Why am I receiving these
proxy materials?

Why did I receive a notice in
the mail regarding the
Internet availability of the
proxy materials instead of a
paper copy of the proxy
materials?

You are receiving these proxy materials from us because you were a
stockholder of record at the close of business on the Record Date (which was
March 24, 2009). As a stockholder of record, you are invited to attend the
meeting and are entitled to and requested to vote on the items of business
described in this proxy statement.

Pursuant
to SEC rules, we have elected to provide access to our proxy
materials over the Internet. Accordingly, we are sending a Notice of Internet
Availability of Proxy Materials (the “Notice”) to our stockholders.

All stockholders will have the ability to access the proxy materials on a
website referred to in the Notice or request to receive a printed set of the proxy
materials. Instructions on how to access the proxy materials over the Internet
or to request a printed copy may be found on the Notice.

In addition, stockholders may request to receive proxy materials in printed
form by mail or electronically by email on an ongoing basis. Choosing to
receive your future proxy materials by email will save us the cost of printing
and mailing documents to you and will reduce the impact of our annual
stockholders’ meetings on the environment. If you chose in connection with
our 2008 Annual Meeting of Stockholders to receive future proxy materials by
email, you should receive an email this year with instructions containing a link
to those materials and a link to the proxy voting site. In connection with our

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What is the purpose of the
Annual Meeting?

upcoming Annual Meeting, if you choose to receive future proxy materials by
email, you will receive an email next year with instructions containing a link to
those materials and a link to the proxy voting site. Your election to receive
proxy materials by email will remain in effect until you terminate it.

At our meeting, stockholders of record will vote upon the items of business
outlined in the notice of meeting (on the cover page of this proxy statement),
each of which is described more fully in this proxy statement. In addition,
management will report on the performance of the Company and respond to
questions from stockholders.

Who is entitled to attend the
meeting?

You are entitled to attend the meeting only if you owned our common stock (or
were a joint holder) as of the Record Date or if you hold a valid proxy for the
meeting. You should be prepared to present photo identification for admittance.

Please also note that if you are not a stockholder of record but hold shares in
street name (that is, through a broker or nominee), you will need to provide
proof of beneficial ownership as of the Record Date, such as your most recent
brokerage account statement, a copy of the voting instruction card provided by
your broker, trustee or nominee, or other similar evidence of ownership.

The meeting will begin promptly at 10:00 a.m., local time. Check-in will begin
at 9:30 a.m., local time.

Who is entitled to vote at the
meeting?

Only stockholders who owned our common stock at the close of business on
the Record Date are entitled to notice of and to vote at the meeting, and at any
postponements or adjournments thereof.

How many shares must be
present or represented to
conduct business at the
meeting (that is, what
constitutes a quorum)?

What items of business will be
voted on at the meeting?

As of the Record Date, 13,287,768 shares of our common stock were
outstanding. Each outstanding share of our common stock entitles the holder to
one vote on each matter considered at the meeting. Accordingly, there are a
maximum of 13,287,768 votes that may be cast at the meeting.

The presence at the meeting, in person or by proxy, of the holders of a majority
of the shares of our common stock entitled to vote at the meeting will
constitute a quorum. A quorum is required to conduct business at the meeting.
The presence of the holders of our common stock representing at
least
6,643,885 votes will be required to establish a quorum at the meeting. Both
abstentions and broker non-votes are counted for the purpose of determining
the presence of a quorum.

The items of business scheduled to be voted on at the meeting are as follows:

1.

2.

3.

4.

the election of two nominees to serve as Class II directors on our
Board;

the approval of the Option Exchange Program for our employees;

the approval of the Option Exchange Program of our Executive
Officers and the independent members of our Board of Directors;
and,

the ratification of the appointment of PricewaterhouseCoopers LLP
as our Independent Registered Public Accounting Firm for the 2009
fiscal year.

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How does the Board
recommend that I vote?

These proposals are described more fully below in this proxy statement. As of
the date of this proxy statement, the only business that our Board intends to
present or knows of that others will present at the meeting is as set forth in this
proxy statement. If any other matter or matters are properly brought before the
meeting, it is the intention of the persons who hold proxies to vote the shares
they represent in accordance with their best judgment.

Our Board recommends that you vote your shares “FOR” each of the director
nominees, “FOR” the approval of the Option Exchange Program for our
employees, “FOR” the approval of the Option Exchange Program for our
Executive Officers and the independent members of our Board of Directors,
and “FOR”
ratification of PricewaterhouseCoopers LLP as our
Independent Registered Public Accounting Firm for the 2009 fiscal year.

the

What shares can I vote at the
meeting?

You may vote all shares owned by you as of the Record Date, including
(1) shares held directly in your name as the stockholder of record, and
(2) shares held for you as the beneficial owner through a broker, trustee or
other nominee such as a bank.

What is the difference
between holding shares as a
stockholder of record and as a
beneficial owner?

How can I vote my shares
without attending the
meeting?

Most of our stockholders hold their shares through a broker or other nominee
rather than directly in their own name. As summarized below, there are some
distinctions between shares held of record and those owned beneficially.

Stockholders of Record. If your shares are registered directly in your
name with our transfer agent, Computershare Trust Company, Inc., you
are considered, with respect to those shares, the stockholder of record,
and these proxy materials are being sent directly to you by us. As the
stockholder of record, you have the right to grant your voting proxy
directly to Cutera or to vote in person at the meeting. We have enclosed a
proxy card for your use.

Beneficial Owner. If your shares are held in a brokerage account or by
another nominee, you are considered the beneficial owner of shares held
in street name, and these proxy materials are being forwarded to you
together with a voting instruction card. As the beneficial owner, you have
the right to direct your broker, trustee or nominee how to vote and are
also invited to attend the meeting. Please note that since a beneficial
owner is not the stockholder of record, you may not vote these shares in
person at the meeting unless you obtain a “legal proxy” from the broker,
trustee or nominee that holds your shares, giving you the right to vote the
shares at the meeting. Your broker, trustee or nominee has enclosed or
provided voting instructions for you to use in directing the broker, trustee
or nominee how to vote your shares.

Whether you hold shares directly as the stockholder of record or beneficially in
street name, you may direct how your shares are voted without attending the
meeting. Stockholders of record of our common stock may submit proxies by
completing, signing and dating their proxy cards and mailing them in the
accompanying pre-addressed envelope. Our stockholders who hold shares
beneficially in street name may vote by mail by completing, signing and dating
the voting instruction cards provided by the broker, trustee or nominee and
mailing them in the accompanying pre-addressed envelope.

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How can I vote my shares in
person at the meeting?

Can I change my vote?

Is my vote confidential?

What vote is required to
approve each item and how
are votes counted?

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Shares held in your name as the stockholder of record may be voted in person
at the meeting. Shares held beneficially in street name may be voted in person
only if you obtain a legal proxy from the broker, trustee or nominee that holds
your shares giving you the right to vote the shares. Even if you plan to attend
the meeting, we recommend that you also submit your proxy card or voting
instructions as described above so that your vote will be counted if you later
decide not to, or are unable to, attend the meeting.

You may change your vote at any time prior to the vote at the meeting. If you
are the stockholder of record, you may change your vote by granting a new
proxy bearing a later date (which automatically revokes the earlier proxy), by
providing a written notice of revocation to our Secretary prior to your shares
being voted, or by attending the meeting and voting in person. Attendance at
the meeting will not cause your previously granted proxy to be revoked unless
you specifically so request.

For shares you hold beneficially in street name, you may change your vote by
submitting new voting instructions to your broker, trustee or nominee, or, if you
have obtained a legal proxy from your broker, trustee or nominee giving you the
right to vote your shares, by attending the meeting and voting in person.

identify individual
Proxy instructions, ballots and voting tabulations that
stockholders are handled in a manner that protects your voting privacy. Your
vote will not be disclosed either within Cutera or to third parties, except: (1) as
necessary to meet applicable legal requirements, (2) to allow for the tabulation
of votes and certification of the vote, and (3) to facilitate a successful proxy
solicitation. Occasionally, stockholders provide written comments on their
proxy card, which are then forwarded to our management.

The vote required to approve each item of business and the method for
counting votes is set forth below:

Election of Directors. The two director nominees receiving the highest
number of affirmative “FOR” votes at the meeting (a plurality of votes
cast) will be elected to serve as Class II directors. You may vote either
“FOR” or “WITHHOLD” your vote for the director nominees. A properly
executed proxy marked “WITHHOLD” with respect to the election of one
or more directors will not be voted with respect to the director or directors
indicated, although it will be counted for purposes of determining whether
there is a quorum.

Approval of the Option Exchange Program for our employees. For the
the
approval of the Option Exchange Program for our employees,
affirmative “FOR” vote of a majority of the shares represented in person
or by proxy and entitled to vote on the item will be required for approval.
You may vote “FOR,” “AGAINST” or “ABSTAIN” for this item of
business. If you “ABSTAIN,” your abstention has the same effect as a
vote “AGAINST.”

Approval of
the Option Exchange Program for our Executive
Officers and the independent members of our Board of Directors. For
the approval of the Option Exchange Program for our Executive Officers
and the independent members of our Board of Directors, the affirmative
“FOR” vote of a majority of the shares represented in person or by proxy

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and entitled to vote on the item will be required for approval. You may
vote “FOR,” “AGAINST” or “ABSTAIN” for this item of business. If
you “ABSTAIN,” your abstention has the same effect as a vote
“AGAINST.”

Ratification of PricewaterhouseCoopers LLP as our Independent
Registered Public Accounting Firm. For
the
appointment of our Independent Registered Public Accounting Firm, the
affirmative “FOR” vote of a majority of the shares represented in person
or by proxy and entitled to vote on the item will be required for approval.
You may vote “FOR,” “AGAINST” or “ABSTAIN” for this item of
business. If you “ABSTAIN,” your abstention has the same effect as a
vote “AGAINST.”

the ratification of

If you provide specific instructions with regard to certain items, your shares will
be voted as you instruct on such items. If you sign your proxy card or voting
instruction card without giving specific instructions, your shares will be voted in
the
accordance with the recommendations of
Company’s nominees to the Board, “FOR” approval of the Option Exchange
Program for our employees, “FOR” approval of the Option Exchange Program
for our Executive Officers and the independent members of our Board of
ratification of PricewaterhouseCoopers LLP as our
Directors,
Independent Registered Public Accounting Firm, and in the discretion of the
proxy holders on any other matters that may properly come before the meeting).

the Board (“FOR” all of

“FOR”

What is a “broker
non-vote”?

Under the rules that govern brokers who have record ownership of shares that
are held in street name for their clients who are the beneficial owners of the
shares, brokers have the discretion to vote such shares on routine matters. The
election of directors and the ratification of the appointment of an independent
registered public accounting firm are considered routine matters. Therefore, if
you do not otherwise instruct your broker, the broker may turn in a proxy card
voting your shares “FOR” all of the Company’s nominees to the Board and
“FOR” ratification of the Independent Registered Public Accounting Firm. A
“broker non-vote” occurs when a broker expressly instructs on a proxy card
that it is not voting on a matter, whether routine or non-routine.

How are “broker non-votes”
counted?

Broker non-votes will be counted for the purpose of determining the presence
or absence of a quorum for the transaction of business, but they will not be
counted in tabulating the voting result for any particular proposal.

How are abstentions
counted?

What happens if additional
matters are presented at the
meeting?

If you return a proxy card that indicates an abstention from voting on all
matters, the shares represented will be counted for the purpose of determining
both the presence of a quorum and the total number of votes cast with respect
to a proposal (other than the election of directors), but they will not be voted
on any matter at the meeting. In the absence of controlling precedent to the
contrary, we intend to treat abstentions in this manner. Accordingly,
abstentions will have the same effect as a vote “AGAINST” a proposal.

Other than the three proposals described in this proxy statement, we are not
aware of any other business to be acted upon at the meeting. If you grant a
proxy, the persons named as proxy holders, Kevin P. Connors (our President,
Chief Executive Officer and member of our Board) and Ronald J. Santilli (our
Chief Financial Officer), will have the discretion to vote your shares on any
additional matters that may be properly presented for a vote at the meeting. If,

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for any unforeseen reason, any of our nominees is not available as a candidate
for director, the persons named as proxy holders will vote your proxy for such
other candidate or candidates as may be nominated by our Board.

Who will serve as inspector
of election?

We expect a representative of Computershare Trust Company, Inc., our
transfer agent, to tabulate the votes, and expect our General Counsel to act as
inspector of election at the meeting.

What should I do in the
event that I receive more
than one set of proxy/voting
materials?

Who is soliciting my vote
and who will bear the costs
of this solicitation?

You may receive more than one set of these proxy solicitation materials,
including multiple copies of this proxy statement and multiple proxy cards or
voting instruction cards. For example, if you hold your shares in more than one
brokerage account, you may receive a separate voting instruction card for each
brokerage account
in which you hold shares. In addition, If you are a
stockholder of record and your shares are registered in more than one name,
you may receive more than one proxy card. Please complete, sign, date and
return each Cutera proxy card and voting instruction card that you receive to
ensure that all your shares are voted.

Your vote is being solicited on behalf of the Board, and the Company will bear
the entire cost of solicitation of proxies, including preparation, assembly,
printing and mailing of this proxy statement. In addition to these mailed proxy
materials, our directors and employees may also solicit proxies in person, by
telephone, by electronic mail or by other means of communication. Directors
and employees will not be paid any additional compensation for soliciting
proxies. We may reimburse brokerage firms, banks and other agents for the
cost of forwarding proxy materials to beneficial owners. We may also engage
the services of a professional proxy solicitation firm to aid in the solicitation of
proxies from certain brokers, bank nominees and other institutional owners.
Our costs for such services, if retained, will not be material.

Where can I find the voting
results of the meeting?

We intend to announce preliminary voting results at the meeting and publish
final results in our quarterly report on Form 10-Q for the second quarter of
fiscal 2009.

What is the deadline to
propose actions for
consideration at next year’s
Annual Meeting of
Stockholders or to nominate
individuals to serve as
directors?

As a stockholder, you may be entitled to present proposals for action at a
future meeting of stockholders, including director nominations.

Stockholder Proposals: For a stockholder proposal to be considered for
inclusion in our proxy statement for the Annual Meeting to be held in
2010, the written proposal must be received by our corporate Secretary at
our principal executive offices no later than December 6, 2009, which is
the date 120 calendar days before the anniversary of the mailing date of
the Notice of Internet Availability of Proxy Materials. If the date of next
year’s Annual Meeting is moved more than 30 days before or after the
anniversary date of this year’s Annual Meeting, the deadline for inclusion
of proposals in our proxy statement is instead a reasonable time before we
begin to print and mail its proxy materials. Such proposals also must
comply with the requirements of Rule 14a-8 of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), and any other applicable
rules established by the SEC. Stockholders interested in submitting such a
proposal are advised to contact knowledgeable legal counsel with regard

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to the detailed requirements of applicable securities laws. Proposals
should be addressed to:

Secretary
Cutera, Inc.
3240 Bayshore Blvd.
Brisbane, California 94005-1021

Nomination of Director Candidates: You may propose director
candidates for consideration by our Board. Any such recommendations
should include the nominee’s name and qualifications for Board
membership and should be directed to the “Secretary” at the address of
our principal executive offices set forth above. In addition, our Bylaws
permit stockholders to nominate directors for election at an Annual
Meeting of stockholders. To nominate a director, the stockholder must
provide the information required by our Bylaws, as well as a statement by
the nominee consenting to being named as a nominee and to serve as a
director if elected. In addition, the stockholder must give timely notice to
our corporate Secretary in accordance with the provisions of our Bylaws,
which require that the notice be received by our corporate Secretary no
later than December 6, 2009.

Copy of Bylaw Provisions: You may contact our corporate Secretary at
our principal executive offices for a copy of the relevant bylaw provisions
regarding the requirements
for making stockholder proposals and
nominating director candidates.

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STOCK OWNERSHIP

Security Ownership of Certain Beneficial Owners and Management

The following table provides information relating to the beneficial ownership of our common stock as of the

Record Date, by:

•

•

•

•

each stockholder known by us to own beneficially more than 5% of our common stock;

each of our Named Executive Officers named in the Summary Compensation Table on page 32 (our
Chief Executive Officer, our Chief Financial Officer, and our former Executive Vice President of
Research and Development);

each of our directors; and

all of our directors and Named Executive Officers as a group.

The number of shares beneficially owned by each entity, person, director or executive officer is determined
in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership
for any other purpose. Under such rules, beneficial ownership includes any shares over which the individual has
the sole or shared voting power or investment power and any shares that the individual has the right to acquire
within 60 days of March 24, 2009 (the Record Date) through the exercise of any stock option or other right. The
number and percentage of shares beneficially owned is computed on the basis of 13,287,768 shares of our
common stock outstanding as of the Record Date. The information in the following table regarding the beneficial
owners of more than 5% of our common stock is based upon information supplied by principal stockholders or
Schedules 13D and 13G filed with the SEC.

Shares of our common stock that a person has the right to acquire within 60 days of the Record Date are
deemed outstanding for purposes of computing the percentage ownership of the person holding such rights, but
are not deemed outstanding for purposes of computing the percentage ownership of any other person, except with
respect to the percentage ownership of all directors and executive officers as a group. To our knowledge, except
as set forth in the footnotes to this table and subject to applicable community property laws, each person or entity
named in the table has sole voting and disposition power with respect to the shares set forth opposite such
person’s or entity’s name. The address for those persons for which an address is not otherwise provided is c/o
Cutera, Inc., 3240 Bayshore Blvd., Brisbane, California 94005-1021.

Name and Address of Beneficial Owner

Number of
Shares
Outstanding

Warrants and
Options
Exercisable
Within 60 Days

Approximate
Percent
Owned

Eagle Asset Management, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Putnam, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paradigm Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Renaissance Technologies LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Entities affiliated with American Century Companies, Inc. . . . . . . . . .
Entities affiliated with GAMCO Investors, Inc. . . . . . . . . . . . . . . . . . .
Annette J. Campbell-White . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David B. Apfelberg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kevin P. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David A. Gollnick . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
W. Mark Lortz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jerry P. Widman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Timothy J. O’Shea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ronald J. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All directors and Named Executive Officers as a group (8 persons) . .

1,855,127
1,288,031
899,465
739,707
677,200
639,100
56,774
20,000
478,154
175,812
2,285
—
—
9,466
742,491

—
—
—
—
—

45,000
35,000
181,979
41,126
45,000
45,000
25,000
98,876
516,981

14%
10%
7%
6%
5%
5%
1%
*
5%
2%
*
*
*
1%
9%

*

Less than 1%.

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors, officers and beneficial owners of more than 10%
of our common stock to file reports of ownership and reports of changes in the ownership with the SEC. Such
persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

Based solely on our review of the copies of such forms received by us, or written representations from
reporting persons that no Forms 3, 4 or 5 were required of such persons, we believe that during our fiscal year
ended December 31, 2008, all reports were timely filed, with the exceptions noted herein. A late Form 4 report
was filed on May 27, 2008 for each of Kevin P. Connors, Ronald J. Santilli and David A. Gollnick to report the
shares of our common stock withheld by the Company to settle each such person’s minimum tax liability on
restricted stock units of our common stock that vested in June 2006 and June 2007.

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CORPORATE GOVERNANCE AND BOARD MATTERS

Director Independence

Our Board currently consists of seven directors, with one vacancy. The Company’s directors are Kevin P.
Connors, David A. Gollnick, Timothy J. O’Shea, David B. Apfelberg, W. Mark Lortz, Jerry P. Widman, and
Annette J. Campbell-White. Our Board has determined that each of the directors other than Kevin P. Connors,
the Company’s President and Chief Executive Officer, and David A. Gollnick, the Company’s former Executive
Vice President of Research and Development, satisfy the current “independent director” standards established by
rules of The NASDAQ Stock Market LLC (“Nasdaq”).

Committees of the Board

Our Board has two standing committees: the Audit Committee and the Compensation Committee. From
time to time, our Board may also create various ad hoc committees for special purposes. The membership during
the last fiscal year and the function of each of the committees are described below.

Name of Director

Audit
Committee

Compensation
Committee

Non-Employee Directors:
Jerry P. Widman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Timothy J. O’Shea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
W. Mark Lortz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David B. Apfelberg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annette J. Campbell-White . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

X*
X
X

X

X*
X

Employee Directors:
Kevin P. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David A. Gollnick** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of Meetings Held During the Last Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . .

6

2

X = Committee member
* = Chairman of Committee
** = Mr. Gollnick resigned from the position of Executive Vice President of Research and Development effective

March 20, 2009 and continues to be a member of our Board of Directors.

Audit Committee. The Audit Committee oversees the Company’s accounting and financial reporting
processes and the audits of its financial statements. In this role, the Audit Committee monitors and oversees the
integrity of the Company’s financial statements and related disclosures, the qualifications, independence, and
performance of the Company’s Independent Registered Public Accounting Firm, and the Company’s compliance
with applicable legal requirements and its business conduct policies. Our Board has determined that each
member of the Audit Committee meets the independence and financial literacy requirements of the Nasdaq rules
and the independence requirements of the SEC. Our Board has determined that Jerry P. Widman continues to
qualify as an “audit committee financial expert,” as defined in SEC rules. The Audit Committee has a written
charter, which was adopted by our Board in January 2004, a copy of which can be found on our website at
www.cutera.com. The report of the Audit Committee appears on page 14 of this proxy statement.

Compensation Committee. The Compensation Committee,

together with the Board, establishes
compensation for the Chief Executive Officer and the other executive officers and administers the Company’s
2004 Equity Incentive Plan (as amended in 2008) and 2004 Employee Stock Purchase Plan. The Compensation
Committee has a written charter, which was adopted by our Board in January 2004, and amended on April 13,
2007 and on April 25, 2008, and can be found on our website.

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Meetings Attended by Directors

During 2008, the Board held nine meetings, the Audit Committee held six meetings and the Compensation
Committee held two meetings. No director attended fewer than 75% of the meetings of the Board or committee(s)
on which he or she served during 2008, except for Mark Lortz who attended 67% of the Board meetings in 2008.

The directors of the Company are encouraged to attend the Company’s Annual Meeting of Stockholders,
and directors Kevin P. Connors and David A. Gollnick attended the meeting in 2008 in person, and directors
David B. Apfelberg, Timothy J. O’Shea and Jerry Widman attended that meeting telephonically. No other board
members attended that meeting, in person or telephonically.

Director Nomination Process

Nominations. Our Board does not currently have a nominating committee or other committee performing a
similar function nor do we have any formal written policies outlining the factors and process relating to the selection
of nominees for consideration for Board membership by the full Board and the stockholders. Our Board has adopted
resolutions in accordance with the Nasdaq Marketplace Rules authorizing a majority of its independent members to
recommend qualified nominees for consideration by the full Board. Our Board believes that it is appropriate for us
to not have a standing nominating committee because of a number of factors, including the number of independent
directors who want to participate in consideration of candidates for membership on the Board. Our Board consists of
seven members, five of whom are independent. Our Board considered forming a nominating committee consisting
of several of the independent members of our Board. Forming a committee consisting of less than all of the
independent members was unattractive because it would have omitted the other independent members of our Board
who wanted to participate in considering qualified candidates for Board membership. Since our Board desired the
participation in the nominations process of all of its independent members, it therefore decided not to form a
nominating committee and instead authorized a majority of the independent members of our Board to make and
consider nominations for Board membership. The independent members of our Board do not have a nominating
committee charter, but act pursuant to Board resolutions as described above. Each of the members of our Board
authorized to recommend nominees to the full Board is independent within the meaning of the current “independent
director” standards established by Nasdaq’s rules. Our Board intends to review this matter periodically, and may in
the future elect to designate a formal nominating committee.

Director Qualifications. While the independent members of our Board have not established specific
minimum qualifications for director candidates, the candidates for Board membership should have the highest
professional and personal ethics and values, and conduct themselves consistent with our Code of Ethics. While
the independent members of the Board have not formalized specific minimum qualifications they believe must be
met by a candidate to be recommended by the independent members, the independent members of the Board
believe that candidates and nominees must reflect a Board that is comprised of directors who (i) have broad and
relevant experience, (ii) are predominantly independent, (iii) are of high integrity, (iv) have qualifications that
will
increase overall Board effectiveness and enhance long-term stockholder value, and (v) meet other
requirements as may be required by applicable rules, such as financial literacy or financial expertise with respect
to Audit Committee members.

Stockholder Nominations and Recommendations. As described above in the Question and Answer section of
this proxy statement under “What is the deadline to propose actions for consideration at next year’s Annual
Meeting of Stockholders or to nominate individuals to serve as directors?,” our Bylaws set forth the procedure
for the proper submission of stockholder nominations for membership on our Board. In addition, the independent
members of our Board may consider properly submitted stockholder recommendations (as opposed to formal
nominations) for candidates for membership on the Board. A stockholder may make such a recommendation by
submitting the following information to our Secretary at 3240 Bayshore Blvd., Brisbane, California 94005-1021:
the candidate’s name, home and business contact information, detailed biographical data, relevant qualifications,
professional and personal references, information regarding any relationships between the candidate and Cutera
within the last three years and evidence of ownership of Cutera stock by the recommending stockholder.

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Identifying and Evaluating Director Nominees. Typically new candidates for nomination to the Board are
suggested by existing directors or by our executive officers, although candidates may initially come to our
attention through professional search firms, stockholders or other persons. The independent members of the
Board shall carefully review the qualifications of any candidates who have been properly brought to its attention.
Such a review may, in the Board’s discretion, include a review solely of information provided to the Board or
may also include discussion with persons familiar with the candidate, an interview with the candidate or other
actions that the Board deems proper. The Board shall consider the suitability of each candidate, including the
current members of the Board, in light of the current size and composition of the Board. In evaluating the
qualifications of the candidates, the independent members of the Board considers many factors, including, issues
of character,
length of service, and other
commitments. The Board evaluates such factors, among others, and does not assign any particular weighting or
priority to any of these factors. Candidates properly recommended by stockholders are evaluated by the
independent directors using the same criteria as other candidates.

independence, expertise, diversity of experience,

judgment,

Director Compensation

The following table sets forth a summary of the cash compensation and the fair value of stock options

earned by our non-employee directors in the year ended December 31, 2008.

Name

Fees Earned(1)

Option
Awards(2)

Total

Jerry P. Widman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Timothy J. O’Shea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
W. Mark Lortz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David B. Apfelberg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annette J. Campbell-White . . . . . . . . . . . . . . . . . . . . . . . . . . .

$51,000
32,500
32,500
45,000
31,000

$104,264(3) $155,264
136,764
104,264(4)
136,764
104,264(5)
149,264
104,264(6)
135,264
104.264(7)

(1) Amounts were earned in connection with attendance at meetings of our Board and its committees, or

committee Chairman retainers, each as described below.

(2) Amount reflects the total stock-based compensation expense for the year ended December 31, 2008
calculated in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment, or SFAS No. 123(R), using the modified prospective method for unvested awards as of January 1,
2006 and excluding estimates of forfeitures. See Note 5 of the Notes to Financial Statements included in our
Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 16, 2009
for a discussion of the assumptions made in determining the grant date fair value and stock-based
compensation expense of equity awards.

(3) At December 31, 2008, Jerry P. Widman held options to purchase 62,000 shares of common stock.
(4) At December 31, 2008, Timothy J. O’Shea held options to purchase 42,000 shares of common stock.
(5) At December 31, 2008, W. Mark Lortz held options to purchase 62,000 shares of common stock.
(6) At December 31, 2008, David B. Apfelberg held options to purchase 52,000 shares of common stock.
(7) At December 31, 2008, Annette J. Campbell-White held options to purchase 62,000 shares of common stock.

For 2008, our non-employee directors earned an annual retainer of $25,000 for regular board meetings; an
annual retainer of $6,000 for compensation committee meetings; and an annual retainer of $7,500 for audit
committee meetings. Additionally in 2008, the Chairman of the Audit Committee earned an annual $20,000
retainer and the Chairman of the Compensation Committee earned an annual $20,000 retainer.

Our 2004 Equity Incentive Plan provides for the automatic grant of options to our non-employee directors.
Effective from January 1, 2008, each non-employee director who is appointed to the Board will receive an initial
option to purchase 14,000 shares of our common stock upon such appointment, and each non-employee director
who has been a director for at least the preceding six months will receive a subsequent option to purchase 7,000
shares of our common stock immediately following each Annual Meeting of our stockholders. All options
granted under those automatic grant provisions will have an exercise price equal to fair market value on the date

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of grant and a term of seven years. Each option to purchase 14,000 shares will become exercisable as to one-third
of the shares subject to the option on each anniversary of its date of grant, provided the non-employee director
remains a director on such dates. Each option to purchase 7,000 shares will become exercisable as to 100% of the
shares subject to the option on the anniversary of its date of grant, provided the non-employee director remains a
director up to and including such date.

Code of Ethics

We are committed to maintaining the highest standards of business conduct and ethics. Our Code of Ethics,
as amended, (the “Code”) reflects our values and the business practices and principles of behavior that support
this commitment. The Code is intended to satisfy SEC rules for a “code of ethics” required by Section 406 of the
Sarbanes-Oxley Act of 2002, as well as the Nasdaq listing standards requirement for a “code of conduct.” The
Code is an Exhibit to our Form 8-K filed with the SEC on April 27, 2004 and is available on the Company’s
website at www.cutera.com. We will post any amendment to the Code, as well as any waivers that are required to
be disclosed by the rules of the SEC or the Nasdaq, on our website.

Compensation Committee Interlocks and Insider Participation

No member of our Compensation Committee, nor any of our executive officers, has a relationship that
would constitute an interlocking relationship with executive officers or directors of another entity. No
Compensation Committee member is an officer or employee of Cutera.

Certain Relationships and Related Transactions

In the Company’s last fiscal year, and except for compensation paid to its directors and executive officers
for services performed in such roles, and except as provided in the following paragraph, there has not been nor is
there currently proposed any transaction or series of similar transactions to which the Company was or is to be a
party in which the amount involved exceeds $120,000 and in which any director, executive officer, holder of
more than 5% of our common stock or any member of their immediate families had or will have a direct or
indirect material interest.

Family Relationships

John J. Connors, our Vice President of Sales, is the brother of Kevin P. Connors, our President, Chief
Executive Officer and Director. There are no family relationships among any of our directors or executive
officers.

Communications with the Board by Stockholders

Stockholders wishing to communicate with the Board or with an individual Board member concerning the
Company may do so by writing to the Board or to the particular Board member, and mailing the correspondence
to: Attention: Board of Directors, c/o Secretary, Cutera, Inc., 3240 Bayshore Blvd., Brisbane, California 94005-
1021. The envelope should indicate that
it contains a stockholder communication. All such stockholder
communications will be forwarded to the director or directors to whom the communications are addressed.

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REPORT OF THE AUDIT COMMITTEE

The material in this section is not deemed filed with the SEC and is not incorporated by reference in any
filing of our Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date of this Proxy Statement and irrespective of any general incorporation language in those
filings.

The Audit Committee of the Board of Directors is comprised solely of independent directors (as defined by
Nasdaq rules) who were all appointed by the Board of Directors. The Audit Committee operates pursuant to a
written charter adopted by the Board of Directors, a copy of which can be found on our website. The Audit
Committee reviews and assesses the adequacy of its charter on an annual basis. As more fully described in the
charter, the purpose of the Audit Committee is to provide general oversight of Cutera’s financial reporting,
integrity of financial statements, internal controls and internal audit functions. The Audit Committee has
authority to retain outside legal, accounting or other advisors as its deems necessary to carry out its duties and to
require Cutera to pay for such expenditures.

The Audit Committee monitors Cutera’s external audit process,

including the scope, fees, auditor
independence matters and the extent to which the Independent Registered Public Accounting Firm may be
retained to perform non-audit services. The Audit Committee has responsibility for
the appointment,
compensation, retention and oversight of Cutera’s Independent Registered Public Accounting Firm. The Audit
Committee also reviews the results of the external audit work with regard to the adequacy and appropriateness of
Cutera’s financial, accounting and internal controls over financial reporting. In addition, the Audit Committee
generally oversees Cutera’s internal compliance programs. The Audit Committee members are not all
professional accountants or auditors, and their function is not intended to duplicate or to certify the activities of
management and the Independent Registered Public Accounting Firm, nor can the Audit Committee certify that
the Independent Registered Public Accounting Firm is “independent” under applicable rules.

The Audit Committee provides advice, counsel and direction to management and the Independent
Registered Public Accounting Firm on matters for which it is responsible based on the information it receives
from management and the Independent Registered Public Accounting Firm and the experience of its members in
business, financial and accounting matters.

Management is responsible for the preparation and integrity of Cutera’s financial statements, accounting and
financial reporting processes and internal control over financial reporting for compliance with applicable
accounting standards, laws and regulations.

Cutera’s Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP, is responsible for
performing an independent audit of Cutera’s financial statements in accordance with generally accepted auditing
standards and expressing an opinion in its report on those financial statements, and for expressing an opinion on
the effectiveness of Cutera’s internal control over financial reporting.

In this context, the Audit Committee hereby reports as follows:

•

•

•

The Audit Committee has reviewed and discussed the audited financial statements for 2008 with
Cutera’s management.

The Audit Committee has discussed with the Independent Registered Public Accounting Firm the
matters required to be discussed by SAS 61 (Codification of Statements on Auditing Standard, AU 380),
SAS 99 (Consideration of Fraud in a Financial Statement Audit) and SEC rules discussed in Final
Releases Nos. 33-8183 and 33-8183a.

The Audit Committee has received written disclosures and a letter from the Independent Registered
Public Accounting Firm, PricewaterhouseCoopers LLP, pursuant to Rule 3526, Communication with

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Audit Committees Concerning Independence, of the Public Company Accounting Oversight Board
(“PCAOB”), and has discussed with PricewaterhouseCoopers LLP its independence.

The Audit Committee has discussed with the Independent Registered Public Accounting Firm the
overall scope and plans for its audit.

The Audit Committee has met with the Independent Registered Public Accounting Firm, with and
without management present, to discuss the results of its examinations, its evaluations of our internal
control over financial reporting, and to discuss the overall quality of our financial reporting.

The Audit Committee has considered whether the provision by the Independent Registered Public
Accounting Firm of non-audit services is compatible with maintaining its independence.

•

•

•

• Based on the review and discussion referred to above, the Audit Committee has approved that the
audited financial statements and the report of management on internal control over financial reporting
be included in Cutera’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

The foregoing report is provided by the undersigned members of the Audit Committee.

W. Mark Lortz
Timothy J. O’Shea
Jerry P. Widman

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PROPOSAL ONE—ELECTION OF DIRECTORS

Classes of the Board of Directors

Our Amended and Restated Certificate of Incorporation provides that our Board shall be divided into three
classes designated as Class I, Class II and Class III, respectively, with the classes of directors serving for
staggered three-year terms. Our Board currently consists of seven directors, divided among the three classes as
follows: two Class I directors, Kevin P. Connors and David A. Gollnick, whose terms expire at our Annual
Meeting of Stockholder to be held in 2011; two Class II directors, David B. Apfelberg and Timothy J. O’Shea,
whose terms expire at this Annual Meeting; and three Class III directors, Annette J. Campbell-White, W. Mark
Lortz and Jerry P. Widman, whose terms expire at our Annual Meeting of Stockholders to be held in 2010.

The name of each member of the Board, the class in which he or she serves, and his or her age as of the

Record Date, principal occupation and length of service on the Board are as follows:

Name

Class I Directors
Kevin P. Connors . . . . . . . . . . . . . .
David A. Gollnick(1) . . . . . . . . . . . .

Class II Directors
Timothy J. O’Shea(3) . . . . . . . . . . . .
David B. Apfelberg(2) . . . . . . . . . . .

Class III Directors
W. Mark Lortz(3) . . . . . . . . . . . . . . .
Jerry P. Widman(2)(3) . . . . . . . . . . . .
Annette J. Campbell-White(2) . . . . .

Term
Expires Age

Principal Occupation

Director
Since

2011
2011

47
45

President and Chief Executive Officer
Former Executive Vice President of Research and

1998
1998

Development

2009
2009

56 Managing Director, Oxo Capital
67 Clinical Professor of Plastic Surgery, Stanford

2004
1998

University Medical Center

2010
2010
2010

Former Chief Executive Officer, TheraSense, Inc.
Former Chief Financial Officer, Ascension Health

57
66
62 Managing General Partner, MedVenture

2004
2004
1998

Associates I-V

(1) Mr. Gollnick resigned from the position of Executive Vice President of Research and Development effective

March 20, 2009.

(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.

Director Nominees

The Board has nominated David B. Apfelberg and Timothy J. O’Shea for re-election as Class II directors.

David B. Apfelberg, MD has served as a member of our board of directors since November 1998. Since
1980, Dr. Apfelberg has held various roles at the Stanford University Medical Center, and currently serves as a
Clinical Professor of Plastic Surgery. Since 1987, Dr. Apfelberg has also been a consultant for entrepreneurs and
venture capital companies in the areas of medical devices and medicine. From June 1991 to May 2001,
Dr. Apfelberg was Director of the Plastic Surgery Center in Atherton, California. Dr. Apfelberg holds both a
B.M.S., Bachelor of Medical Science, and an M.D. from Northwestern University Medical School.

Timothy J. O’Shea has served as a member of our board of directors since April 2004. Mr. O’Shea has been
with Oxo Capital since 2008 and serves as a managing director. From 1995 to 2008, he served in a variety of
management positions at Boston Scientific, including vice president of business development from 2000 to 2008.
Mr. O’Shea holds a B.A. in history from the University of Detroit.

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If elected to our board of directors, directors David B. Apfelberg and Timothy J. O’Shea would each hold
office as a Class II director until our Annual Meeting of Stockholders to be held in 2012 or until his earlier death,
resignation or removal.

Board of Directors’ Recommendation

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH OF THE TWO

NOMINEES FOR CLASS II DIRECTOR LISTED ABOVE.

Directors Whose Terms Extend Beyond the 2009 Annual Meeting

Annette J. Campbell-White has served as a member of our board of directors since November 1998. Since
May 1986, Ms. Campbell-White has been the Managing General Partner of MedVenture Associates I-V, which
are venture partnerships investing primarily in early stage businesses in the healthcare field. Ms. Campbell-White
currently serves on the boards of a number of privately-held companies. Ms. Campbell-White holds a B.S. in
Chemical Engineering and an M.S. in Chemistry, both from the University of Cape Town, South Africa.

Kevin P. Connors has served as our President and Chief Executive Officer and as a member of our board of
directors since our inception in August 1998. Mr. Connors also currently serves as a member of the board of
directors of the Exploratorium in San Francisco. From May 1996 to June 1998, Mr. Connors served as President
and General Manager of Coherent Medical Group, a unit of Coherent Inc., which manufactures lasers, optics and
related accessories.

David A. Gollnick has served as a member of our Board since our inception in August 1998. He served as
our Vice President of Research and Development from August 1998 until April 2007, and served as our
Executive Vice President of Research and Development from April 2007 until March 2009. From June 1996 to
July 1998, Mr. Gollnick was Vice President of Research and Development at Coherent Medical Group, a unit of
Coherent Inc. Mr. Gollnick holds a B.S. in Mechanical Engineering from Fresno State University.

W. Mark Lortz has served as a member of our board of directors since June 2004. Mr. Lortz served as the
Chairman, President and Chief Executive Officer of TheraSense until June of 2004 after its acquisition by Abbott
Laboratories. Prior to TheraSense, Mr. Lortz held several positions at LifeScan, including Vice President,
Operations and Group Vice President, Worldwide Business Operations. Prior to LifeScan, Mr. Lortz has 18 years
of experience with the General Electric Company in several divisions. Mr. Lortz is a member of the board of
directors of Neurometrix, a publicly-traded manufacturer of neurological diagnostic and therapeutic devices.
Mr. Lortz holds an MBA in Management from Xavier University and a BS in Engineering Science from Iowa
State University.

Jerry P. Widman has served as a member of our board of directors since March 2004. From 1982 to 2001,
Mr. Widman served as the Chief Financial Officer of Ascension Health, a not-for-profit multi-hospital system.
Mr. Widman currently serves as a member of the board of directors of two other privately-held companies in the
healthcare industry. Mr. Widman holds a B.B.A. from Case Western Reserve University, an M.B.A. from the
University of Denver, and a J.D. from Cleveland State University and is a Certified Public Accountant.

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PROPOSALS TWO AND THREE—APPROVAL OF THE OPTION EXCHANGE PROGRAM FOR
OUR EMPLOYEES, AND FOR OUR EXECUTIVE OFFICERS AND THE INDEPENDENT MEMBERS
OF OUR BOARD OF DIRECTORS

BACKGROUND

We have historically granted stock options to our employees, executive officers and independent members
of our Board of Directors as a critical component of their compensation. Stock options were granted to these
persons to encourage them to act as owners, which helps align their interests with those of our stockholders and
reward performance that enhances stockholder value. The objectives of our 2004 Equity Incentive Plan, as
amended (the “2004 Equity Incentive Plan”) are to motivate persons whose long-term service is considered
essential to our continuing progress and to encourage them to continue their service with us.

Our stock price – like that of the majority of other public companies—has declined because of a decline in
general economic conditions. As a result, as of February 25, 2009, approximately 88% of stock options granted
under our 2004 Equity Incentive Plan were underwater (meaning the exercise price of each of those stock options
is greater than the per share fair market value of the Company’s common stock).

This means that the majority of these stock options no longer are effective as incentives to motivate and
retain employees, executive officers and independent members of our Board of Directors. These options are
perceived as having little or no value. In addition, although these stock options are not likely to be exercised as
long as our stock price is lower than the applicable exercise price, we will continue to record stock-based
compensation expense against our earnings. Further, they will remain on our books with the potential to dilute
stockholders’ interests for up to the full term of the options, while delivering little or no retentive or incentive
value, unless they are surrendered or cancelled.

In January 2009, our Board of Directors determined that it would be in the best interests of the Company
and our stockholders to provide for a one-time exchange of stock options that are underwater on the date of
exchange (the “Option Exchange”), and delegated to its Compensation Committee the task of developing a
specific plan. The Compensation Committee approved the detailed terms of the Option Exchange in March 2009,
subject to approval by our stockholders.

If options are exchanged, participants would receive new stock options to purchase fewer shares in
accordance with a specified exchange ratio. Our executive officers and the independent members of our Board of
Directors would be permitted to participate in the Option Exchange only if Proposal Three is approved by our
stockholders. For purposes of this Proposal Three, “executive officers” refers to Kevin P. Connors, our president
and chief executive officer, and Ronald J. Santilli, our executive vice president and chief financial officer.

We have not commenced the Option Exchange and will not do so unless, among other things, our
stockholders approve either Proposal Two (which would limit participation only to eligible employees) and/or
Proposal Three (which would include participation by our executive officers and the independent members of our
Board of Directors). If the Company receives stockholder approval of either Proposal Two and/or Proposal
Three, the Option Exchange may commence at a time determined by our Compensation Committee, with terms
expected to be materially similar to those described in these proposals. However, even if the stockholders
approve Proposal Two and/or Proposal Three, the Compensation Committee may still later determine not to
implement the Option Exchange. It is currently anticipated that the Option Exchange would commence as
promptly as practicable following approval of the applicable proposal(s) by our stockholders; provided, however,
that if the Option Exchange does not commence within six months of stockholder approval, the Company would
not commence the Option Exchange without again seeking and receiving stockholder approval.

If stockholders approve the Option Exchange by approving Proposal Two and/or Proposal Three and if the
Compensation Committee decides to commence the Option Exchange, eligible persons will be offered the
opportunity to participate in the Option Exchange under a Tender Offer Statement to be filed with the SEC and

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distributed to all eligible persons. Participants would be given at least twenty business days to decide whether to
accept the offer of the new options in exchange for the surrender of their eligible options. The surrendered
options would be cancelled on the day that the Option Exchange closes. The new options would be granted on the
date of cancellation of the old options and such new options would have an exercise price equal to the fair market
value of our common stock on the date of the new grant.

OPTION EXCHANGE PROGRAM

As mentioned above, eligible participants would surrender unexercised stock options they currently hold
with an exercise price that is underwater on the date of exchange and is greater than or equal to $9.00, and would
receive new options to replace the surrendered ones. These new options would give the participant the right to
purchase a number of shares that is less than the number of shares available under the surrendered options based
on the exercise price of the surrendered options, in accordance with a specified exchange ratio as further
described below and which would be recalculated as of the date of the Option Exchange. The new options would
be granted on the date of cancellation of the old options and such new options would have an exercise price equal
to the fair market value of our common stock on the new option grant date.

Objectives of the Option Exchange Program

•

•

The Option Exchange would provide renewed incentives and motivate the eligible participants to
contribute to achieving future growth of our stock price. By realigning the exercise prices of previously
granted stock options with the current value of our common stock, based on the exchange ratios
described below, we believe that the new stock options would become an important tool to help
motivate eligible participants to continue to create stockholder value.

The Option Exchange would also enable us to recapture value from compensation costs that we already
are incurring with respect to outstanding equity awards that currently have very little motivational
impact. We believe it is not an efficient use of our resources to recognize compensation expense on
awards that do not provide value to our employees, executive officers and the independent members of
our Board of Directors. Under applicable accounting rules, we are required to recognize compensation
expense related to these awards, even if these awards are never exercised. By replacing options that
have little or no retentive or incentive value with a lesser number of new options with an exercise price
equal to the fair market value of our common stock on the date of the new grant, we would dramatically
increase the retentive and incentive values of the options. In addition, by applying the exchange rations
described below, replacing these options is not expected to create any material additional compensation
expense beyond the amounts recognized relating to the surrendered options.

Benefits of the Option Exchange Program to Eligible Participants

Because the decision whether to participate in the Option Exchange is completely voluntary, we are not able
to predict who would participate, the number of options any participant would elect to exchange, nor the number
of replacement options that we may grant. The Option Exchange program would not be available to any former
employees or other service providers of Cutera.

Details of the Option Exchange Program

Implementing the Stock Option Exchange Program

If stockholders approve Proposal Two and if the Compensation Committee decides to commence the Option
Exchange, eligible employees who are employed by us in the United States would be offered the opportunity to
participate in the Option Exchange under a Tender Offer Statement to be filed with the SEC and distributed to all
eligible participants. And if stockholders approve Proposal Three and if the Compensation Committee decides to
commence the Option Exchange, our executive officers and the independent members of our Board of Directors
would be offered the opportunity to participate in the Option Exchange under a Tender Offer Statement to be
filed with the SEC and distributed to all eligible participants. Eligible participants would be given at least twenty

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(20) business days in which to accept the offer of the new options in exchange for the surrender of their eligible
options. The surrendered options would be cancelled on the day that the Option Exchange closes. The new
options would be granted on the date of cancellation of the old options. Surrendered options that were granted
under the 2004 Equity Incentive Plan would be returned to the 2004 Equity Incentive Plan, and would be
available for grant under the terms of the 2004 Equity Incentive Plan.

Eligibility

To receive new options, an eligible participant who tenders his or her options for exchange must also have
been continuously employed or be a member of our Board of Directors on the date of the new grant. If an optionee
is no longer an eligible employee, executive officer or an independent member of our Board of Directors for any
reason, including layoff, termination, voluntary resignation, death or disability, on the date that the Option
Exchange commences, the optionee cannot participate in the program. If an optionee is no longer an eligible
employee, executive officer or an independent member of our Board of Directors on the date that the new grants are
made, even if he or she had elected to participate and had tendered his or her options for exchange, such individuals’
tender would automatically be deemed withdrawn and he or she would not participate in the Option Exchange
program. Such person would retain his or her outstanding options in accordance with their current terms and
conditions, and he or she may exercise them during a limited period of time following the termination of service in
accordance with their terms to the extent that they are vested. A vote by an eligible participant in favor of this
proposal at the Annual Meeting does not constitute an election to participate in the Option Exchange.

Exchange Ratio

The exchange ratios set out below in Proposal Two and Proposal Three for the Option Exchange (that is,
how many current options an eligible participant must surrender in order to receive one new option) would be
determined using the Black Scholes Model. This model is commonly used to calculate a theoretical option
valuation (call price) using five key determinants, which are: stock price on date of grant, option exercise price,
expected stock price volatility, expected option term (the duration that the optionee will hold the option before
exercising), and a risk free interest rate. The expected option term will be estimated using the Monte Carlo
simulation methodology. We intend to grant a ‘value-for-value’ exchange, such that the value of the surrendered
options would approximate the value of the new options issued in the proposed Option Exchange. This would
result in an approximate cost neutral exchange to Cutera. New option grants calculated according to the exchange
ratios would be rounded down to the nearest whole share on a grant-by-grant basis. Options to purchase
fractional shares would not be issued.

The ratios set out below in Proposal Two and Proposal Three were established based on Cutera’s closing
stock price on February 25, 2009 and the above mentioned option valuation methodology. The actual exchange
rates for optionees would be determined on the date of the Option Exchange.

Election to Participate

Participation in the Option Exchange program would be voluntary. Under the Option Exchange, eligible
participants would make a one-time election to surrender stock options that have an exercise price greater than or
equal to $9.00 in exchange for a number of new options determined in accordance with the exchange ratios set
out below.

Exercise Price of New Options

All new options would be granted with an exercise price equal to the fair market value of our common stock

on the date of the new grant.

Vesting of New Options

The new options would add an additional six months of vesting to the vesting period of the surrendered
options. This means that all new options would be completely unvested at the time of grant, regardless of

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whether the surrendered options were partially or wholly vested at that time. New options replacing surrendered
options that were fully vested as of the surrender date would fully vest six-months following the new option grant
date. New options replacing surrendered options that were not vested as of the surrender date would vest six
months after the original vesting date of the surrendered options. New options would vest only if the optionee
continues providing services to the Company through the applicable vesting date. New options that are not vested
at the time of termination of service cannot be exercised and would be forfeited.

Term of New Options

The term of an option is the length of time during which it may be exercised. Under the Option Exchange,
each new option would retain the same expiration date as the corresponding surrendered options, subject to
earlier expiration of the option upon termination of the service of the optionee.

Other Conditions of New Options

The other terms and conditions of the new options would be governed by the 2004 Equity Incentive Plan. New
options would be non-qualified stock options under U.S. tax laws. The shares of common stock for which the new
options would be exercisable have already been registered with the SEC as part of our stock plan registrations.

U.S. Federal Income Tax Consequences

The exchange of options pursuant to the Option Exchange should be treated as a non-taxable exchange and
Cutera and participants should recognize no income for U.S. federal income tax purposes upon the grant of the
new options. All new options granted under the Option Exchange program would be non-qualified stock options
for U.S. federal income tax purposes.

Availability of Cancelled Options for Future Awards

Assuming Proposal Two and/or Proposal Three are approved, the net shares that are cancelled in the Option
Exchange would be returned to the pool of stock options available for future grants in accordance with the terms
of our 2004 Equity Incentive Plan.

Accounting Impact

We intend for the Option Exchange program to not result in any additional compensation expense.
Therefore, the average fair value of each new stock option award granted to participants in exchange for
surrendered stock options, measured as of the date such awards are granted, is intended to be “cost neutral.” In
accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (revised 2004)
the unamortized compensation expense relating to the surrendered option awards would continue to be
recognized over the remaining service period of the surrendered awards. If any portion of the new stock option
awards is forfeited prior to the completion of the service period of the surrendered options due to termination of
service, the compensation cost for the forfeited portion of the award would not be recognized.

Potential Modification to Terms to Comply with Governmental Requirements

The terms of the Option Exchange would be described in a Tender Offer Statement that would be filed with
the SEC. Although we do not anticipate that the SEC would require us to modify the terms materially, it is
possible that we would need to alter the terms of the Option Exchange to comply with potential SEC comments.

Vote Required

The approval of the Option Exchange Program for our employees requires the affirmative vote of a majority of
the votes cast on Proposal Two at the 2009 Annual Meeting of Stockholders. The approval of the Option Exchange
Program for our executive officers and the independent members of our Board of Directors requires the affirmative
vote of a majority of the votes cast on Proposal Three at the 2009 Annual Meeting of Stockholders.

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PROPOSAL TWO—APPROVAL OF THE OPTION EXCHANGE PROGRAM FOR OUR
EMPLOYEES

We believe that stock options are a valuable tool to align employees’ interests with those of stockholders.
We have historically granted stock options to recognize, reward and motivate employees’ performance and to
encourage them to continue their service with us.

The table below reflects information on the options eligible for the Option Exchange as of February 25,
2009 and assumes the approval of only Proposal Two (which is limited to our employees), but not Proposal
Three (which would include our executive officers and the independent members of our Board of Directors). As
of February 25, 2009, there were a total of 1,670,483 shares underlying options outstanding under our equity
compensation plans for our employees (but not options held by our executive officers or the independent
members of our Board of Directors). Of these outstanding options, options to purchase 1,209,119, or 72%, of the
shares of common stock would be eligible for exchange under Proposal Two of the proposed Option Exchange.
If 100% of eligible options were to be exchanged under this Proposal Two, and new grants of options made in
accordance with the exchange ratios set out below — that are based on a $6.47 price of our common stock on
February 25, 2009 — the number of shares underlying options outstanding would be reduced by 645,469 shares,
or approximately 39% of all outstanding employee options.

Exercise Price of Eligible Employee Grants
$9.01-10.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.01-11.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.01-13.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.01-14.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.01-18.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.01-21.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .
22.01-23.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.01-24.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .
24.01-25.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .
25.00-26.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .
26.01-27.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .
27.00-28.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.00-35.00 . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of Shares
Underlying
Eligible Options
(Projected as of
Exchange Date)

23,833
299,450
105,667
150,955
85,000
79,973
12,000
144,741
182,000
5,000
93,000
25,000
2,500
1,209,119

Weighted Average
Exercise Price of
Eligible Options
$10.00
$10.43
$12.20
$13.65
$17.99
$20.25
$22.53
$23.75
$24.49
$25.73
$26.15
$27.36
$34.45
$17.66

Weighted Average
Remaining Life of
Eligible Options
5.45
5.95
5.66
4.78
5.85
6.12
5.11
3.98
3.20
6.35
6.17
4.35
4.63
5.1

Exchange
Ratios (New
options to
Cancelled
Options)
74%
72%
64%
53%
47%
42%
34%
23%
12%
28%
32%
23%
17%
46%

Board of Directors’ Recommendation

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF

THE OPTION EXCHANGE PROGRAM FOR OUR EMPLOYEES.

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PROPOSAL THREE—APPROVAL OF THE OPTION EXCHANGE PROGRAM FOR OUR
EXECUTIVE OFFICERS AND THE INDEPENDENT MEMBERS OF OUR BOARD OF DIRECTORS

The Company is asking its stockholders to approve the participation in the Option Exchange program by our
executive officers and the independent members of our Board of Directors. The Company’s directors and
executive officers have an interest in this proposal.

Please note that this proposal is separate and distinct from Proposal Two relating to the approval of the Option
Exchange program for our employees. Accordingly, a vote for this proposal will not affect your vote for or against
Proposal Two, and how you vote on Proposal Two will not affect your vote for or against this Proposal Three.

While the Company strongly believes that permitting its executive officers and the independent members of
its Board of Directors to participate in the Option Exchange program is critical for retention purposes and to
ensure the future success of the Company, given the importance of the Option Exchange program to the
Company, the Company felt it appropriate to allow its stockholders to separately determine the ability of our
executive officers and the independent members of our Board of Directors to participate in the Option Exchange.

As of February 25, 2009, 86% of the stock options held by our executive officers and the independent
members of our Board of Directors were underwater (meaning that the exercise price of the stock options is
greater than the value of our common stock). As such, these options offer little retention value, but the Company
is still required to recognize compensation expense related to these awards. By replacing options that have little
or no retentive or incentive value with a lesser number of new options with an exercise price equal to the fair
market value of our common stock on the date of the new grant, we would dramatically increase the retentive and
incentive values of the options and increase the Company’s ability to retain its leadership.

The table below reflects information on the options eligible for the Option Exchange as of February 25,
2009 and assumes the approval of only Proposal Three (which is limited to our executive officers and the
independent members of our Board of Directors), but not Proposal Two (which would include our employees).
As of February 25, 2009, there were a total of 937,720 shares underlying options outstanding under our equity
compensation plans for our executive officers and the independent members of our Board of Directors (but not
options held by our other employees). Of these outstanding options, options to purchase 803,345, or 86%, of the
shares of common stock would be eligible for exchange under Proposal Three. If 100% of eligible options were
to be exchanged under this Proposal Three, and new grants of options made in accordance with the exchange
ratios set out below—that are based on a $6.47 price of our common stock on February 25, 2009—the number of
shares underlying options outstanding would be reduced by 392,625 shares, or approximately 42% of all
outstanding options held by our executive officers and independent members of our Board of Directors.

Exercise Price of Eligible Employee Grants

9.01-10.00 . . . . . . . . . . . . . . . . . . . . . .
10.01-11.00 . . . . . . . . . . . . . . . . . . . . .
13.01-14.00 . . . . . . . . . . . . . . . . . . . . .
14.01-15.00 . . . . . . . . . . . . . . . . . . . . .
20.01-21.00 . . . . . . . . . . . . . . . . . . . . .
21.01-22.00 . . . . . . . . . . . . . . . . . . . . .
22.01-23.00 . . . . . . . . . . . . . . . . . . . . .
23.01-24.00 . . . . . . . . . . . . . . . . . . . . .
24.01-25.00 . . . . . . . . . . . . . . . . . . . . .
25.00-26.00 . . . . . . . . . . . . . . . . . . . . .

Number of Shares
Underlying Eligible
Options
(Projected as of
Exchange Date)

35,000
258,700
43,958
140,000
54,687
50,000
5,000
115,000
76,000
25,000
803,345

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Weighted Average
Exercise Price of
Eligible Options

Weighted Average
Remaining Life of
Eligible Options

Exchange Ratios
(New options to
Cancelled Options)

$ 9.74
$10.43
$13.30
$14.37
$20.25
$21.84
$22.53
$23.75
$24.46
$25.39
$16.40

5.99
5.95
5.09
5.28
6.12
7.01
5.11
3.98
2.98
5.01
5.3

74%
72%
53%
56%
42%
40%
34%
23%
12%
28%
51%

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Board of Directors’ Recommendation

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF
THE OPTION EXCHANGE PROGRAM FOR OUR EXECUTIVE OFFICERS AND THE
INDEPENDENT MEMBERS OF OUR BOARD OF DIRECTORS.

PROPOSAL FOUR—RATIFICATION OF PRICEWATERHOUSECOOPERS LLP AS OUR
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee of the Board has appointed PricewaterhouseCoopers LLP as the Independent
Registered Public Accounting Firm to perform the audit of the Company’s consolidated financial statements for
the fiscal year ending December 31, 2009. PricewaterhouseCoopers LLP audited the Company’s consolidated
financial statements for the fiscal years 2001 through 2008.

The Board is asking the stockholders to ratify the appointment of PricewaterhouseCoopers LLP as the
Company’s Independent Registered Public Accounting Firm for 2009. Although not required by law, by rules of
Nasdaq, or by the Company’s bylaws, the Board is submitting the appointment of PricewaterhouseCoopers LLP
to the stockholders for ratification as a matter of good corporate practice. Even if the appointment is ratified, the
Audit Committee in its discretion may appoint a different Independent Registered Public Accounting Firm at any
time during the year if it determines that such a change would be in the best interests of the Company and its
stockholders.

Representatives of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting. They
will have an opportunity to make a statement if they desire to do so and will be available to respond to
appropriate questions from the Company’s stockholders.

Board of Directors’ Recommendation

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE RATIFICATION
OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2009.

Audit and Non-Audit Services

the Company’s consolidated financial statements for 2008,

The Audit Committee is directly responsible for the appointment, compensation, and oversight of the
Company’s Independent Registered Public Accounting Firm. In addition to retaining PricewaterhouseCoopers
LLP to audit
the Audit Committee retained
PricewaterhouseCoopers LLP to provide other auditing and advisory services in 2008. The Audit Committee
understands the need for PricewaterhouseCoopers LLP to maintain objectivity and independence in its audits of
the Company’s financial statements. The Audit Committee has reviewed all non-audit services provided by
PricewaterhouseCoopers LLP in 2008 and has concluded that the provision of such services was compatible with
maintaining PricewaterhouseCoopers LLP’s independence in the conduct of its auditing functions.

To help ensure the independence of the Independent Registered Public Accounting Firm, the Audit
Committee has adopted a policy for the pre-approval of all audit and non-audit services to be performed for the
Company by its Independent Registered Public Accounting Firm. Pursuant to this policy, all audit and non-audit
services to be performed by the Independent Registered Public Accounting Firm must be approved in advance by
the Audit Committee. The Audit Committee may delegate to one or more of its members the authority to grant
the required approvals, provided that any exercise of such authority is presented to the full Audit Committee at
its next regularly scheduled meeting.

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The aggregate fees incurred by the Company for audit and non-audit services in 2008 and 2007 were as

follows:

Service Category

2008

2007

Audit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit Related Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$710,800
—
—
1,500

$654,000
—
22,000
1,000

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$712,300

$677,000

In the above table, in accordance with the SEC’s definitions and rules, “audit fees” are fees for professional
services for the audit of a company’s financial statements and internal control over financial reporting included in
the annual report on Form 10-K and for the review of a company’s financial statements included in the quarterly
reports on Form 10-Q; “audit-related fees” are fees for services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements; “tax fees” are fees for tax compliance, tax
advice and tax planning; and “all other fees” are a subscription fee for a PricewaterhouseCoopers LLP online
service used for accounting research purposes. Included in audit fees are fees that were billed and unbilled for
services rendered during the year ended December 31, 2008.

All of the services provided by PricewaterhouseCoopers LLP described in the table above were approved by

the Audit Committee.

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NAMED EXECUTIVE OFFICERS

Set forth below is certain information concerning our Named Executive Officers as of December 31, 2008.

Name

Age

Position(s)

Kevin P. Connors . . . . . . . .
David A. Gollnick(1) . . . . . .
. . . . . . . .
Ronald J. Santilli

President, Chief Executive Officer and Director
Former Executive Vice President of Research and Development and Director

47
45
49 Executive Vice President and Chief Financial Officer

(1) Mr. Gollnick resigned from the position of Executive Vice President of Research and Development effective

March 20, 2009.

Further information regarding Kevin P. Connors and David A. Gollnick is provided above under “Directors

Whose Terms Expire Beyond the 2009 Annual Meeting.”

Ronald J. Santilli has served as our Chief Financial Officer since September 2001 and as our Executive Vice
President since April 2007. From September 2001 to April 2007, Mr. Santilli served as our Vice President. From
April 2001 to August 2001, Mr. Santilli served as Senior Director of Financial Planning and Accounting at
Lumenis, a manufacturer of medical lasers. From May 1993 to March 2001, Mr. Santilli held several positions at
Coherent Inc., including Sales Operations Manager, Controller of the Medical Group and, most recently, Director
of Finance and Administration. Mr. Santilli holds a B.S. in Business Administration from San Jose State
University and an M.B.A. in Finance from Golden Gate University.

Compensation Discussion and Analysis

Overview

The primary objectives of our compensation programs are:

•

•

•

that they be fair, objective and consistent across the employee population;

that compensation be directly and substantially linked to measurable corporate and individual
performance; and

that compensation remains competitive, so that we can attract, motivate, retain and reward the key
employees whose knowledge, skills and performance are necessary for our success.

We seek to foster a culture where individual performance is aligned with organizational objectives. We
evaluate and reward our Named Executive Officers based on the comparable market compensation for their
respective positions in the company and an evaluation of their contributions to the achievement of short- and
long-term organizational goals. Executive compensation is reviewed annually, and adjustments are made to
reflect performance-based factors and competitive conditions.

Role of Our Compensation Committee

Compensation Committee Charter

The Compensation Committee establishes compensation for our three Named Executive Officers – our
Chief Executive Officer, Chief Financial Officer and former Executive Vice President of Research and
Development, and administers our equity incentive plans, which are currently the 2004 Equity Incentive Plan and
the 2004 Employee Stock Purchase Plan. The Compensation Committee has a written charter, which was adopted
by our Board in January 2004, and was amended in April 2007 and in April 2008. A copy of this charter, as
amended, can be found on our website, which is www.cutera.com.

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Duties of the Compensation Committee

The responsibilities of the Compensation Committee include:

(i) Establishing the following for the Named Executive Officers and such other officers as appropriate:
(a) annual base salary, (b) annual incentive bonus, which may include the setting of specific goals and
amounts, (c) equity compensation, (d) agreements for employment, severance and change-of-control, and
(e) any other benefits, compensation or arrangements, other than benefits generally available to our employees.

(ii) Reviewing and making recommendations to our Board of Directors, at such intervals as may be
decided by the Compensation Committee from time to time, regarding (a) general compensation goals and
guidelines for our employees and the criteria by which bonuses and stock compensation awards to our
employees are determined; and, (b) other policies and plans for the provision of compensation to our
employees, directors and consultants.

(iii) Acting as Administrator of our 2004 Equity Incentive Plan, 2004 Employee Stock Purchase Plan,

and any other equity compensation plans adopted by our Board.

(iv) Reviewing and making recommendations to our Board with respect to policies relating to the

issuance of equity incentives to employees, consultants and directors.

(v) Preparing the report that follows this Compensation Discussion and Analysis.

Compensation Committee Members

The members of our Compensation Committee are appointed by our Board. The members of that committee
as of the Record Date were Dr. David B. Apfelberg (chairman), Mr. Jerry P. Widman and Ms. Annette J.
Campbell-White. Each member of the Compensation Committee is an “outside director” for purposes of
Section 162(m) of the Internal Revenue Code, a “non-employee director” for purposes of Rule 16b-3 under the
Exchange Act and satisfies the independence requirements imposed by Nasdaq.

Role of the Compensation Committee and its Consultant in Setting Executive Compensation

Since April 2008, our Compensation Committee has been establishing the compensation packages for our
Named Executive Officers to ensure consistency with market compensation rates for similar positions, our
compensation philosophy and corporate governance guidelines. Prior to April 2008,
the Compensation
Committee reviewed and made recommendations about executive compensation for approval by the independent
members of our Board. In either situation, decisions are made only by the directors who are “outside directors”
for purposes of Section 162(m) of the Internal Revenue Code and “non-employee directors” for purposes of
Rule 16b-3 under the Exchange Act.

From 2005 to 2009, we worked with a third-party compensation consultant, Compensia, Inc., to assist us in
setting executive compensation. In March 2009, we replaced Compensia with Mercer (US), Inc. as our third-
party compensation consultant. In past years, management took a more active role in working with the consultant
and in preparing recommendations of executive compensation for review by the Compensation Committee, and
ultimately, the Board. Since 2007, with the SEC’s recent reforms relating to executive compensation disclosure,
our Compensation Committee has assumed a more active role.

From 2007 through April 2008, our Compensation Committee had worked directly with Compensia, and
they together had produced reports and recommendations of executive compensation for
the Board’s
consideration. Since April 2008, the Compensation Committee, with the assistance of a compensation consultant,
has been establishing executive compensation. Because certain components of executive compensation—such as
bonus targets—are driven by operational priorities, as to which management has greater insight than the Board or
the Compensation Committee, the Compensation Committee has directed management to interface with the
Committee and the compensation consultant to help establish appropriate targets.

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In the future, we may decide not to hire a compensation consultant each year, but rather once every few
years or so. This decision shall be evaluated regularly and will be based on the Compensation Committee’s
evaluation of whether the prior report obtained, along with increased disclosures of other public companies from
our Peer Group relating to executive compensation disclosure, is sufficient to allow them to make informed and
reasonable decisions with regard to executive-compensation matters.

Role of our Executives in Setting Compensation

On occasion, the Compensation Committee meets with members of our management team, including
Messrs. Kevin Connors and Ron Santilli, to obtain recommendations with respect to Company compensation
programs, practices and packages for executives, other employees and directors. Management may make
recommendations to the Compensation Committee on all components of compensation. The Compensation
Committee considers, but is not bound to and does not always accept, management’s recommendations with
respect to these matters. The Compensation Committee has the ultimate authority to make decisions with respect
to the compensation of our Named Executive Officers and does not delegate any of its compensation functions to
others.

Market Benchmarks

In developing its recommendations for annual compensation packages for our Named Executive Officers,
our Compensation Committee worked with Compensia to gather market data and identify an appropriate peer
group of public companies. The members of that peer group are Abaxis, AngioDynamics, Aspect Medical
Systems, Atrion Corporation, BSML, Candela, Cerus, Cholestech, Cynosure, I-Flow Corporation, IntraLase,
Iridex, OraSure Technologies, Palomar Medical Technologies, STAAR Surgical, Solta and VNUS Medical
(the “Peer Group”). Our Compensation Committee used this data in developing its
Technologies
recommendations for annual compensation for our Named Executive Officers, but also ensured that
its
recommendations were consistent with the philosophy underlying our compensation programs.

Compensation Components

Our Named Executive Officers are compensated with cash, equity and non-equity incentives, and other

customary employee benefits.

Cash Compensation. Cash compensation consists of base salary, participation in a discretionary bonus
program and participation in a discretionary profit-sharing plan. Our cash compensation goals for our Named
Executive Officers are based upon the following principals:

•

•

Salary should generally be set at or above the 50th percentile of our Peer Group;

Salary should be positioned to reflect each individual’s experience, performance and potential;

• A significant portion of cash compensation should be “at risk;” and

•

The amount of discretionary bonuses payable in any quarter is based on revenue growth, compared with
the same quarter in the prior year, and the operating profit before stock-based compensation and
non-operational expenses, or “Adjusted Operating Profit.” Further, discretionary bonuses are payable
only if we have an Adjusted Operating Profit for that quarter.

Base Salary and Total Target Cash Compensation. In June 2007, our Board approved a recommendation by
our Compensation Committee to set the annual base salary and total target cash compensation of our Named
Executive Officers, from June 1, 2007 through May 31, 2008, at the 50th percentile of our Peer Group. Total
target cash compensation for each Named Executive Officer includes his annual base salary, annual target bonus
level (described below) and annual profit-sharing payments.

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In February 2008, our Board approved a recommendation by our Compensation Committee to set the annual
base salary and total target cash compensation of Messrs. Kevin Connors, Ronald Santilli and David Gollnick,
from January 1, 2008 through December 31, 2008, at the same rate that was set in 2007 and effective through
May 31, 2008.

Discretionary Bonus Program. In addition to base salary compensation, we have a discretionary bonus
program for our Named Executive Officers and other personnel pursuant to which cash payments may be made
quarterly based on the Company’s performance in the then-preceding quarter. In June 2007, our Board of
Directors, upon the review and recommendation by the Compensation Committee, set the annual target bonus
levels as a percentage of base salary for the Named Executive Officers. In February 2008, our Board confirmed
that the annual target bonus levels for our Named Executive Officers that were set in 2007 would remain the
same through December 31, 2008.

Target bonuses are calculated based upon a matrix of revenue growth and Adjusted Operating Profit. For
example, at 10% revenue growth and 10% Adjusted Operating Profit, an individual would receive 100% of his or
her target bonus. At 50% revenue growth and 25% Adjusted Operating Profit, an individual would receive 375%
of his or her target bonus. The actual bonus earned by each of our Named Executive Officers in 2008 was equal
to approximately 19% of his respective target bonus.

Payments under this bonus program are made quarterly and only in the event that we have an Adjusted

Operating Profit in that then-preceding quarter.

Discretionary Profit-Sharing Program. We also have a discretionary profit sharing program for our Named
Executive Officers and other personnel pursuant to which cash payments may be made quarterly. Payments
under this plan in any given quarter are generally equal to about eight percent of the recipient’s base salary for
that given quarter. Target profit-sharing payments are calculated based upon half of the quarterly pre-tax
Adjusted Operating Profit percentage (pre-tax Adjusted Operating Profit divided by revenue) multiplied by the
Named Executive Officer’s gross salary earned during that quarter.

Long-Term Incentive Program. We believe that equity-based compensation promotes and encourages long-
term successful performance by our Named Executive Officers that is aligned with the organization’s goals and
the generation of stockholder value. Our equity compensation goals for our Named Executive Officers and others
are based upon the following principals:

•

Stockholder and executive interests should be aligned;

• Key and high-performing employees, who have a demonstrable impact on our performance and /or

stockholder value, should be provided this benefit;

•

•

The program should be structured to provide meaningful retention incentives to participants;

The equity grants should reflect each individual’s experience, performance, potential and be comparable
to what the Peer Group grants for the respective position; and

• Actual awards should be tailored to reflect individual performance and attraction/retention goals.

Under our 2004 Equity Incentive Plan, we are permitted to grant stock options, stock appreciation rights,
restricted shares, restricted stock units, performance shares, and other stock-based awards. Under that Plan, we
grant options to our officers, directors and employees to purchase shares of our common stock at an exercise
price equal to the fair market value of such stock on the date of grant. The grant date for stock options to our
Named Executive Officers is typically the date of a regularly scheduled board meeting, of which we have four
per year, or, for annual merit grants, on or around June 1 of each year. Our outside directors are granted options
annually on the date of our annual meeting of stockholders. We have no program, plan or practice to select option
grant dates (or set board meeting and annual general meeting of stockholders dates) to correspond with the
release of material non-public information.

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In May 2008, our Compensation Committee, with the approval of our non-employee, outside directors,
granted equity awards to our Named Executive Officers to acquire shares of our common stock under our 2004
Equity Incentive Plan. These equity grants are in the form of (i) stock option awards, (ii) retention option awards
and (iii) performance share awards. At the time these awards were granted, the unvested stock options of each of
our Named Executive Officers had exercise prices that were higher than the then-current per-share price of our
common stock. Each of these awards was issued for the purpose of retaining the individual recipient and
increasing the value of the Company. The total value of the equity awards granted to each Named Executive
Officer was set at approximately the 75th percentile of our Peer Group.

Each of the stock option awards described in the preceding paragraph has a vesting commencement date of
June 1, 2008, a term of seven years, and vests as follows: twelve forty-eighths of the total number of shares
subject to the stock option shall vest one full calendar year following the vesting commencement date and one
forty-eighth of the total number of shares subject to the stock option shall vest on the last day of each full
calendar month thereafter, until all such shares have vested, subject to the option holder continuing to provide
services to us through each such date.

Each of the retention option awards described above has a vesting commencement date of May 28, 2008, a
term of seven years, and will fully vest on May 28, 2011, subject to the option holder continuing to provide
services to us through such date.

The number of shares that could have been awarded to each Named Executive Officer pursuant to his
performance share award described above was between 0% - 250% of his respective target number of shares
based on a matrix that included the Company’s 2008 revenue and operating profit. Since the Company’s
operating results for 2008 were below the minimal threshold for an award, no performance shares were awarded
to any of the Named Executive Officers.

In 2005, we issued performance unit awards (otherwise commonly referred to as restricted stock units) to
our Named Executive Officers and certain employees pursuant to, and as provided under, the 2004 Equity
Incentive Plan. Each recipient of an award entered into a performance unit award agreement (or Award
Agreement). These awards vest annually at the rate of 25% of the units per year, for four years, provided the
recipient continues to provide us with service. Pursuant to the Award Agreements, following each annual vesting
date, the award is settled in stock, net of stock withheld for the payment of employee taxes. Under the terms of
the 2004 Equity Incentive Plan and the Award Agreements, each unit has an initial value equal to the fair market
value of our common stock on the date of grant. On its vesting date, the unit has a value equal to the fair market
value of our common stock on the date of vesting.

We also have a 2004 Employee Stock Purchase Plan that provides eligible employees with the opportunity
to purchase shares of our common stock at a 15% discounted price to the lower of the fair market value at either
the beginning or the end of the applicable offering period. During 2008, our Chief Financial Officer participated
in this Plan, but our Chief Executive Officer and our former Executive Vice President of Research and
Development did not participate in this Plan.

Benefits. We provide the following benefits to our Named Executive Officers generally on the same basis as

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the benefits provided to all employees:

• Health, dental and vision insurance;

•

•

•

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Life insurance;

Short-and long-term disability;

401(k) plan; and

Flexible Spending Accounts.

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These benefits are consistent with those offered by other companies and specifically with those companies

with which we compete for employees.

In December 2008, our Compensation Committee, with the approval of our non-employee, outside directors,
approved a form of Change of Control and Severance Agreement and instructed the Company to enter into such
agreements with each of our Named Executive Officers. The purpose of these agreements is to provide incentives
to our Named Executive Officers to continue their employment with the Company and not be distracted by the
possibility of loss of employment as a result of an acquisition of the Company or for other reasons.

The Change of Control and Severance Agreements provide that if a Named Executive Officer’s employment
with the Company is terminated by the Company without Cause or by the executive for Good Reason either prior
to 3 months before or after 12 months following a Change of Control (as such capitalized terms are defined in the
Change of Control and Severance Agreement, a copy of which was filed with the SEC on December 18, 2008) of
the Company, the executive will receive, subject to signing a release of claims in favor of the Company, (i) a
lump sum severance payment equal to 200% of the annual base salary as in effect immediately prior to such
termination for our Chief Executive Officer and 100% of the annual base salary as in effect immediately prior to
such termination for our Chief Financial Officer and our former Executive Vice President of Research and
Development; and (ii) up to 24 months for our Chief Executive Officer and up to 12 months for our Chief
Financial Officer and our former Executive Vice President of Research and Development of reimbursement for
premiums paid for COBRA coverage.

The Change of Control and Severance Agreements also provide that if an executive’s employment with the
Company is terminated by the Company without Cause or by the executive for Good Reason and such
termination occurs within the period beginning 3 months before, and ending 12 months following, a Change of
Control of the Company, the executive will receive, subject to signing a release of claims in favor of the
Company, (i) a lump sum severance payment equal to 200% of the annual base salary as in effect immediately
prior to such termination or, if greater, at the level in effect immediately prior to the Change of Control for our
Chief Executive Officer and 100% of the annual base salary as in effect immediately prior to such termination or,
if greater, at the level in effect immediately prior to the Change of Control for our Chief Financial Officer and
our former Executive Vice President of Research and Development; (ii) a lump sum severance payment equal to
100% of the executive’s annual target bonus for the fiscal year in which the termination occurs or, if greater,
executive’s annual target bonus in effect immediately prior to the Change of Control; (iii) automatic vesting in
full of all outstanding and unvested equity awards held by the executive as of the date of the Change of Control;
and (iv) up to 24 months for our Chief Executive Officer and up to 12 months for our Chief Financial Officer and
our former Executive Vice President of Research and Development of reimbursement for premiums paid for
COBRA coverage.

Each Change of Control and Severance Agreement has an initial term of three years, and will extend for an
additional year unless the Company or the applicable executive provides written notice at least sixty days prior to
the third anniversary of the agreement.

Except for these Change of Control and Severance Agreements, we do not have employment agreements

with any of our Named Executive Officers.

Internal Revenue Code Section 162(m) and Limitations on Executive Compensation

Section 162(m) of the United States Internal Revenue Code of 1986, as amended, may limit our ability to
deduct for United States federal income tax purposes compensation paid to either our Chief Executive Officer or
to other highly paid executive officers in any one fiscal year that is, for each such person, in excess of
$1,000,000. None of our executive officers received any such compensation in excess of this limit during 2008,
or any prior year.

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Grants of stock options under the 2004 Equity Incentive Plan are not subject to the deduction limitation;
however, to preserve our ability to deduct the compensation income associated with options granted to such
executive officers pursuant to Section 162(m) of the Internal Revenue Code, our 2004 Equity Incentive Plan
provides that no optionee may be granted option(s) to purchase more than 500,000 shares of our common stock
in any one fiscal year. However, in the fiscal year in which the optionee is hired, an optionee may be granted an
option to purchase up to 1,000,000 shares of our common stock.

Securities Authorized for Issuance Under Equity Compensation Plans

Our stockholders approved each of our equity compensation plans, including a 2008 amendment to our 2004
Equity Incentive Plan. The following table provides information regarding common stock that may be issued upon
the exercise of options and restricted stock units under our 2004 Equity Incentive Plan as of December 31, 2008.

Plan category

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)

Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)

Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
(c)

Equity compensation plans approved by security

holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,081,733

Equity compensation plan not approved by security

holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,081,733

$12.94

—

$12.94

1,604,267

—

1,604,267

Summary Compensation Table

The following table sets forth summary compensation information for the years ended December 31, 2008,
2007 and 2006 for our Chief Executive Officer, Chief Financial Officer and former Executive Vice President of
Research of Development. We refer to these persons as our Named Executive Officers elsewhere in this proxy
statement. Except as provided below, none of our Named Executive Officers received any other compensation
required to be disclosed by law or in excess of $10,000 annually.

Name and Principal Position

Salary

Bonus(1)

Kevin P. Connors

President and Chief Executive Officer

Option
and
Stock
Awards(2)

Non-Equity
Incentive Plan
Compensation(3)

All Other
Compensation(4)

Total

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 420,00 $ 53,086 $555,906
404,725
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
305,193
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

258,267
433,066

390,833
329,167

Ronald J. Santilli

Chief Financial Officer and Executive
Vice President

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $290,000 $ 28,513 $313,449
268,511
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
234,370
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

134,795
201,461

267,083
220,417

David A. Gollnick

Former Executive Vice President of
Research and Development

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $275,000 $ 24,465 $271,321
210,167
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
165,177
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

256,205
217,500

119,873
198,610

32

$6,852
7,725
—

$10,817
10,358
11,250

$1,046,436
1,071,908
1,078,676

$ —
—
—

$ —
—
—

$10,350
10,358
11,250

$ 642,312
680,747
667,498

$10,817
10,358
11,250

$ 581,603
596,603
592,537

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(1) Amounts represent a discretionary bonus and profit sharing earned in 2008.
(2) Amount reflects the total stock-based compensation expense for the year ended December 31, 2008 calculated in
accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS No. 123(R),
using the modified prospective method for unvested awards as of January 1, 2006 and excluding estimates of forfeitures.
See Note 5 of the Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2008 filed with the SEC on March 16, 2009 for a discussion of the assumptions made in determining the
grant date fair value and stock-based compensation expense of equity awards.

(3) Amounts represent non-cash benefit associated with a company sponsored, non-business, event for achieving sales

targets in accordance with our commission incentive plan.

(4) Amount represents 401(k) employer-match contributions and service award, where applicable.

Grants of Plan-Based Awards

The following table lists grants of plan-based awards made to our Named Executive Officers in 2008 and

their related grant date fair value calculated in accordance with SFAS 123(R).

Name

Grant Date

Threshold

Target Maximum

Estimated Future Payouts Under
Non-Equity Incentive Plan Awards

All Other
Option
Awards:
Number of
Securities
Underlying
Options

Exercise
or Base
Price of
Option
Awards(2)

Grant
Date Fair
Value of
Stock
Option
Awards(1)

Kevin P. Connors . . . . . . . . . . .

5/28/2008

—

President and Chief
Executive Officer

Ronald J. Santilli . . . . . . . . . . . .
Chief Financial Officer and
Executive Vice President

5/28/2008

—

David A. Gollnick . . . . . . . . . . .

5/28/2008

—

—

—

—

—

133,300

$10.43

$708,145

—

—

63,700

10.43

339,765

61,700

10.43

330,065

Former Executive Vice
President Research and
Development

(1) Amount reflects the total stock-based compensation expense for the year ended December 31, 2008
calculated in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment, or SFAS No. 123(R), using the modified prospective method for unvested awards as of January 1,
2006 and excluding estimates of forfeitures. See Note 5 of the Notes to Financial Statements included in our
Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 16, 2009
for a discussion of the assumptions made in determining the grant date fair value and stock-based
compensation expense of equity awards.

(2) The per-share prices were the closing price of our common stock on the respective dates of grant.

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Equity Incentive Awards Outstanding

The following table lists the outstanding equity incentive awards held by our Named Executive Officers as

of December 31, 2008.

Name

Kevin P. Connors . . . . . . . . . . . . . . . . . . . .
President and Chief Executive Officer

Ronald J. Santilli . . . . . . . . . . . . . . . . . . . .

Chief Financial Officer and
Executive Vice President

David A. Gollnick(3) . . . . . . . . . . . . . . . . . .

Former Executive Vice President
Research and Development

Option Awards

Number of
Securities
Underlying
Unexercised
Earned
Options(1)

Number of
Securities
Underlying
Unexercised
Unearned
Options(1)

Option
Exercise
Price

Option
Expiration
Date

Stock Awards(2)
Market Value
of Shares
or Units of
Stock that
Have Not
Vested

Number
of Shares
or Units
of Stock
that Have
Not Vested

Date
Awards
Will be
Fully
Vested

408,333
50,000
3,333
26,250
40,000
34,375
15,000
0

3,372
14,753
10,000
13,125
20,000
21,875
8,250
0

25,000
25,000
23,400
2,917
3,958
7,812
15,625
5,250
1,875
61,700

0
0
0
3,750
0
20,625
25,000
133,300

0
0
0
1,875
0
13,125
13,750
63,700

0
0
0
0
0
1,875
9,375
8,750
3,125
61,700

$ 0.10
0.50
4.25
20.25
2.50
23.75
24.46
10.43

4.25
4.25
13.30
20.25
5.50
23.75
24.46
10.43

0.10
0.50
2.50
4.25
13.30
20.25
23.75
24.46
22.53
10.43

9/13/2009
8/4/2010
8/13/2013
7/28/2015
6/8/2011
6/8/2013
6/8/2012
5/28/2015

8/7/2012
8/13/2013
7/20/2014
7/28/2015
9/24/2011
6/8/2013
6/8/2012
5/28/2015

9/13/2009
6/9/2010
6/8/2011
8/13/2013
7/20/2014
7/28/2015
6/8/2013
6/8/2012
7/27/2014
5/28/2015

2,500

$22,157

6/1/2009

1,250

11,088

6/1/2009

(1) One-quarter (1/4th) of the shares underlying each of these options vest on the one year anniversary of the vesting commencement

date and 1/48 of the underlying shares vest each month thereafter.

(2) Performance unit awards (otherwise commonly referred to as restricted stock units) vest at the rate of 25% per year, for four

years, provided the recipient continues to provide us with service.

(3) Mr. Gollnick resigned from the position of Executive Vice President of Research and Development effective March 20, 2009. In
accordance with a consulting agreement entered into with Cutera and filed with the SEC on March 4th 2009, all of stock options
and awards of Mr. Gollnick ceased to vest as of March 2, 2009.

1,250

11,088

6/1/2009

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Options Exercised and Stock Vested

The following table lists the options exercised by, and stock vested to, our Named Executive Officers in the

year ended December 31, 2008.

Name

Option Awards

Stock Awards

Number of
Shares
Acquired
on Exercise

Value
Realized
on
Exercise(1)

Number
of Shares
Acquired
on Vesting

Value
Realized
Upon
Vesting(2)

Kevin P. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

President and Chief Executive Officer

Ronald J. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chief Financial Officer and Executive Vice President

David A. Gollnick . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

—

—

—

—

2,500

25,600

1,250

12,800

1,250

12,800

Former Executive Vice President of Research and
Development

(1) Represents the excess of fair market value of the shares exercised on the exercise date over the aggregate

exercise price for such shares.

(2) These shares were originally issued by us pursuant to performance unit awards. On each vesting date, the

unit had a value equal to the fair market value of our common stock on the date of vesting.

COMPENSATION COMMITTEE REPORT(1)

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis
required by Item 402(b) of SEC Regulation S-K with management. Based on such review and discussions, the
Compensation Committee recommended to the Board of Directors that the Compensation Discussion and
Analysis be included in Cutera’s proxy statement.

The foregoing report is provided by the undersigned members of the Compensation Committee.

Dr. David B. Apfelberg
Mr. Jerry P. Widman
Ms. Annette J. Campbell-White

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(1) The material in this report is not deemed soliciting material or filed with the SEC and is not to be
incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after the date of this Proxy Statement
and irrespective of any general incorporation language in those filings.

35

OTHER MATTERS

We are not aware of any other business to be presented at the meeting. As of the date of this proxy
statement, no stockholder had advised us of the intent to present any business at the meeting. Accordingly, the
only business that our Board of Directors intends to present at the meeting is as set forth in this proxy statement.

If any other matter or matters are properly brought before the meeting, the proxies will use their discretion

to vote on such matters in accordance with their best judgment.

By order of the Board of Directors,

Brisbane, California
March 30, 2009

Kevin P. Connors
President and Chief Executive Officer

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t
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2008
Commission file number: 000-50644

Cutera, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

77-0492262
(I.R.S. Employer
Identification Number)

3240 Bayshore Blvd.
Brisbane, California 94005
(415) 657-5500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Common Stock, $0.001 par value per share

Name of Each Exchange on Which Registered
The NASDAQ Stock Market, LLC

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant

Act. Yes ‘ No È

is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act. Yes ‘ No È

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See

definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ‘ Accelerated filer È Non-accelerated filer (Do not check if a smaller reporting company) ‘
Smaller reporting company ‘

Indicate by check mark whether

Act). Yes ‘ No È

registrant

is a shell company (as defined in Rule 12b-2 of

the Exchange

The aggregate market value of the registrant’s common stock, held by non-affiliates of the registrant as of June 30, 2008 (which
is the last business day of registrant’s most recently completed second fiscal quarter) based upon the closing price of such stock on
the NASDAQ Global Market on that date, was $73 million. For purposes of this disclosure, shares of common stock held by entities
and individuals who own 5% or more of the outstanding common stock and shares of common stock held by each officer and
director have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the Rules and
Regulations of the Securities Exchange Act of 1934. This determination of affiliate status is not necessarily conclusive.

The number of shares of Registrant’s common stock issued and outstanding as of February 28, 2009 was 13,287,768.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference certain information from the registrant’s definitive proxy statement for the 2009 Annual

Meeting of Stockholders.

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TABLE OF CONTENTS

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

3
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PART I

Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.

PART II

Item 5.

Item 6.
Item 7.

Item 7A.
Item 8.
Item 9.

Item 9A.
Item 9B.

PART III

Item 10.
Item 11.
Item 12.

Item 13.
Item 14.

PART IV

Item 15.

Exhibits and Financial Statement Schedules

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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ITEM 1. BUSINESS

PART I

We are a global medical device company headquartered in Brisbane, California specializing in the design,
development, manufacture, marketing and servicing of laser and other light-based aesthetics systems for
practitioners worldwide. We offer easy-to-use products based on three platforms—CoolGlide®, Xeo® and
Solera®—which enable physicians and other qualified practitioners to perform safe and effective aesthetic
procedures for their customers.

• CoolGlide- Our first product platform, CoolGlide, was launched in March 2000. This product offers
laser applications for hair removal, treatment of a range of vascular lesions, including leg and facial
veins, and Laser Genesis—a skin rejuvenation procedure that reduces fine lines, reduces pore size and
improves skin texture.

• Xeo-

In 2003, we introduced the Xeo platform, which can combine pulsed light and laser applications
in a single system. The Xeo is a fully upgradeable platform on which a customer can use every
application that we offer to remove unwanted hair, treat vascular lesions and rejuvenate the skin by
treating discoloration, improving texture, reducing pore size and treating fine lines and laxity.

•

Solera-
In 2004, we introduced our Solera platform—a compact tabletop system designed to support a
single technology platform. Solera systems use either infrared (Solera Titan) or pulsed light (Solera
Opus) and can be used to remove unwanted hair, treat vascular lesions and rejuvenate the skin. The
Solera Opus can support one or more pulsed light applications in a single system.

Each of our products consists of one or more hand pieces and a console that incorporates a universal graphic user
interface, a laser 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 instead contained in the hand
piece. A description of each of our hand pieces, and the aesthetic conditions they are designed to treat, are
contained in the section entitled “Products,” below.

We offer our customers the ability to select the systems and applications that best fit their practice and to
subsequently upgrade their systems to add new applications. This upgrade path allows our customers to cost-
effectively build their aesthetic practices and provides us with a source of recurring revenue.

The Structure of Skin and Conditions that Affect Appearance

The skin is the body’s largest organ and is comprised of layers called the epidermis and dermis. The epidermis is
the outer layer, and serves as a protective barrier for the body. It contains cells that determine pigmentation, or
skin color. The underlying layer of skin, the dermis, contains hair follicles and large and small blood vessels that
are found at various depths below the epidermis. Collagen, also found within the dermis, provides strength and
flexibility to the skin.

Many factors, such as age, smoking and sun damage, can result in aesthetically unpleasant changes in the
appearance of the skin. These changes can include:

• Undesirable hair growth;

•

Enlargement or swelling of blood vessels due to circulatory changes that become visible at the skin’s
surface in the form of unsightly veins;

• Deterioration of collagen, which weakens the skin, leading to uneven texture, increased pore size,

wrinkles and laxity; and

• Uneven pigmentation or sun spots due to long-term sun exposure.

People with unwanted hair or any of the above-mentioned skin conditions often seek aesthetic treatments to
improve their appearance.

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The Market for Non-Surgical Aesthetic Procedures

The market for non-surgical aesthetic procedures has grown significantly over the past several years. The
American Society of Plastic Surgeons estimates that in 2007 there were nearly 10 million minimally-invasive
aesthetic procedures performed, a 9% increase over 2006 and an 81% increase over 2000. We believe there are
several factors contributing to the growth of these aesthetic procedures, including:

•

•

•

Aging of the U.S. Population- The “baby boomer” demographic segment, ages 44 to 62 in 2008,
represented approximately 26% of the U.S. population as of July 1, 2005. The size of this aging
segment, and its desire to retain a youthful appearance, has driven the growth for aesthetic procedures.

Broader Range of Safe and Effective Treatments- Technical developments have led to safe, effective,
easy-to-use and low-cost treatments with fewer side effects, resulting in broader adoption of aesthetic
procedures by practitioners. In addition, technical developments have enabled practitioners to offer a
broader range of treatments. These technical developments have reduced the required treatment and
recovery times, which in turn have led to greater patient demand.

Broader Base of Customers- Managed care and government payer reimbursement restrictions in the
United States, and similar payment related constraints outside the United States, may help motivate
qualified practitioners from differing specialties to establish or expand their elective aesthetic practices
with procedures that are paid for directly by patients. As a result, in addition to the core users such as
dermatologists and plastic surgeons, many other non-core practitioners, such as gynecologists, family
practitioners, primary care physicians, physicians offering aesthetic treatments in non-medical offices,
and other qualified practitioners are offering aesthetic procedures.

Non-Surgical Aesthetic Procedures for Improving the Skin’s Appearance and Their Limitations

Many alternative therapies are available for improving a person’s appearance by treating specific structures
within the skin. These procedures utilize injections or abrasive agents to reach different depths of the dermis and
the epidermis. In addition, non-invasive and minimally-invasive treatments have been developed that employ
laser and other light-based technologies to achieve similar therapeutic results. Some of these more common
therapies and their limitations are described below.

Hair Removal- Techniques for hair removal include waxing, depilatories, tweezing, shaving, electrolysis and
laser and other light-based hair removal. The only techniques that provide a long-lasting solution are electrolysis
and light-based hair removal. Electrolysis is usually painful, time-consuming and expensive for large areas, but is
the most common method for removing light-colored hair. During electrolysis, an electrologist inserts a needle
directly into a hair follicle and activates an electric current in the needle. Since electrolysis only treats one hair
follicle at a time, the treatment of an area as small as an upper lip may require numerous visits and many hours of
treatment. In addition, electrolysis can cause blemishes and infection related to needle use.

Leg and Facial Veins- The current aesthetic treatment methods for leg and facial veins include sclerotherapy
and laser and other light-based treatments. With these treatments, patients seek to eliminate visible veins and
improve overall skin appearance. Sclerotherapy requires a skilled practitioner to inject a saline or detergent-based
solution into the target vein, which breaks down the vessel causing it to collapse and be absorbed into the body.
The need to correctly position the needle on the inside of the vein makes it difficult to treat smaller veins, which
limits the treatment of facial vessels and small leg veins. The American Society of Plastic Surgeons estimates
that over 383,000 sclerotherapy procedures were performed in 2007.

Skin Rejuvenation- Skin rejuvenation treatments include a broad range of popular alternatives, including
Botox and collagen injections, chemical peels, microdermabrasions, radiofrequency treatments and lasers and
other light-based treatments. With these treatments, patients hope to improve overall skin tone and texture,
reduce pore size, tighten skin and remove other signs of aging, including mottled pigmentation, diffuse redness
and wrinkles. All of these procedures are temporary solutions and must be repeated within several weeks or

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months to sustain their effect, thereby increasing the cost and inconvenience to patients. For example, the body
absorbs Botox and collagen and patients require supplemental injections every three to six months to maintain
the benefits of these treatments.

Some skin rejuvenation treatments, such as chemical peels and microdermabrasions, can have undesirable side
effects. Chemical peels use acidic or caustic solutions to peel away the epidermis, and microdermabrasion
generally utilizes sand crystals to resurface the skin. These techniques can lead to stinging, redness, irritation and
scabbing. In addition, more serious complications, such as changes in skin color, can result from deeper chemical
peels. Patients that undergo these deep chemical peels are also advised to avoid exposure to the sun for several
months following the procedure. The American Society of Plastic Surgeons estimates that in 2007, 4.6 million
injections of Botox and over 1.5 million injections of collagen and other soft-tissue fillers were administered, and
1.0 million chemical peels and over 890,000 microdermabrasion procedures were performed.

In radiofrequency tissue tightening, energy is applied to heat the dermis of the skin with the goal of shrinking and
tightening the collagen fibers. This approach may result in a more subtle and incremental change to the skin than
a surgical facelift. Drawbacks to this approach may include surface irregularities that may resolve over time, and
the risk of burning the treatment area.

Laser and other light-based non-surgical treatments for hair removal, veins and skin rejuvenation are discussed in
the following section and in the section entitled “Our Applications and Procedures,” below.

Laser and Other Light-Based Aesthetic Treatments

Laser and other light-based aesthetic treatments can achieve therapeutic results by affecting structures within the
skin. The development of safe and effective aesthetic treatments has created a well-established market for these
procedures.

Ablative skin resurfacing is a method of improving the appearance of the skin by removing the outer layers of the
skin. Ablative skin resurfacing procedures are considered invasive or minimally invasive, depending on how
much of the epidermis is removed during a treatment. Non-ablative skin resurfacing is a method of improving the
appearance of the skin by treating the underlying structure of the skin without damaging the outer layers of the
skin. Practitioners can use laser and other light-based technologies to selectively target hair follicles, veins or
collagen in the dermis, as well as cells responsible for pigmentation in the epidermis, without damaging
surrounding tissue. They can also use these technologies to safely remove portions of the epidermis and deliver
heat to the dermis as a means of generating new collagen growth.

Safe and effective laser and other light-based treatments require an appropriate combination of the following four
parameters:

•

•

•

Energy Level-

the amount of light emitted to heat a target;

Pulse Duration-

the time interval over which the energy is delivered;

Spot Size-

the diameter of the energy beam, which affects treatment depth and area; and

• Wavelength-
delivered.

the color of light, which impacts the effective depth and absorption of the energy

For example, in the case of hair removal, by utilizing the correct combination of these parameters, a practitioner
can use a laser or other light source to selectively target melanin within the hair follicle to absorb the laser energy
and destroy the follicle, without damaging other delicate structures in the surrounding tissue. Wavelength and
spot size permit the practitioner to target melanin in the base of the hair follicle, which is found in the dermis.
The combination of pulse duration and energy level may vary, depending upon the thickness of the targeted hair
follicle. A shorter pulse length with a high energy level is optimal to destroy fine hair, whereas coarse hair is best

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treated with a longer pulse length with lower energy levels. If treatment parameters are improperly set,
non-targeted structures within the skin may absorb the energy thereby eliminating or reducing the therapeutic
effect. In addition, improper setting of the treatment parameters or failure to protect the surface of the skin may
cause burns, which can result in blistering, scabbing and skin discoloration.

Technology and Design of Our Systems

Our unique CoolGlide, Xeo and Solera platforms provide the long-lasting benefits of laser and other light-based
aesthetic treatments. Our technology allows for a combination of a wide variety of applications available in a
single system. Key features of our solutions include:

• Multiple Applications Available in a Single System- Our multi-application systems enable
practitioners to perform multiple aesthetic procedures using a single device. These procedures include
hair
including the treatment of
discoloration, laxity, fine lines, pore size and uneven texture. Because practitioners can use our systems
for multiple indications, the cost of a unit may be spread across a potentially greater number of patients
and procedures, and therefore may be more rapidly recovered.

treatment of unsightly veins and skin rejuvenation,

removal,

•

Technology and Design Leadership- We offer innovative laser and other light-based solutions for the
aesthetic market. Our laser technology combines long wavelength, adjustable energy levels, variable
spot sizes and a wide range of pulse durations, allowing practitioners to customize treatments for each
patient and condition. Our proprietary pulsed light hand pieces for the treatment of discoloration, hair
removal and vascular treatments optimize the wavelength used for treatments and incorporate a
monitoring system to increase safety. Our Titan hand pieces utilize a novel light source that had not
been previously used for aesthetic treatments. And our Pearl and Pearl Fractional hand pieces, with
proprietary YSGG technology, represent the first application of the 2790 nm wavelength for minimally-
invasive cosmetic dermatology.

• Upgradeable Platform- We design our products to allow our customers to cost-effectively upgrade to
our multi-application systems, which provide our customers with the option to add additional
applications to their existing systems and provides us with a source of recurring revenue. We believe
that product upgradeability allows our customers to take advantage of our latest product offerings and
provide additional treatment options to their patients, thereby expanding the opportunities for their
aesthetic practices.

•

Treatments for Broad Range of Skin Types and Conditions- Our products remove hair safely and
effectively on patients of all skin types, including harder-to-treat patients with dark or tanned skin. In
addition, the wide parameter range of our systems allows practitioners to effectively treat patients with
both fine and coarse hair. Practitioners may use our products to treat spider and reticular veins, which
are unsightly small veins in the leg, as well as small facial veins. And they can treat color, texture, pore
size, fine lines and laxity on any type of skin with our skin rejuvenation systems. The ability to
customize treatment parameters enables practitioners to offer safe and effective therapies to a broad base
of their patients.

• Ease of Use- We design our products to be easy to use. Our proprietary hand pieces are lightweight
and ergonomic, minimizing user fatigue, and allow for clear views of the treatment area, reducing the
possibility of unintended damage and increasing the speed of application. Our control console contains a
universal graphic user interface with three simple, independently adjustable controls from which to
select a wide range of treatment parameters to suit each patient’s profile. The clinical navigation user
interface on the Xeo platform provides recommended clinical treatment parameter ranges based on
patient criteria entered. And our Pearl and Pearl Fractional hand pieces include a scanner with multiple
scan patterns to allow simple and fast treatments of the face. Risks involved in the use of our products
include risks common to other laser and other light-based aesthetic procedures, including the risk of
burns, blistering and skin discoloration.

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Strategy

Our goal is to maintain and expand our position as a leading, worldwide provider of light-based aesthetic devices
by executing the following strategies:

• Continuing to Develop New Products- We have introduced at least one new product every year since
2000. In 2008, we introduced Pearl Fractional—a minimally invasive, 2790 nm YSGG laser for the
fractional ablative market to be used for rejuvenation applications. We plan to continue developing our
existing technology platforms and develop other platforms with the intent of offering new applications
for our customers.

•

•

Increasing Sales of Existing Products in the United States- Although the U.S. economy is currently in
a recession, we believe that the U.S. market for aesthetic systems will continue to offer growth
opportunities. In 2008, we restructured our U.S. direct sales force with the goals of managing expenses
in line with our business, and improving productivity by retaining our key performers and expanding
their sales territories. We also continued to leverage our relationship with PSS World Medical Shared
Services, Inc., or PSS, a wholly-owned subsidiary of PSS World Medical. PSS operates medical supply
distribution service centers with over 700 sales consultants serving physician offices throughout the
United States.

Expanding our International Presence- We believe that the international market continues to be a
significant growth opportunity for us. As such, in 2008 we remained focused on building global brand-
recognition by increased sales and marketing activities. In 2008, we increased our direct international
sales force and ended the year with distributors in over 30 countries. We plan on continuing to manage
our international direct sales employees, distributors and support staff to increase sales and strengthen
customer relationships in the international markets.

• Maintaining a Broad Customer Base- We believe there is growth opportunity in targeting our products
to various market segments, including the core and non-core aesthetic practices. Dermatologists and
plastic surgeons had generally been regarded as the core customers for laser and other light-based
aesthetic equipment. However, due to increased consumer demand for aesthetic procedures,
the
development of safer and effective aesthetic equipment, and the attractive financial opportunities for
practitioners, the customer base for aesthetic equipment expanded to non-core aesthetic practitioners,
including gynecologists, primary care physicians, family practitioners, physicians offering aesthetic
treatments in non-medical offices, and other qualified practitioners. Our goal is to continue marketing
our products to a broad customer base, while maintaining a focus on the core practitioners.

•

Leveraging our Installed Base with Sales of Upgrades- Each time we have introduced a major new
product, we have designed it to allow existing customers to upgrade their previously purchased systems
to offer additional capabilities. We believe that providing upgrades to our existing installed base of
customers continues to represent a potentially significant opportunity for recurring revenue. We also
believe that our upgrade program aligns our interest in generating revenue with our customers’ interest
in improving the return on their investment by expanding the range of applications that can be
performed with their existing systems. In 2009, we plan on continuing to market upgrades to our
installed base, including our Pearl and Pearl Fractional applications introduced in 2007 and 2008,
respectively.

• Generating Revenue from Services and Refillable Hand Pieces- Our Titan hand pieces and pulsed-
light hand pieces are refillable products, which provide us with a source of recurring revenue from our
existing customers. We offer post-warranty services to our customers either through extended service
contracts to cover preventive maintenance or replacement parts and labor, or through direct billing for
parts and labor. These post-warranty services serve as additional sources of recurring revenue.

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Products

Our CoolGlide, Xeo and Solera platforms allow for the delivery of multiple laser and other light-based aesthetic
applications from a single system. With our Xeo and Solera platforms, practitioners can purchase customized
systems with a variety of our multi-technology applications. The following table lists our products and each
checked box represents the incremental applications that were added to the respective platforms in the years
noted.

Applications:

System
Platforms:

Products:

CoolGlide CV

Xeo:

Solera

Excel
Vantage

Nd:YAG
OPS600
LP560
Titan S
ProWave 770
AcuTip 500
Titan V/XL
LimeLight
Pearl
Pearl Fractional

Titan S
ProWave 770
OPS 600
LP560
AcuTip 500
Titan V/XL
LimeLight

Hair
Removal:

Vascular
Lesions:

Skin Rejuvenation

Dyschromia:

Texture,
Lines and
Wrinkles:

Skin
Laxity:

x

x

x

x

Year:

2000
2001
2002

2003
2003
2004
2004
2005
2005
2006
2006
2007
2008

2004
2005
2005
2005
2005
2006
2006

Energy
Source:

a
a
a

a
b
b
c
b
b
c
b
d
d

c
b
b
b
b
c
b

x

x

x

x

x

x

x
x

x

x

x

x

x
x

x
x

x
x

x

Energy Source: a. 1064nm Nd:YAG laser; b. flashlamp; c. Infrared laser; d. 2790 nm YSGG laser

Each of our products consists of a control console and one or more hand pieces, depending on the model.

Control Console

Our control console includes a universal graphic user interface, control system software and high voltage
electronics. All CoolGlide systems, and some models of the Xeo platform, include our laser module which consists
of electronics, a visible aiming beam, a focusing lens, and an Nd:YAG and/or flashlamp laser that functions at
wavelengths that permit penetration over a wide range of depths and is effective across all skin types. The interface
allows the practitioner to set the appropriate laser or flashlamp parameters for each procedure through a user-
friendly format. The control system software ensures that the operator’s instructions are properly communicated
from the graphic user interface to the other components within the system. Our high voltage electronics produce
over 10,000 watts of peak laser energy, which permits therapeutic effects at short pulse durations. Our Solera
console platform comes in two configurations—Opus and Titan—both of which include a universal graphic user
interface, control system software and high voltage electronics. The Solera Opus console is designed specifically to
drive our flashlamp hand pieces while the Solera Titan console is designed specifically to drive the Titan hand
the operator’s instructions are properly
pieces. The control system software is designed to ensure that
communicated from the graphical user interface to the other components within the system and includes real-time
calibration to control the output energy as the pulse is delivered during the treatment.

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Hand Pieces

1064 nm Nd:YAG Hand Piece- Our 1064nm Nd:YAG hand piece delivers laser energy to the treatment area
for hair removal, leg and facial vein treatment, and skin rejuvenation procedures to treat skin texture and fine
lines, and reduce pore size. The 1064nm Nd:YAG hand piece consists of an energy-delivery component,
consisting of an optical fiber and lens, and a copper cooling plate with imbedded temperature monitoring. The
hand piece weighs approximately 14 ounces, which is light enough to be held with one hand. The lightweight
nature and ergonomic design of the hand piece allows the operation of the device without user fatigue. Its design
allows the practitioner an unobstructed view of the treatment area, which reduces the possibility of unintended
damage to the skin and can increase the speed of treatment. The 1064nm Nd:YAG hand piece also incorporates
our cooling system, providing integrated pre- and post cooling of the treatment area through a temperature-
controlled copper plate to protect the outer layer of the skin. The hand piece is available in either a fixed 10
millimeter spot size for our CoolGlide CV system, or a user-controlled variable 3, 5, 7 or 10 millimeter spot size
for our CoolGlide Excel and CoolGlide Vantage systems.

Pulsed Light Hand Pieces- The LP560, ProWave 770, AcuTip 500 and LimeLight hand pieces are designed to
produce a pulse of light over a wavelength spectrum to treat discoloration, including pigmented lesions, such as
age and sun spots, hair removal and superficial facial vessels. The hand pieces each consist of a custom
flashlamp, proprietary wavelength filter, closed-loop power control and embedded temperature monitor, and
weigh approximately 13 ounces. The filter in the AcuTip 500 eliminates long and short wavelengths, transmitting
only the therapeutic range required for safe and effective treatment. The filter in the LP560, ProWave 770 and
LimeLight eliminates short wavelengths, allowing longer wavelengths to be transmitted to the treatment area. In
addition, the wavelength spectrum of the ProWave 770 and the LimeLight can be shifted based on the setting of
the control console. Our power control includes a monitoring system to ensure that the desired energy level is
delivered. The hand pieces protect the epidermis by regulating the temperature of the hand piece window through
the embedded temperature monitor. These hand pieces are available on the Xeo and Solera platforms.

Titan Hand Pieces- The Titan hand pieces are designed to produce a sustained pulse of light over a wavelength
spectrum tailored to provide heating in the dermis to treat skin laxity (although it is cleared in the United States
by the U.S. Food and Drug Administration, or FDA, only for deep dermal heating). The hand piece consists of a
custom light source, proprietary wavelength filter, closed-loop power control, sapphire cooling window and
embedded temperature monitor, and weighs approximately three pounds. The temperature of the epidermis is
controlled by using a sapphire window to provide cooling before, during and after the delivery of energy to the
treatment site. We offer two different Titan hand pieces—Titan V and Titan XL.

Titan V- Titan V has a treatment tip that extends beyond the hand piece housing to provide enhanced visibility
of the skin’s surface to effectively treat delicate areas such as the skin around the eyes and nose.

Titan XL- Titan XL, like the Titan V, has a treatment tip that extends beyond the housing for improved
visibility. It also has a larger treatment spot size to treat larger body areas faster, such as the arms, abdomen and
legs.

The Titan hand pieces can be used on the Xeo and Solera platforms. The Titan hand piece requires a periodic
“refilling” process, which includes the replacement of the optical source, after a set number of pulses have been
used. This provides us with a source of recurring revenue.

Pearl Hand Piece- The Pearl hand piece, introduced in 2007, is designed to treat fine lines, uneven texture and
dyschromia through the application of proprietary YSGG laser technology. This hand piece can safely remove a
small portion of the epidermis, while coagulating the remaining epidermis, leading to new collagen growth. The
Pearl hand piece consists of a custom monolithic laser source, scanner and power monitoring electronics. The
scanner includes multiple scan patterns to allow simple and fast treatments of the face. The hand piece includes
an attachment for a smoke evacuator, allowing the practitioner to use one hand during treatment.

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Pearl Fractional Hand Piece- The Pearl Fractional hand piece, introduced in 2008, also uses proprietary
YSGG technology and is designed to treat wrinkles and deep dermal imperfections (although it is cleared in the
United States by the FDA only for skin resurfacing and coagulation). This hand piece penetrates the deep dermis
producing a series of microcolumns across the skin, which can result in the removal of damaged tissue and the
production of new collagen. The Pearl Fractional hand piece consists of a custom monolithic laser source,
scanner and power monitoring electronics. The scanner includes multiple scan patterns to allow simple and fast
treatments of the face. The hand piece includes an attachment for a smoke evacuator, allowing the practitioner to
use one hand during treatment.

Our Applications and Procedures

Our products are designed to allow the practitioner to select an appropriate combination of energy level, spot size
and pulse duration for each treatment. The ability to manipulate the combinations of these parameters allows our
customers to treat the broadest range of conditions available with a single light-based system.

Hair Removal- Our laser technology allows our customers to treat all skin types and hair thicknesses. Our 1064
nm Nd:YAG laser permits energy to safely penetrate through the epidermis of any skin type and into the dermis
where the hair follicle is located. Using the universal graphic user interface on our control console, the
practitioner sets parameters to deliver therapeutic energy with a large spot size and variable pulse durations,
allowing the practitioner to treat fine or coarse hair. Our 1064nm Nd:YAG hand piece allows our customers to
treat all skin types, while our ProWave 770 hand piece, with its pulsed light technology, treats the majority of
skin types quickly and effectively.

To remove hair using a 1064nm Nd:YAG hand piece, the treatment site on the skin is first cleaned and shaved.
The practitioner then applies a thin layer of gel to glide across the skin, and next applies the hand piece directly
to the skin to cool the area to be treated and then delivers a laser pulse to the pre-cooled area. To remove hair
using the ProWave 770 hand piece, mineral oil is used instead of gel, and cooling is provided by a sapphire
window placed directly on the skin, allowing the pulse of light to be applied while the treatment area is being
cooled. In the case of both hand pieces, delivery of the energy destroys the hair follicles and prevents hair
re-growth. This procedure is then repeated at the next treatment site on the body, and can be done in a gliding
motion to increase treatment speed. Patients receive on average three to six treatments. Each treatment can take
between five minutes and one hour depending on the size of the area and the condition being treated. On average,
there are six to eight weeks between treatments.

Vascular Lesions- Our laser technology allows our customers to treat the widest range of aesthetic vein
conditions, including spider and reticular veins and small facial veins. Our 1064nm Nd:YAG hand piece’s
adjustable spot size of 3, 5, 7 or 10 millimeters allows the practitioner to control treatment depth to target
different sized veins. Selection of the appropriate energy level and pulse duration ensures effective treatment of
the intended target. Our AcuTip 500 hand piece, with its 6 millimeter spot size, uses pulsed-light technology and
is designed for the treatment of facial vessels.

The vein treatment procedure when using the 1064nm Nd:YAG hand piece is performed in a substantially similar
manner to the laser hair removal procedure. The laser hand piece is used to cool the treatment area both before
and after the laser pulse has been applied. With the AcuTip 500 hand piece, the pulse of light is delivered while
the treatment area is being cooled with the sapphire tip. The delivered energy damages the vein and, over time, it
is absorbed by the body. Patients receive on average between one and six treatments, with six weeks or longer
between treatments.

Skin Rejuvenation- Our laser and other light-based technologies allow our customers to perform non-invasive
and minimally-invasive treatments that reduce redness, pore size, fine lines and laxity, improve skin texture, and
treat other aesthetic conditions. Our products are each designed to minimize the risk of damage to the
surrounding tissue.

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Texture; Lines and Wrinkles- When using a 1064nm Nd:YAG laser to improve skin texture, reduce pore size
and treat fine lines, cooling is not applied and the hand piece is held directly above the skin. A large number of
pulses are directed at the treatment site, repeatedly covering an area, such as the cheek. By delivering many
pulses of laser light to a treatment area, a gentle heating of the dermis occurs and collagen growth is stimulated to
rejuvenate the skin and reduce wrinkles. Patients typically receive four to six treatments for this procedure. The
treatment typically takes less than a half hour and there are typically two to four weeks between treatments.

When treating texture and fine lines with a Pearl hand piece, the hand piece is held at a controlled distance from
the skin and the scanner delivers a preset pattern of spots to the treatment area. Cooling is not applied to the
epidermis during the treatment. The energy delivered by the hand piece ablates a portion of the epidermis while
leaving a coagulated portion that will gently peel off over the course of a few days. Heat is also delivered into the
dermis which can result in the production of new collagen. Treatment of the full face can usually be performed in
15 to 30 minutes. Patients receive on average between one and three treatments at monthly intervals.

When treating wrinkles and deep dermal imperfections with a Pearl Fractional hand piece, the hand piece is held
at a controlled distance from the skin and the scanner delivers a preset pattern of spots to the treatment area.
Cooling is not applied to the epidermis during the treatment. The energy delivered by the hand piece penetrates
the deep dermis producing a series of microcolumns across the skin, which can result in the removal of damaged
tissue and the production of new collagen. Treatment of the full face can usually be performed in less than an
hour. Patients receive on average between one and three treatments at monthly intervals.

Our CE Mark allows us to market Pearl Fractional in the European Union, Australia and certain other countries
outside the United States for the treatment of wrinkles and deep dermal imperfections. However, in the United
States we have a 510(k) clearance for only skin resurfacing and coagulation.

Dyschromia- Our pulsed-light technologies allow our customers to safely and effectively treat red and brown
dyschromia, which is skin discoloration, pigmented lesions and rosacea. The practitioner delivers a narrow
spectrum of light to the surface of the skin through our LP560 or LimeLight hand pieces. These hand pieces
include one of our proprietary wavelength filters, which reduce the energy level required for therapeutic effect
and minimize the risk of skin injury.

In treating pigmented lesions with a pulsed-light technology, the hand piece is placed directly on the skin and
then the light pulse is triggered. The cells forming the pigmented lesion absorb the light energy, darken and then
flake off over the course of two to three weeks. Several treatments may be required to completely remove the
lesion. The treatment takes a few minutes per area treated and there are typically three to four weeks between
treatments.

Practitioners can also treat dyschromia and other skin conditions with our Pearl hand piece. During these
treatments, the heat delivered by the Pearl hand piece will remove the outer layer of the epidermis while
coagulating a portion of the epidermis. That coagulated portion will gently peel off over the course of a few days,
revealing a new layer of skin underneath. Treatment of the full face can usually be performed in 15 to 30
minutes. Patients receive on average between one and three treatments at monthly intervals.

Skin Laxity- Our Titan technology allows our customers to use deep dermal heating to tighten lax skin. The
practitioner delivers a spectrum of light to the skin through our Titan hand piece. This hand piece includes our
proprietary light source and wavelength filter which tailors the delivered spectrum of light to provide heating at
the desired depth in the skin.

In treating skin laxity, the hand piece is placed directly on the skin and then the light pulse is triggered. A
sustained pulse causes significant heating in the dermis. This heating can cause immediate collagen contraction
while also stimulating long-term collagen re-growth. Several treatments may be required to obtain the desired
degree of tightening of the skin. The treatment of a full face can take over an hour and there are typically four
weeks between treatments.

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Our CE Mark allows us to market the Titan in the European Union, Australia and certain other countries outside
the United States for the treatment of wrinkles through skin tightening. However, in the United States we have a
510(k) clearance for only deep dermal heating.

Product Upgrades

Our products are designed to allow our customers to cost-effectively upgrade to our newest technologies, which
provides our customers the option to add applications to their system and provides us with a source of recurring
revenue. When we introduce a new product, we notify our customers of the upgrade opportunity through a sales
call or mailing. In most cases, a field service representative can install the upgrade at the customer site in a
matter of hours, which results in very little downtime for practitioners. In some cases, where substantial upgrades
are necessary, customers will receive fully-refurbished systems before sending their prior systems back to our
headquarters.

Post-Warranty Service and Titan Hand Piece Refills

Each Titan hand piece is a refillable product, which provides us with a source of recurring revenue from our
existing customers. We offer post-warranty services to our customers either through extended service contracts to
cover preventive maintenance or replacement parts and labor, or through direct billing for parts and labor. These
post-warranty services serve as additional sources of recurring revenue from our installed base.

Sales and Marketing

In the United States we market and sell our products primarily through a direct sales organization. Generally,
each direct sales employee is assigned a specific territory. As of December 31, 2008, we had a U.S. direct sales
force of 35 employees. In addition to direct sales employees, we have a distribution relationship with PSS World
Medical that operates medical supply distribution service centers with over 700 sales representatives serving
physician offices throughout the United States. For the years ended December 31, 2008, 2007 and 2006, revenue
from PSS was $12.1 million, $14.6 million and $15.4 million, respectively. In January 2009, we had a company-
wide reduction in force of approximately 10%, which included members of our direct sales force.

International sales are generally made through a direct international sales force of 31 employees, as well as a
worldwide distributor network in over 30 countries as of December 31, 2008. As of December 31, 2008, we had
direct sales offices in Australia, Canada, France, Japan, Spain, Switzerland and the United Kingdom. Our
international revenue represented 50%, 37% and 31% of total revenue for the years ended December 31, 2008,
2007 and 2006, respectively.

We also sell certain items like Titan hand piece refills and marketing brochures via the internet.

Although specific customer requirements can vary depending on applications, customers generally demand
quality performance, ease of use, and high productivity in relation to the cost of ownership. We have responded
to these customer demands by introducing new products focused on these requirements in the markets we serve.
Specifically, we believe that we introduce new products and applications that are innovative, that address the
specific aesthetic procedures in demand, and that are upgradeable on our customers’ existing systems. In
addition, we provide attractive upgrade pricing to new product families and are responsive to our customers’
financing preferences. To increase market penetration, in addition to marketing to the core specialties of plastic
surgeons and dermatologists, we also market to the non-core aesthetic practices consisting of gynecologists,
primary care physicians, family practitioners, physicians offering aesthetic treatments in non-medical offices and
other qualified practitioners.

We seek to establish strong ongoing relationships with our customers through the upgradeability of our products,
sales of extended service contracts, the refilling of Titan hand pieces, and ongoing training and support. We

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primarily target our marketing efforts to practitioners through office visits, workshops, trade shows, webinars and
trade journals. We also market to potential patients through brochures, workshops and our website. We offer
clinical forums with recognized expert panelists to promote advanced treatment techniques using our products to
further enhance customer loyalty and uncover new sales opportunities.

Competition

Our industry is subject to intense competition. Our products compete against conventional non-light-based
treatments, such as electrolysis, Botox and collagen injections, chemical peels, microdermabrasion and
sclerotherapy. Our products also compete against
laser and other light-based products offered by public
companies, such as Candela, Cynosure, Elen (in Italy), Iridex, Palomar, Solta and Syneron, as well as private
companies, including, Alma, Aesthera, Lumenis, Sciton and several other companies.

Competition among providers of laser and other light-based devices for the aesthetic market is characterized by
extensive research efforts and innovative technology. While we attempt to protect our products through patents
and other intellectual property rights, there are few barriers to entry that would prevent new entrants or existing
competitors from developing products that would compete directly with ours. There are many companies, both
public and private, that are developing innovative devices that use both light-based and alternative technologies.
Some of these competitors have greater resources than we do or product applications for certain sub-markets in
which we do not participate. Additional competitors may enter the market, and we are likely to compete with
new companies in the future. To compete effectively, we have to demonstrate that our products are attractive
alternatives to other devices and treatments by differentiating our products on the basis of performance, brand
name, service and price. We have encountered and expect to continue to encounter potential customers who, due
to existing relationships with our competitors, are committed to, or prefer the products offered by these
competitors. Competitive pressures may result in price reductions and reduced margins for our products.

Research and Development

Our research and development group develops new products and applications and builds clinical support to
address unmet or underserved market needs. As of December 31, 2008, our research and development activities
were conducted by a staff of 22 employees with a broad base of experience in lasers and optoelectronics. We
have developed relationships with outside contract engineering and design consultants, giving our team
additional technical and creative breadth. We work closely with thought leaders and customers, both individually
and through our sponsored seminars, to understand unmet needs and emerging applications in aesthetic medicine.
Research and development expenses for 2008, 2007 and 2006, were $7.6 million, $7.2 million and $6.5 million,
respectively.

Service and Support

Our products are engineered to enable quick and efficient service and support. There are several separate
components of our products, each of which can easily be removed and replaced. We believe that quick and
effective delivery of service is important to our customers. As of December 31, 2008, we had a 40-person global
service department. Internationally, we provide direct service support through our Australia, Canada, France,
Japan, Spain and Switzerland offices, and also through the network of distributors in over 30 countries and third-
party service providers. We provide initial warranties on our products to cover parts and service and offer
extended service plans that vary by the type of product and the level of service desired. Our standard warranty on
system consoles covers parts and service for a standard period of one or two years. From time to time, we also
have promotions whereby we include a post-warranty service contract with the sale of our products. Customers
are notified before their initial warranty expires and are able to choose from two different extended service plans
covering preventative maintenance or replacement parts and labor. In the event a customer does not purchase an
extended service plan, we will offer to service the customer’s system and charge the customer for time and
materials. Our Titan hand pieces generally include a warranty for a set number of shots instead of for a period of
time. We have invested substantial financial and management resources to develop a worldwide infrastructure to
meet the service needs of our customers worldwide.

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Manufacturing

We manufacture our products with components and subassemblies supplied by vendors. We assemble and test
each of our products at our Brisbane, California facility. Quality control, cost reduction and inventory
management are top priorities of our manufacturing operations.

We purchase certain components and subassemblies from a limited number of suppliers. We have flexibility with
our suppliers to adjust the number of components and subassemblies as well as the delivery schedules. The
forecasts we use are based on historical demands and sales projections. Lead times for components and
subassemblies may vary significantly depending on the size of the order, time required to fabricate and test the
components or subassemblies, specific supplier requirements and current market demand for the components and
subassemblies. We reduce the potential for disruption of supply by maintaining sufficient inventories and
identifying additional suppliers. The time required to qualify new suppliers for some components, or to redesign
them, could cause delays in our manufacturing. To date, we have not experienced significant delays in obtaining
any of our components or subassemblies.

We use small quantities of common cleaning products in our manufacturing operations, which are lawfully
disposed of through a normal waste management program. We do not forecast any material costs due to
compliance with environmental laws or regulations.

We are required to manufacture our products in compliance with the FDA’s Quality System Regulation, or QSR.
The QSR covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality
assurance, packaging, storage and shipping of our products. The FDA enforces the QSR through periodic
unannounced inspections. Our single manufacturing facility located in Brisbane, CA, was inspected by the FDA
in 2008. There were no significant findings as a result of this audit and our responses have been accepted by the
FDA. Our failure to maintain compliance with the QSR requirements could result in the shut down of our
manufacturing operations and the recall of our products, which would have a material adverse effect on business.
In the event that one of our suppliers fails to maintain compliance with our quality requirements, we may have to
qualify a new supplier and could experience manufacturing delays as a result. We have opted to maintain quality
assurance and quality management certifications to enable us to market our products in the United States, the
member states of the European Union, the European Free Trade Association and countries which have entered
into Mutual Recognition Agreements with the European Union. Our manufacturing facility is ISO 13485
certified.

Patents and Proprietary Technology

laws, and non-disclosure,
We rely on a combination of patent, copyright,
intellectual property rights. As of
confidentiality and invention assignment agreements to protect our
December 31, 2008, we had eleven issued U.S. patents and twenty-eight pending U.S. patent applications.
Cutera, CoolGlide, Solera, Xeo, AcuTip, Limelight, Pearl, ProWave 770 and Titan are only some of our
trademarks. We have trademark rights to these names and others in the United States and certain other countries.
We intend to file for additional patents and trademarks to continue to strengthen our intellectual property rights.

trademark and trade secret

We license certain patents from Palomar and pay ongoing royalties based on sales of applicable hair-removal
products. The royalty rate on these products ranges from 3.75% to 7.50% of revenue. The patents are set to
expire in February 2013 and February 2015. Our revenue from systems that do not include hair-removal
capabilities (such as our Solera Titan) and revenue from service contracts are not subject to these royalties. In
addition, in 2006 we capitalized $1.2 million as an intangible asset representing the ongoing license for these
patents, which is being amortized on a straight-line basis over their expected useful life of 9-10 years. We also
have a technology sublicense purchased in 2002, and a trademark license which we purchased in 2007, which are
being amortized over their expected useful lives of ten and two years, respectively.

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Our employees and technical consultants are required to execute confidentiality agreements in connection with
their employment and consulting relationships with us. We also require them to agree to disclose and assign to us
all inventions conceived in connection with the relationship. We cannot provide any assurance that employees
and consultants will abide by the confidentiality or assignability terms of their agreements. Despite measures
taken to protect our intellectual property, unauthorized parties may copy aspects of our products or obtain and
use information that we regard as proprietary.

Government Regulation

Our products are medical devices subject to extensive and rigorous regulation by the U.S. Food and Drug
Administration, as well as other regulatory bodies. FDA regulations govern the following activities that we
perform and will continue to perform to ensure that medical products distributed domestically or exported
internationally are safe and effective for their intended uses:

•

•

•

•

•

•

Product design and development;

Product testing;

Product manufacturing;

Product safety;

Product labeling;

Product storage;

• Recordkeeping;

•

Pre-market clearance or approval;

• Advertising and promotion;

•

•

Production; and

Product sales and distribution.

FDA’s Pre-market Clearance and Approval Requirements

Unless an exemption applies, each medical device we wish to commercially distribute in the United States will
require either prior 510(k) clearance or pre-market approval from the FDA. The FDA classifies medical devices
into one of three classes. Devices deemed to pose lower risks are placed in either class I or II, which requires the
manufacturer to submit to the FDA a pre-market notification requesting permission to commercially distribute
the device. This process is generally known as 510(k) clearance. Some low risk devices are exempted from this
requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or
implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are
placed in class III, requiring pre-market approval. All of our current products are class II devices.

510(k) Clearance Pathway

When a 510(k) clearance is required, we must submit a pre-market notification demonstrating that our proposed
device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial
distribution before May 28, 1976 for which the FDA has not yet called for the submission of Pre-Market
Approval, or PMA, applications. By regulation, the FDA is required to clear or deny a 510(k), pre-market
notification within 90 days of submission of the application. As a practical matter, clearance often takes
significantly longer. The FDA may require further information, including clinical data, to make a determination
regarding substantial equivalence. Laser devices used for aesthetic procedures, such as hair removal, have
generally qualified for clearance under 510(k) procedures.

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The following table details the indications for which we received a 510(k) clearance for our products and when
these clearances were received.

FDA Marketing Clearances:

Laser-based products:

- treatment of vascular lesions
- hair removal
- permanent hair reduction
- treatment of benign pigmented lesions and pseudofolliculitis barbae, commonly
referred to as razor bumps, and for the reduction of red pigmentation in scars

- treatment of wrinkles

Pulsed-light technologies:

- treatment of pigmented lesions
- hair removal and vascular treatments

Date Received:

June 1999
March 2000
January 2001
June 2002

October 2002

March 2003
March 2005

Infrared Titan technology for deep dermal heating for the temporary relief of minor

February 2004

muscle and joint pain and for the temporary increase in local circulation where applied

Solera tabletop console:

- for use with the Titan hand piece
- for use with our pulsed-light hand pieces

Pearl product for the treatment of wrinkles

Pearl Fractional product for skin resurfacing and coagulation

Pre-Market Approval (PMA) Pathway

October 2004
January 2005

March 2007

August 2008

A PMA must be submitted to the FDA if the device cannot be cleared through the 510(k) process. A PMA must
be supported by extensive data, including but not limited to, technical, preclinical, clinical trials, manufacturing
and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device.

No device that we have developed has required pre-market approval, nor do we currently expect that any future
device or indication will require pre-market approval.

Product Modifications

We have modified aspects of our products since receiving regulatory clearance, but we believe that new 510(k)
clearances are not required for these modifications. After a device receives 510(k) clearance or a PMA, any
modification that could significantly affect its safety or effectiveness, or that would constitute a major change in
its intended use, will require a new clearance or approval. The FDA requires each manufacturer to make this
determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s
determination. If the FDA disagrees with our determination not to seek a new 510(k) clearance or PMA, the FDA
may retroactively require us to seek 510(k) clearance or pre-market approval. The FDA could also require us to
cease marketing and distribution and/or recall the modified device until 510(k) clearance or pre-market approval
is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.

Clinical Trials

When FDA approval of a class I, class II or class III device requires human clinical trials, and if the device
presents a “significant risk,” as defined by the FDA, to human health, the device sponsor is required to file an
Investigational Device Exemption, or IDE, application with the FDA and obtain IDE approval prior to
commencing the human clinical trial. If the device is considered a “non-significant” risk, IDE submission to the

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FDA is not required. Instead, only approval from the Institutional Review Board, or IRB, overseeing the clinical
trial is required. Human clinical studies are generally required in connection with approval of class III devices
and may be required for class I and II devices. The IDE application must be supported by appropriate data, such
as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing
protocol is scientifically sound. The IDE must be approved in advance by the FDA for a specified number of
patients. Clinical trials for a significant risk device may begin once the application is reviewed and cleared by the
FDA and the appropriate institutional review boards at the clinical trial sites. Future clinical trials of our products
may require that we submit and obtain clearance of an IDE from the FDA prior to commencing clinical trials.
The FDA, and the IRB at each institution at which a clinical trial is being performed, may suspend a clinical trial
at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health
risk.

Our clinical department continues to work with physicians and other experts in the medical aesthetic market to
gather additional data that may provide the basis for physician-authored white papers, the promotion of our
existing products, or seeking the approval for additional indications on our existing and any future products.

Pervasive and Continuing Regulation

After a device is placed on the market, numerous regulatory requirements apply. These include:

• Quality system regulations, which require manufacturers, including third-party manufacturers, to follow
stringent design, testing, control, documentation and other quality assurance procedures during all
aspects of the manufacturing process;

•

Labeling regulations and FDA prohibitions against
unapproved or “off-label” uses;

the promotion of products for un-cleared,

• Medical device reporting regulations, which require that manufacturers report to the FDA if their device
may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely
cause or contribute to a death or serious injury if the malfunction were to recur; and

•

Post-market surveillance regulations, which apply when necessary to protect the public health or to
provide additional safety and effectiveness data for the device.

The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections
by the FDA and the Food and Drug Branch of the California Department of Health Services, or CDHS, to
determine our compliance with the QSR and other regulations, and these inspections may include the
manufacturing facilities of our subcontractors. In the past, our prior facility has been inspected, and observations
were noted. There were no findings that involved a material violation of regulatory requirements. Our responses
to these observations have been accepted by the FDA and CDHS, and we believe that we are in substantial
compliance with the QSR. Our current manufacturing facility has been inspected by the FDA but not by the
CDHS. The FDA noted observations, but there were no findings that involved a material violation of regulatory
requirements. Our responses to those observations have been accepted by the FDA.

We are also regulated under the Radiation Control for Health and Safety Act, which requires laser products to
comply with performance standards, including design and operation requirements, and manufacturers to certify
in product labeling and in reports to the FDA that their products comply with all such standards. The law also
requires laser manufacturers to file new product and annual reports, maintain manufacturing, testing and sales
records, and report product defects. Various warning labels must be affixed and certain protective devices
installed, depending on the class of the product.

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Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which
may include any of the following sanctions:

• Warning letters, fines, injunctions, consent decrees and civil penalties;

• Repair, replacement, recall or seizure of our products;

• Operating restrictions or partial suspension or total shutdown of production;

• Refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses,

or modifications to existing products;

• Withdrawing 510(k) clearance or pre-market approvals that have already been granted; and

• Criminal prosecution.

The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we
have manufactured or distributed. If any of these events were to occur, they could have a material adverse effect
on our business.

We are also subject to a wide range of federal, state and local laws and regulations, including those related to the
environment, health and safety, land use and quality assurance. We believe that compliance with these laws and
regulations as currently in effect will not have a material adverse effect on our capital expenditures, earnings and
competitive and financial position.

International

International sales of medical devices are subject to foreign governmental regulations, which vary substantially
from country to country. The time required to obtain clearance or approval by a foreign country may be longer or
shorter than that required for FDA clearance or approval, and the requirements may be different.

The primary regulatory environment in Europe is that of the European Union, which consists of a number of
countries encompassing most of the major countries in Europe. The member states of the European Free Trade
Association have voluntarily adopted laws and regulations that mirror those of the European Union with respect
to medical devices. Other countries, such as Switzerland, have entered into Mutual Recognition Agreements and
allow the marketing of medical devices that meet European Union requirements. The European Union has
adopted numerous directives and European Standardization Committees have promulgated voluntary standards
regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices.
Devices that comply with the requirements of a relevant directive will be entitled to bear CE conformity marking,
indicating that the device conforms with the essential requirements of the applicable directives and, accordingly,
can be commercially distributed throughout the member states of the European Union, the member states of the
European Free Trade Association and countries which have entered into a Mutual Recognition Agreement. The
method of assessing conformity varies depending on the type and class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body, an
independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party
assessment may consist of an audit of the manufacturer’s quality system and specific testing of the
manufacturer’s device. An assessment by a Notified Body in one member state of the European Union, the
European Free Trade Association or one country which has entered into a Mutual Recognition Agreement is
required in order for a manufacturer to commercially distribute the product throughout these countries. ISO 9001
and ISO 13845 certification are voluntary harmonized standards. Compliance establishes the presumption of
conformity with the essential requirements for a CE Marking. In February 2000, our facility was awarded the
ISO 9001 and EN 46001 certification. In March 2003, we received our ISO 9001 updated certification (ISO
9001:2000) as well as our certification for ISO 13485:1996 which replaced our EN 46001 certification. In March
2004, we received our ISO 13485:2003 certification, which is the most current ISO certification for medical
device companies, and in March 2006, we passed our ISO 13485 recertification audit.

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Employees

As of December 31, 2008, we had 244 employees, of which 101 were in sales and marketing, 55 in
manufacturing operations, 40 in technical service, 22 in research and development and 26 in general and
administrative. We believe that our future success will depend in part on our continued ability to attract, hire and
retain qualified personnel. None of our employees is represented by a labor union, and we believe our employee
relations are good. In January 2009, we had a company-wide reduction in force of approximately 10%.

Available Information

We are subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, we are
required to file reports and information with the Securities and Exchange Commission, or SEC, including reports
on the following forms: annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934. These reports and other information concerning the company may be accessed through
the SEC’s website at http://www.sec.gov and our website at http://www.cutera.com. Such filings are placed on
our website soon after they are filed with the SEC.

Our charters for our Audit and Compensation Committees and our Code of Ethics are available on our website at
http://www.cutera.com. In the event that we grant a waiver under our Code of Ethics to any of our officers and
directors, we will publish it on our website.

ITEM 1A. RISK FACTORS

We are in a difficult economic period, and the uncertainty in the economy may reduce customer demand for
our products, cause potential customers to delay their purchase decisions and make it more difficult for some
potential customers to obtain credit financing, all of which would adversely affect our business and may
increase the volatility of our stock price.

Current economic conditions are unstable and we are in a global recession. The general economic difficulties
being experienced by our customers and the lack of availability of consumer credit for some of our customers are
adversely affecting the market in which we operate. In times of economic uncertainty or recession, individuals
often reduce the amount of money that they spend on discretionary items, including aesthetic procedures. This
economic uncertainty may cause potential customers to delay their capital equipment purchase decisions, and
may make it more difficult for some potential customers to obtain credit financing necessary to purchase our
products or make timely payments to us, each of which can have a material adverse effect on our revenue,
profitability and business and may increase the volatility of our stock price.

We rely heavily on our sales professionals to market and sell our products worldwide. If we are unable to
effectively train, retain and manage these employees, our ability to manage our business will be harmed,
which would impair our future revenue and profitability.

Our success largely depends on our ability to manage and improve the productivity levels of our sales
professionals worldwide. Measures we implement
to improve that productivity may not be
successful. For example, in January 2009 we had a company-wide reduction of employees, including members of
our direct sales force. Further, we restructured our sales commission program, and assigned some sales
employees with new sales or management responsibilities. These measures may not improve productivity and
may lead to reduced revenue and employee turnover, which could materially harm our business. If we experience
significant levels of attrition or reductions in productivity among our sales professionals or our sales managers,
our revenue and profitability may be adversely affected as a result.

in an effort

The initiatives that we are implementing in an effort to improve revenue and profitability could be
unsuccessful, which could harm our business.

In 2008, compared to 2007, our revenue decreased 18%, U.S. sales decreased 35% and international sales
increased 11%. In an effort to improve our revenue and profitability, we have implemented several strategic

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initiatives focusing on our worldwide sales and marketing infrastructure, product introductions and expense
management. For example, in January 2009, we had a company-wide reduction in force of approximately 10%
and we also reduced or eliminated certain employee benefit programs in an effort to manage expenses in line
with expected revenue levels. These initiatives are intended to improve our revenue and profitability; however,
they may instead result in employee turnover, instability to our operations and cause harm to our business.

A lack of customer demand for our products in any of our markets would harm our revenue.

Most of our products are marketed to established dermatology and plastic surgeon medical offices, as well as the
non-core businesses, such as family practitioners, primary care physicians, gynecologists, and non-medical
models. Our most recent product introductions, Pearl and Pearl Fractional, are targeted at dermatologists and
plastic surgeons. Continuing to achieve and maintain penetration into each of our markets is a material
assumption of our business strategy.

Demand for our products in any of our markets could be weakened by several factors, including:

•

The duration of the current worldwide recession;

• Current lack of credit financing for some of our potential customers;

•

•

Poor financial performance of market segments that try introducing aesthetic procedures to their
businesses;

The inability to differentiate our products from those of our competitors;

• Reduced patient demand for elective aesthetic procedures;

•

Failure to build and maintain relationships with opinion leaders within the various market segments; and

• An increase in malpractice lawsuits.

If we do not achieve anticipated demand for our products in each of our market segments, our revenue may be
adversely impacted.

To successfully market and sell our products internationally, we must address many issues that are unique to
our international business.

Our international revenue was $41.7 million in 2008, which represented 50% of our total revenue. International
revenue is a material component of our business strategy. We depend on third-party distributors and a direct sales
force to sell our products internationally, and if they underperform we may be unable to increase or maintain our
level of international revenue. To grow our business, we will need to improve productivity in current sales
territories and expand into new territories. However, direct sales productivity may not improve and distributors
may not accept our business or commit the necessary resources to market and sell our products to the level of our
expectations. As a result, we may not be able to increase or maintain international revenue growth.

We believe that an increasing amount of our future revenue will come from international sales as we expand our
overseas operations and develop opportunities in additional international territories. International sales are
subject to a number of risks, including:

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• Difficulties in staffing and managing our foreign operations;

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Fluctuating foreign currency exchange rates;

Foreign certification and regulatory requirements;

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Lengthy payment cycles and difficulty in collecting accounts receivable;

• Customs clearance and shipping delays;

•

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Political and economic instability;

Lack of awareness of our brand in international markets;

Preference for locally-produced products; and

• Reduced protection for intellectual property rights in some countries.

If one or more of these risks were realized, it could require us to dedicate significant resources to remedy the
situation; and if we were unsuccessful at finding a solution, we may not be able to sell our products in a
particular market and, as a result, our revenue may decline.

We compete against companies that have longer operating histories, newer and different products, and greater
resources, each of which may result in a competitive disadvantage to us and harm our business.

Our industry is subject to intense competition. Our products compete against similar products offered by public
companies, such as Candela, Cynosure, Elen (in Italy), Iridex, Palomar, Solta, and Syneron and as well as private
companies such as Aesthera, Alma, Lumenis, Sciton and several other companies. We are likely to compete with
new companies in the future. Competition with these companies could result in reduced selling prices, reduced
profit margins and loss of market share, any of which would harm our business, financial condition and results of
operations. We also face competition from medical products, such as Botox, an injectable compound used to
reduce wrinkles, and collagen injections. Other alternatives to the use of our products include sclerotherapy, a
procedure involving the injection of a solution into the vein to collapse it, electrolysis, a procedure involving the
application of electric current to eliminate hair follicles, and chemical peels. We may also face competition from
manufacturers of pharmaceutical and other products that have not yet been developed. Our ability to compete
effectively depends upon our ability to distinguish our company and our products from our competitors and their
products, and includes such factors as:

•

•

•

Success and timing of new product development and introductions;

Product performance;

Product pricing;

• Quality of customer support;

• Development of successful distribution channels, both domestically and internationally; and

•

Intellectual property protection.

Some of our competitors have newer or different products and more established customer relationships than we
do, which could inhibit our market penetration efforts. For example, we have encountered, and expect to continue
to encounter, situations where, due to pre-existing relationships, potential customers decided to purchase
additional products from our competitors. Potential customers also may need to recoup the cost of products that
they have already purchased from our competitors and may decide not to purchase our products, or to delay such
purchases. If we are unable to achieve continued market penetration, we will be unable to compete effectively
and our business will be harmed.

In addition, some of our current and potential competitors have greater financial, research and development,
business development, manufacturing, and sales and marketing resources than we have. Our competitors could
utilize their greater financial resources to acquire other companies to gain enhanced name recognition and market
share, as well as new technologies or products that could effectively compete with our existing product lines. For
example, Thermage acquired Reliant in December 2008 and thereby formed Solta. To compete effectively, we

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have to demonstrate that our products are attractive alternatives to other devices and treatments by differentiating
our products on the basis of such factors as performance, brand name, service and price, and this is difficult to do
in a crowded market. Our competitors could form strategic alliances with other companies to develop products
and solutions that effectively compete with our products. For example, Palomar and Syneron have each entered
into agreements with Proctor and Gamble for the proposed development of home-use aesthetic devices. Business
combinations and alliances by our competitors could increase competition, which could harm our business.

The aesthetic equipment market is characterized by rapid innovation. To compete effectively, we must develop
and acquire new products, market them successfully, and identify new markets for our technology.

We have created products to apply our technology to hair removal, treatment of veins and skin rejuvenation,
including the treating of diffuse redness, skin laxity, fine lines, wrinkles, skin texture, pore size and pigmented
lesions. Currently, these applications represent the majority of offered laser and other energy-based aesthetic
procedures. To grow in the future, we must develop and acquire new and innovative aesthetic applications,
identify new markets for our existing technologies, and develop and acquire new technologies for various
platforms. To successfully expand our product offerings, we must, among other things:

• Develop and acquire new products that either add to or significantly improve our current products;

• Convince our customers and prospects that our new products or upgrades would be an attractive

revenue-generating addition to their practices;

Sell our products to a broad customer base;

Identify new markets and alternative applications for our technology;

Protect our existing and future products with defensible intellectual property; and

Satisfy and maintain all regulatory requirements for commercialization.

•

•

•

•

Every year since 2000, we have introduced at least one new product. Historically, these introductions have
generally been a significant component of our financial performance. Our business strategy is based, in part, on
our expectation that we will continue to make regular product introductions that we can sell to new customers as
systems and to existing customers as upgrades to their existing systems. Even with a significant investment in
research and development, we may be unable to continue to develop, acquire or effectively launch and market
new products and technologies regularly, or at all, which could adversely affect our business.

Some of our competitors release new products more often and more successfully than we do. For example, in the
second half of 2008, revenue from sales of our new Pearl Fractional product to new and existing customers did
not meet our expectations. We believe that, to increase revenue from sales of new products and related upgrades,
we need to continue to develop our clinical support, further expand and nurture relationships with industry
thought leaders and increase market awareness of the benefits of our new products. If we fail to successfully
commercialize any of our new products, our business could be harmed.

While we attempt to protect our products through patents and other intellectual property, there are few barriers to
entry that would prevent new entrants or existing competitors from developing products that compete directly
with ours. For example, while our CoolGlide product was the first long-pulse Nd:YAG, or long wavelength, laser
system cleared by the FDA for permanent hair reduction on all skin types, competitors have subsequently
introduced systems that utilize Nd:YAG lasers, and received FDA clearances to market these products as treating
all skin types. We expect
that any competitive advantage we may enjoy from other current and future
innovations, such as combining multiple hand pieces in a single system to perform a variety of applications, may
diminish over time, as companies successfully respond to our, or create their own, innovations. Consequently, we
believe that we will have to continuously innovate and improve our products and technology to compete
successfully. If we are unable to innovate successfully, our products could become obsolete and our revenue
could decline as our customers and prospects purchase our competitors’ products.

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If there is not sufficient consumer demand for the procedures performed with our products, practitioner
demand for our products could be inhibited, resulting in unfavorable operating results and reduced growth
potential.

Continued expansion of the global market for laser and other energy-based aesthetic procedures is a material
assumption of our business strategy. Most procedures performed using our products are elective procedures not
reimbursable through government or private health insurance, with the costs borne by the patient. The decision to
utilize our products may therefore be influenced by a number of factors, including:

• Consumer disposable income, which may be impacted by political and economic conditions, such as

concerns over the recession, high unemployment rates and the housing and credit market crisis;

•

•

•

•

The cost of procedures performed using our products;

The cost, safety and effectiveness of alternative treatments, including treatments which are not based
upon laser or other energy-based technologies and treatments which use pharmaceutical products;

The success of our sales and marketing efforts; and

The education of our customers and patients on the benefits and uses of our products, compared to
competitors’ products and technologies.

If, as a result of these factors, there is not sufficient demand for the procedures performed with our products,
practitioner demand for our products could be reduced, which could have a material adverse effect on our
business, financial condition, revenue and result of operations.

If PSS World Medical fails to perform to our expectations, we may fail to achieve anticipated operating
results.

We have a distribution agreement with PSS World Medical. PSS sales professionals work in coordination with
our sales force to locate new customers for our products throughout the United States. For the years ended
December 31, 2008 and 2007, approximately 14% of our revenue came from PSS. Although we have dedicated
sales professionals to work closely with, and increase the focus and attention on, our PSS relationship, there is no
assurance that the focus on PSS will translate into increased revenue for us. Further, if PSS does not perform
adequately under the arrangement, or terminates our relationship, it may have a material adverse effect on our
business, financial condition and results of operations.

We depend on skilled and experienced personnel to operate our business effectively. If we are unable to
recruit, hire and retain these employees, our ability to manage and expand our business will be harmed, which
would impair our future revenue and profitability.

Our success largely depends on the skills, experience and efforts of our officers and other key employees. Except
for Change of Control and Severance Agreements for our executive officers, we do not have employment
contracts with any of our officers or other key employees. Any of our officers and other key employees may
terminate their employment at any time. We do not have a succession plan in place for each of our officers and
key employees. In addition, we do not maintain “key person” life insurance policies covering any of our
employees. The loss of any of our senior management team members could weaken our management expertise
and harm our business.

Our ability to retain our skilled labor force and our success in attracting and hiring new skilled employees are
critical factors in determining whether we will be successful in the future. We may not be able to meet our future
hiring needs or retain existing personnel. We may face particularly significant challenges and risks in hiring,
training, managing and retaining engineering and sales and marketing employees. Failure to attract and retain
personnel, particularly technical and sales and marketing personnel, would materially harm our ability to
compete effectively and grow our business.

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We may incur substantial expenses if our practices are shown to have violated the Telephone Consumer
Protection Act, and defending ourselves against the related litigation could distract management and harm
our business.

A class action lawsuit was filed against us in January 2008 alleging violations under the federal Telephone
Consumer Protection Act and related Illinois state laws. Although we retain general liability insurance, one
carrier has denied coverage, and the other has agreed to defend us subject to a reservation of rights. There can be
no guarantee that any such insurance will cover the claims that are made, or will insure us for losses on covered
claims.

We have not recorded a liability related to this lawsuit. However, we may determine in the future that an accrual
is required, and we may be required to pay damages in respect of this lawsuit, any of which could materially and
adversely affect our results of operations, cash flows and financial condition. Regardless of the outcome, this
lawsuit may cause us to incur significant expenses, consume resources and divert
the attention of our
management and key personnel from our business operations. Each of these factors could harm our business.

Two securities class action lawsuits were filed against us in April and May 2007, respectively, based upon the
decreases in our stock price following the announcement of our preliminary first quarter 2007 revenue and
earnings, and the announcement of our revised 2007 guidance. Defending ourselves against this litigation
could distract management and harm our business.

Two class action lawsuits were filed against us following declines in our stock price in the spring of 2007. On
November 1, 2007, the court ordered the two cases consolidated. These consolidated cases have been on appeal
since November 2008 after our motion to dismiss the plaintiffs’ complaint was granted. Although we retain
director and officer liability insurance, there can be no guarantee that such insurance will cover the claims that
are made or will insure us fully for all losses on covered claims. This litigation may distract our management and
consume resources that would otherwise have been directed toward operating our business. Each of these factors
could harm our business.

We are exposed to fluctuations in the market values of our portfolio investments, specifically auction rate
securities (ARS), and interest rates. Due to failed auctions of our auction rate investments since February
2008, we are unable to readily liquidate our ARS into cash, and in 2008, we took impairment charges. If these
auctions continue to fail, we may have to take additional impairment charges, which could reduce future
earnings, harm our business and cause our stock price to decline.

We invest our excess cash primarily in money market funds and in highly liquid debt instruments of the U.S.
government and its agencies, U.S. municipalities (including ARS), and in bonds of high-quality corporate issuers.
As of December 31, 2008, our balance in marketable securities was $70.3 million. The longer the duration of a
security, the more susceptible it is to changes in market interest rates and bond yields. As yields increase, those
securities with a lower yield-at-cost show a mark-to-market unrealized loss. For example, assuming a
hypothetical increase in interest rates of one percentage point, the fair value of our total investment portfolio as
of December 31, 2008 would have potentially decreased by approximately $858,000, resulting in an unrealized
loss that would subsequently adversely impact our earnings. As a result, changes in the market interest rates will
affect our future net income (loss).

Our marketable securities included $9.9 million of ARS, of which $9.6 are classified under the caption of ‘Long-
term investments’ in the Consolidated Balance Sheets. These ARS are designed to provide liquidity via an
auction process that resets the applicable interest rate at predetermined calendar intervals, generally every
35 days—though auctions for some of the securities are held every 360 days. However, since February 2008,
auctions for each of our investments in ARS have failed due to the current overall credit concerns in capital
markets. Upon an auction failure, the interest rates do not reset at a market rate but instead reset based on a
formula contained in the security, which rate is generally higher than the current market rate. The failure of the

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auctions impacts our ability to readily liquidate our ARS into cash until a future auction of these investments is
successful, a buyer is found outside of the auction process or the ARS is refinanced by the issuer into another
type of debt instrument.

In 2008, we recorded other-than-temporary impairment charges of $3.6 million relating to our ARS investments.
If in the future we are unable to liquidate our investments in ARS, or there are further other-than-temporary
impairments in their market value, we may have to take additional charges, which could reduce our future
earnings, harm our business and cause our stock price to decline.

The price of our common stock may fluctuate substantially. We have a limited number of shares of common
stock outstanding, a large portion of which is held by a small number of investors, which could result in the
increase in volatility of our stock price.

As of December 31, 2008, approximately 63% of our outstanding shares of common stock were held by 10
institutional investors. As a result of our relatively small public float, our common stock may be less liquid than
the stock of companies with broader public ownership. Among other things, trading of a relatively small volume
of our common stock may have a greater impact on the trading price for our shares than would be the case if our
public float were larger.

In 2008, the global equities market declined sharply and our industry was adversely affected. The public market
price of our common stock has in the past fluctuated substantially and, due to the current concentration of
stockholders and the continuing global recession, may continue to do so in the future. The market price for our
common stock could also be affected by a number of other factors, including:

•

•

The duration of the current global economic recession, and other general market conditions unrelated to
our operating performance;

Sales of large blocks of our common stock, including sales by our executive officers, directors and our
large institutional investors;

• Quarterly variations in our, or our competitors’, results of operations;

• Changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or our

failure to achieve analysts’ estimates;

•

•

The announcement of new products or service enhancements by us or our competitors;

The announcement of the departure of a key employee or executive officer;

• Regulatory developments or delays concerning our, or our competitors’ products; and

•

The initiation of litigation by us or against us.

Actual or perceived instability in our stock price could reduce demand from potential buyers of our stock,
thereby causing our stock price to decline.

We may be involved in future costly intellectual property litigation, which could impact our future business
and financial performance.

Our competitors or other patent holders may assert that our present or future products and the methods we
employ are covered by their patents. In addition, we do not know whether our competitors own or will obtain
patents that they may claim prevent, limit or interfere with our ability to make, use, sell or import our products.
Although we may seek to resolve any potential future claims or actions, we may not be able to do so on
reasonable terms, or at all. If, following a successful third-party action for infringement, we cannot obtain a
license or redesign our products, we may have to stop manufacturing and selling the applicable products and our
business would suffer as a result. In addition, a court could require us to pay substantial damages, and prohibit us
from using technologies essential to our products, any of which would have a material adverse effect on our
business, results of operations and financial condition.

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We may become involved in litigation not only as a result of alleged infringement of a third party’s intellectual
property rights but also to protect our own intellectual property. For example, we have been, and may hereafter
become, involved in litigation to protect the trademark rights associated with our company name or the names of
our products. Infringement and other intellectual property claims, with or without merit, can be expensive and
time-consuming to litigate, and could divert management’s attention from our core business.

Intellectual property rights may not provide adequate protection for some or all of our products, which may
permit third parties to compete against us more effectively.

We rely on patent, copyright, trade secret and trademark laws and confidentiality agreements to protect our
technology and products. At December 31, 2008, we had eleven issued U.S. patents. Some of our components,
such as our laser module, electronic control system and high-voltage electronics, are not, and in the future may
not be, protected by patents. Additionally, our patent applications may not issue as patents or, if issued, may not
issue in a form that will be advantageous to us. Any patents we obtain may be challenged, invalidated or legally
circumvented by third parties. Consequently, competitors could market products and use manufacturing
processes that are substantially similar to, or superior to, ours. We may not be able to prevent the unauthorized
disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees or
current employees, despite the existence generally of confidentiality agreements and other contractual
restrictions. Monitoring unauthorized uses and disclosures of our intellectual property is difficult, and we do not
know whether the steps we have taken to protect our intellectual property will be effective. Moreover, the laws of
many foreign countries will not protect our intellectual property rights to the same extent as the laws of the
United States.

The absence of complete intellectual property protection exposes us to a greater risk of direct competition.
Competitors could purchase one of our products and attempt to replicate some or all of the competitive
advantages we derive from our development efforts, design around our protected technology, or develop their
own competitive technologies that fall outside of our intellectual property rights. If our intellectual property is
not adequately protected against competitors’ products and methods, our competitive position and our business
could be adversely affected.

If we fail to obtain or maintain necessary FDA clearances for our products and indications, if clearances for
future products and indications are delayed or not issued, if there are federal or state level regulatory changes
or if we are found to have violated applicable FDA marketing rules, our commercial operations would be
harmed.

Our products are medical devices that are subject to extensive regulation in the United States by the FDA for
manufacturing, labeling, sale, promotion, distribution and shipping. Before a new medical device, or a new use of
or labeling claim for an existing product, can be marketed in the United States, it must first receive either 510(k)
clearance or pre-marketing approval from the FDA, unless an exemption applies. Either process can be expensive
and lengthy. In the event that we do not obtain FDA clearances or approvals for our products, our ability to
market and sell them in the United States and revenue derived there from may be adversely affected.

Medical devices may be marketed in the United States only for the indications for which they are approved or
cleared by the FDA. For example, we have FDA clearance to market our Titan product in the United States only
for deep dermal heating, and are therefore prevented from promoting or advertising Titan in the United States for
any other indications. If we fail to comply with these regulations, it could result in enforcement action by the
FDA which could lead to such consequences as warning letters, adverse publicity, criminal enforcement action
and/or third-party civil litigation, each of which could adversely affect us.

We have obtained 510(k) clearance for the indications for which we market our products. However, our
clearances can be revoked if safety or effectiveness problems develop. We also are subject to Medical Device
Reporting regulations, which require us to report to the FDA if our products cause or contribute to a death or

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serious injury, or malfunction in a way that would likely cause or contribute to a death or serious injury. Our
products are also subject to state regulations, which are, in many instances, in flux. Changes in state regulations
may impede sales. For example, federal regulations allow our products to be sold to, or on the order of, “licensed
practitioners,” as determined on a state-by-state basis. As a result, in some states, non-physicians may legally
purchase our products. However, a state could change its regulations at any time, thereby disallowing sales to
particular types of end users. We cannot predict the impact or effect of future legislation or regulations at the
federal or state levels.

The FDA and state authorities have broad enforcement powers. If we fail to comply with applicable regulatory
requirements, it could result in enforcement action by the FDA or state agencies, which may include any of the
following sanctions:

• Warning letters, fines, injunctions, consent decrees and civil penalties;

• Repair, replacement, recall or seizure of our products;

• Operating restrictions or partial suspension or total shutdown of production;

• Refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses,

or modifications to existing products;

• Withdrawing 510(k) clearance or pre-market approvals that have already been granted; and

• Criminal prosecution.

If any of these events were to occur, it could harm our business.

If we fail to comply with the FDA’s Quality System Regulation and laser performance standards, our
manufacturing operations could be halted, and our business would suffer.

We are currently required to demonstrate and maintain compliance with the FDA’s Quality System Regulation,
or QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design,
testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products.
Because our products involve the use of lasers, our products also are covered by a performance standard for
lasers set forth in FDA regulations. The laser performance standard imposes specific record-keeping, reporting,
product testing and product labeling requirements. These requirements include affixing warning labels to laser
products, as well as incorporating certain safety features in the design of laser products. The FDA enforces the
QSR and laser performance standards through periodic unannounced inspections. Our failure to take satisfactory
corrective action in response to an adverse QSR inspection or our failure to comply with applicable laser
performance standards could result in enforcement actions, including a public warning letter, a shutdown of our
manufacturing operations, a recall of our products, civil or criminal penalties, or other sanctions, such as those
described in the preceding paragraph, which would cause our sales and business to suffer.

If we modify one of our FDA-approved devices, we may need to seek re-approval, which, if not granted, would
prevent us from selling our modified products or cause us to redesign our products.

Any modifications to an FDA-cleared device that would significantly affect its safety or effectiveness or that
would constitute a major change in its intended use would require a new 510(k) clearance or possibly a
pre-market approval. We may not be able to obtain additional 510(k) clearance or pre-market approvals for new
products or for modifications to, or additional indications for, our existing products in a timely fashion, or at all.
Delays in obtaining future clearance would adversely affect our ability to introduce new or enhanced products in
a timely manner, which in turn would harm our revenue and future profitability.

We have made modifications to our devices in the past and may make additional modifications in the future that
we believe do not or will not require additional clearance or approvals. If the FDA disagrees, and requires new
clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified
devices, which could harm our operating results and require us to redesign our products.

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We may be unable to obtain or maintain international regulatory qualifications or approvals for our current
or future products and indications, which could harm our business.

Sales of our products outside the United States are subject to foreign regulatory requirements that vary widely
from country to country. In addition, exports of medical devices from the United States are regulated by the
FDA. Complying with international regulatory requirements can be an expensive and time-consuming process
and approval is not certain. The time required to obtain clearance or approvals, if required by other countries,
may be longer than that required for FDA clearance or approvals, and requirements for such clearances or
approvals may significantly differ from FDA requirements. We may be unable to obtain or maintain regulatory
qualifications, clearances or approvals in other countries. We may also incur significant costs in attempting to
obtain and in maintaining foreign regulatory approvals or qualifications. If we experience delays in receiving
necessary qualifications, clearances or approvals to market our products outside the United States, or if we fail to
receive those qualifications, clearances or approvals, we may be unable to market our products or enhancements
in international markets effectively, or at all, which could have a material adverse effect on our business and
growth strategy.

Any acquisitions that we make could disrupt our business and harm our financial condition.

We expect to evaluate potential strategic acquisitions of complementary businesses, products or technologies.
We may also consider joint ventures and other collaborative projects. We may not be able to identify appropriate
acquisition candidates or strategic partners, or successfully negotiate, finance or integrate any businesses,
products or technologies that we acquire. Furthermore, the integration of any acquisition and management of any
collaborative project may divert management’s time and resources from our core business and disrupt our
operations and we may incur significant legal, accounting and banking fees in connection with such a transaction.
In addition, if we purchase a company that is not profitable, our cash balances may be reduced or depleted. We
do not have any experience as a team with acquiring companies or products. If we decide to expand our product
offerings beyond laser and other energy-based products, we may spend time and money on projects that do not
increase our revenue. Any cash acquisition we pursue would diminish our available cash balances to us for other
uses, and any stock acquisition could be dilutive to our stockholders.

While we from time to time evaluate potential collaborative projects and acquisitions of businesses, products and
technologies, and anticipate continuing to make these evaluations, we have no present understandings,
commitments or agreements with respect to any material acquisitions or collaborative projects.

The expense and potential unavailability of insurance coverage for our customers could adversely affect our
ability to sell our products, and therefore our financial condition.

Some of our customers and prospective customers have had difficulty in procuring or maintaining liability
insurance to cover their operation and use of our products. Medical malpractice carriers are withdrawing
coverage in certain states or substantially increasing premiums. If this trend continues or worsens, our customers
may discontinue using our products and potential customers may opt against purchasing laser and other energy
based products due to the cost or inability to procure insurance coverage. The unavailability of insurance
coverage for our customers and prospects could adversely affect our ability to sell our products, and that could
harm our financial condition.

Because we do not require training for users of our products, and sell our products at times to non-physicians,
there exists an increased potential for misuse of our products, which could harm our reputation and our
business.

Federal regulations allow us to sell our products to or on the order of “licensed practitioners.” The definition of
“licensed practitioners” varies from state to state. As a result, our products may be purchased or operated by
physicians with varying levels of training, and in many states, by non-physicians, including nurse practitioners,

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chiropractors and technicians. Outside the United States, many jurisdictions do not require specific qualifications
or training for purchasers or operators of our products. We do not supervise the procedures performed with our
products, nor do we require that direct medical supervision occur. We and our distributors generally offer but do
not require product training to the purchasers or operators of our products. In addition, we sometimes sell our
systems to companies that rent our systems to third parties and that provide a technician to perform the
procedures. The lack of training and the purchase and use of our products by non-physicians may result in
product misuse and adverse treatment outcomes, which could harm our reputation and our business, and, in the
event these result in product liability litigation, distract management and subject us to liability, including legal
expenses.

Product liability suits could be brought against us due to a defective design, material or workmanship or
misuse of our products and could result in expensive and time-consuming litigation, payment of substantial
damages and an increase in our insurance rates.

If our products are defectively designed, manufactured or labeled, contain defective components or are misused,
we may become subject to substantial and costly litigation by our customers or their patients. Misusing our
products or failing to adhere to operating guidelines could cause significant eye and skin damage, and underlying
tissue damage. In addition, if our operating guidelines are found to be inadequate, we may be subject to liability.
We have been involved, and may in the future be involved, in litigation related to the use of our products.
Product liability claims could divert management’s attention from our core business, be expensive to defend and
result in sizable damage awards against us. We may not have sufficient insurance coverage for all future claims.
We may not be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage
against all potential liabilities. Any product liability claims brought against us, with or without merit, could
increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our
reputation in the industry and could reduce product sales. In addition, we have been experiencing steep increases
in our product liability insurance premiums. If our premiums continue to rise, we may no longer be able to afford
adequate insurance coverage.

If we are unable to maintain adequate insurance coverage, or we have product liability claims in excess of our
insurance coverage, claims would be paid out of cash reserves, thereby harming our financial condition,
operating results and profitability.

Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply
shortages and price fluctuations, which could harm our business.

Many of the components and materials that comprise our products are currently manufactured by a limited
number of suppliers. A supply interruption or an increase in demand beyond our current suppliers’ capabilities
could harm our ability to manufacture our products until a new source of supply is identified and qualified. Our
reliance on these suppliers subjects us to a number of risks that could harm our business, including:

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Interruption of supply resulting from modifications to or discontinuation of a supplier’s operations;

• Delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s

variation in a component;

• A lack of long term supply arrangements for key components with our suppliers;

•

Inability to obtain adequate supply in a timely manner, or on reasonable terms;

• Difficulty locating and qualifying alternative suppliers for our components in a timely manner;

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Production delays related to the evaluation and testing of products from alternative suppliers and
corresponding regulatory qualifications; and,

• Delay in supplier deliveries.

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Any interruption in the supply of components or materials, or our inability to obtain substitute components or
materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the
demand of our customers, which would have an adverse effect on our business.

Any defects in the design, material or workmanship of our products may not be discovered prior to shipment to
customers, which could result in warranty obligations that may reduce our future revenue and increase our cost.

The design of our products is complex. To manufacture them successfully, we must procure quality components
and employ individuals with a significant degree of technical expertise. If our designs are defective, if suppliers
fail to deliver components to specification, or if our employees fail to properly assemble, test and package our
products, the reliability and performance of our products will be compromised.

If our products contain defects that cannot be repaired easily and inexpensively, we may experience:

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Loss of customer orders and delay in order fulfillment;

• Damage to our brand reputation;

•

•

Increased cost of our warranty program due to product repair or replacement;

Inability to attract new customers;

• Diversion of resources from our manufacturing and research and development departments into our

service department; and

•

Legal action.

The occurrence of any one or more of the foregoing could materially harm our business.

We forecast sales to determine requirements for components and materials used in our products and if our
forecasts are incorrect, we may experience either delays in shipments or increased inventory costs.

We keep limited materials and components on hand. To manage our manufacturing operations with our suppliers,
we forecast anticipated product orders and material requirements to predict our inventory needs up to twelve
months in advance and enter into purchase orders on the basis of these requirements. Our experience of materials
usage may not provide us with enough data to accurately predict future demand. If our sales demand decreases
significantly, or if we overestimate our component and material requirements, we will have excess inventories,
which would increase our expenses. If our business expands, or if we underestimate our component and material
requirements, we may have inadequate inventories, which could interrupt, delay or prevent delivery of our
products to our customers. Any of these occurrences would negatively affect our financial performance and the
level of satisfaction our customers have with our business.

Our gross and operating margins may vary over time.

Our gross and operating margins may be adversely affected by a number of factors, including decreases in our
shipment volume, reductions in, or obsolescence of, our inventory, shifts in our product mix and increased
expenses associated with repairing defective products covered by our warranty program. In addition, the
competitive market environment in which we operate may adversely affect pricing for our products. Because we
own most of our manufacturing capacity, a significant portion of our operating costs are fixed. If we experience a
decrease in shipment volume, or have to reduce our pricing to remain competitive, or experience a greater than
expected failure rate for any of our products, our gross and operating margins will be adversely impacted.

We offer payment terms for qualified customers, In the event that there is a default by any of these customers,
this could affect our earnings and could result in an increase in our days sales outstanding.

While we qualify customers to whom we offer payment terms, we cannot assure that the financial positions of
these customers will not change adversely before we receive payment. In the event that there is a default by any
of our customers to whom we have provided payment terms, this could affect our earnings and could result in an
increase in our days sales outstanding.

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We are subject to fluctuations in the exchange rate of the U.S. dollar and foreign currencies.

We do not actively hedge our exposure to currency rate fluctuations. While we transact business primarily in
U.S. Dollars, and a significant proportion of our revenue is denominated in U.S. Dollars, a portion of our costs
and revenue is denominated in other currencies, such as the Euro, Japanese Yen, Australian Dollar, Canadian
Dollar and British Pound Sterling. As a result, changes in the exchange rates of these currencies to the
U.S. Dollar will affect our net income (loss).

As a result of recent fluctuations in currency markets and the strong dollar relative to many other major
currencies, our products priced in U.S. dollars may be more expensive relative to products of our foreign
competitors, which could result in lower sales. In addition, the non-dollar denominated earnings of our foreign
operations may be lower when reported by us in dollars.

We may have exposure to additional tax liabilities which could negatively impact our income tax provision, net
income, and cash flow.

We are subject to income taxes and other taxes in both the U.S. and the foreign jurisdictions in which we
currently operate or have historically operated. The determination of our worldwide provision for income taxes
and current and deferred tax assets and liabilities requires judgment and estimation. In the ordinary course of our
business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are
subject to regular review and audit by both domestic and foreign tax authorities as well as subject to the
prospective and retrospective effects of changing tax regulations and legislation. Although we believe our tax
estimates are reasonable, the ultimate tax outcome may materially differ from the tax amounts recorded in our
consolidated financial statements and may materially affect our income tax provision, net income, and cash flows
in the period in which such determination is made.

Anti-takeover provisions in our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware
law, contain provisions that could discourage a takeover.

Our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that
might enable our management to resist a takeover, and might make it more difficult for an investor to acquire a
substantial block of our common stock. These provisions include:

• A classified board of directors;

• Advance notice requirements to stockholders for matters to be brought at stockholder meetings;

• A supermajority stockholder vote requirement for amending certain provisions of our Amended and

Restated Certificate of Incorporation and Bylaws;

Limitations on stockholder actions by written consent; and

The right to issue preferred stock without stockholder approval, which could be used to dilute the stock
ownership of a potential hostile acquirer.

•

•

These provisions, as well as Change of Control and Severance Agreements entered into with each of our
executive officers, might discourage, delay or prevent a change in control of our company or a change in our
management. The existence of these provisions could adversely affect the voting power of holders of common
stock and limit the price that investors might be willing to pay in the future for shares of our common stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Our corporate headquarters and U.S. operations are located in a 66,000 square foot facility in Brisbane,
California. We lease these premises under a non-cancelable operating lease which expires in 2013. In addition,
we have leased office facilities in certain international countries as follows:

Country

Japan

Approximately 5,790

Square Footage

Lease termination or Expiration

Switzerland

Approximately 2,884

France
Spain

Approximately 1,240
Approximately 175

Three leases which expire in May 2009, May 2010 and July
2010
Lease can be terminated by either party at the end of any
calendar quarter upon six months’ written notice
Lease expires in December 2009
Lease automatically renews at the end of each six-month
period

We believe that these facilities are adequate for our current and future needs for at least the next twelve months.

ITEM 3. LEGAL PROCEEDINGS

Two securities class action lawsuits were filed against us and two of our executive officers in April 2007 and
May 2007, respectively, in the U.S. District Court for the Northern District of California following declines in
our stock price. The plaintiffs claim to represent purchasers of our common stock from January 31, 2007 through
May 7, 2007. The complaints generally allege that materially false statements and omissions were made
regarding our financial prospects, and seek unspecified monetary damages. On November 1, 2007, the Court
ordered the two cases consolidated. On December 17, 2007, the plaintiffs filed a consolidated, amended
complaint, and on January 31, 2008, we filed a motion to dismiss that complaint. On September 30, 2008, in
response to our motion, the Court issued an order dismissing the plaintiffs’ amended complaint without
prejudice. On October 28, 2008, the plaintiffs filed a Notice Of Intention Not to File A Second Amended
Consolidated Complaint. On November 25, 2008,
the Court closed the case on its own initiative. On
November 26, 2008, the plaintiffs filed a Notice of Appeal to the U.S. Court of Appeals for the Ninth Circuit. We
intend to continue to defend this case vigorously, regardless of the stage of litigation. Although we retain director
and officer liability insurance, there is no assurance that such insurance will cover the claims that are made or
will insure us fully for all losses on covered claims. Since we do not believe that a significant adverse result in
this litigation is probable and since the amount of potential damages in the event of an adverse result is not
reasonably estimable, no expense has been recorded with respect to the contingent liability associated with this
matter.

A Telephone Consumer Protection Act, or TCPA, class action lawsuit was filed against us in January 2008 in the
Illinois Circuit Court, Cook County, by Bridgeport Pain Control Center, Ltd., seeking monetary damages,
injunctive relief, costs and other relief. The complaint alleges that we violated the TCPA by sending unsolicited
advertisements by facsimile to the plaintiff and other recipients nationwide during the four-year period preceding
the lawsuit without the prior express invitation or permission of the recipients. Two state law claims, limited to
Illinois recipients, allege a class period of three and five years, respectively. Under the TCPA, recipients of
unsolicited facsimile advertisements may be entitled to damages of $500 per violation for inadvertent violations
and $1,500 per violation for knowing or willful violations. On February 22, 2008, we removed the case to federal
court in the Northern District of Illinois, and filed our response to the complaint on February 29, 2008. Although
it is unclear how many facsimiles were transmitted during the period for which the plaintiff seeks class
certification and unclear how many of these facsimiles were “unsolicited” within the meaning of the TCPA, we

32

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expect that the number of unsolicited facsimiles could be large and potential liability may be substantial as a
result. We retain general liability insurance, with one insurer covering the first two years of the four-year period
preceding the lawsuit, and a second insurer covering the latter two years of that four-year period. The first carrier
has agreed to defend us subject to a reservation of rights. The second carrier has declined coverage. We intend to
defend this case vigorously, including the plaintiff’s allegations seeking class certification, regardless of the stage
of litigation. Since we do not believe that a significant adverse result in this litigation is probable and since the
amount of potential damages in the event of an adverse result is not reasonably estimable, no expense has been
recorded with respect to the contingent liability associated with this matter.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Exchange Listing

Our common stock trades on The NASDAQ Global Market under the symbol “CUTR.” As of February 28, 2009,
the closing sale price of our common stock was $6.37 per share.

Common Stockholders

We had 10 stockholders of record as of February 28, 2009. Since many stockholders choose to hold their shares
under the name of their brokerage firm, we believe, the actual number of stockholders was approximately 5,200.

Stock Prices

The following table sets forth quarterly high and low closing sales prices of our common stock for the indicated
fiscal periods:

4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3rd Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10.58
12.28
13.91
15.53

$ 7.47
9.10
8.98
11.70

$27.04
26.55
38.39
37.48

$14.44
20.84
23.40
27.06

Common Stock

2008

2007

High

Low

High

Low

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Performance Graph

Below is a graph showing the cumulative total return to our stockholders during the period from March 31, 2004
through December 31, 2008, in comparison to the cumulative return on the NASDAQ Composite Index (U.S.)
and the NASDAQ Medical Equipment Index during that same 57-month period. The results compare the return
of a $100 investment in Cutera stock and each of the indeces.

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100

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8

CUTERA, INC.

NASDAQ COMPOSITE

NASDAQ MEDICAL EQUIPMENT

The information under “Performance Graph” is not deemed filed with the Securities and Exchange Commission
and is not to be incorporated by reference in any filing of Cutera under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, whether made before or after the date of this 10-K and
irrespective of any general incorporation language in those filings.

Dividend Policy

We have never paid a cash dividend and have no present intention to pay cash dividends in the foreseeable
future. We intend to retain any future earnings for use in our business.

We did not sell any unregistered securities during the period covered by this Annual Report on Form 10-K.

The information required by this Item regarding equity compensation plans is incorporated by reference to the
information set forth in Part III Item 12 of this Annual Report on Form 10-K.

Securities Authorized for Issuance under Equity Compensation Plans

See Part III, Item 12 for information regarding securities authorized for issuance under equity compensation
plans.

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ITEM 6. SELECTED FINANCIAL DATA

The table set forth below contains certain consolidated financial data for each of our last five fiscal years. This
data should be read in conjunction with the detailed information, financial statements and related notes, as well
as Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere
herein.

Year Ended December 31,

2008

2007

2006

2005

2004

Consolidated Statements of Operations Data
(in thousands, except per share data):

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 83,379
32,358

$101,726
35,002

$100,692
29,859

$ 75,620
19,792

$52,641
14,689

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51,021

66,724

70,833

55,828

37,952

Operating expenses:

Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . .

Total operating expenses . . . . . . . . . . . . . . . .

Income (loss) from operations . . . . . . . . . . . . . . . . . . . .
Interest and other income, net
. . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairments of long-term

investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income (loss) before income taxes . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . .

35,354
7,550
11,270
—

54,174

(3,153)
3,046

(3,554)

(3,661)
(792)

38,277
7,169
11,721
—

57,167

9,557
4,207

—

13,764
3,260

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (2,869) $ 10,504

Net income (loss) available to common stockholders

used in basic net income per share . . . . . . . . . . . . . . .

$ (2,869) $ 10,504

Net income (loss) per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

(0.22) $

(0.22) $

0.80

0.74

32,890
6,473
15,192
18,935

73,490

(2,657)
3,596

—

939
(1,184)

25,021
5,353
8,782
—

39,156

16,672
2,034

—

18,706
4,905

19,326
4,549
8,924
—

32,799

5,153
632

—

5,785
2,025

$

$

$

$

2,123

$ 13,801

$ 3,760

2,123

$ 13,801

$ 3,284

0.17

0.15

$

$

1.20

1.00

$

$

0.38

0.31

Weighted-average number of shares used in per share

calculations:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,770

12,770

13,153

14,228

12,558

14,278

11,535

8,573

13,864

12,222

Consolidated Balance Sheet Data (in thousands):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
Marketable investments . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . .

Total cash and cash equivalents, marketable

As of December 31,

2008

2007

2006

2005

2004

$ 36,540
60,653
9,627

$ 11,054
88,510
7,429

$ 11,800
96,285
—

$

5,260
86,736
—

$ 7,070
59,200
—

investments and long-term investments . . . . . . .
Working capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . .

106,820
101,644
137,476
31,410
112,108

106,993
106,894
138,653
34,279
109,353

108,085
111,999
133,875
23,866
109,732

91,996
98,318
111,958
21,743
97,177

66,270
68,519
80,549
7,942
68,456

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our audited financial statements and notes thereto
for the fiscal year ended December 31, 2008. This Annual Report on Form 10-K, 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 7, the forward-looking statements are based upon
our current expectations, estimates and projections and that 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. The 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, improve the performance of our worldwide sales and distribution network, and to
the outlook regarding long term prospects. We caution you not to place undue reliance on these forward-looking
statements, which reflect management’s analysis only as of the date of this Annual Report on Form 10-K. We
undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after
the date of this Form 10-K.

Some of the important factors that could cause our results to differ materially from those in our forward-looking
statements, and a discussion of other risks and uncertainties, are discussed in Item 1A—Risk Factors
commencing on page 19. We encourage you to read that section carefully as well as other risks detailed from
time to time in our filings with the SEC.

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 in
our Consolidated Statement 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 December 31, 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, where we conduct our
manufacturing, warehousing, research, regulatory, sales, service, marketing and administrative activities. In the

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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, Product 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 instead 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 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 product upgrade revenue. Service revenue relates to amortization of prepaid
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 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, Product upgrade and Titan hand piece refill revenue from our growing installed

base of customers.

In 2008, compared to 2007, our U.S. revenue declined 35% and our international revenue grew 11%. In 2007,
compared to 2006, our U.S. revenue declined 8%, while our international revenue grew 22%. We believe that the
greater decline in U.S. revenue growth from 2007 to 2008, as compared from 2006 to 2007, was primarily
attributable to a U.S. 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. The weaker international revenue growth in 2008, compared to international revenue
growth in 2007, was primarily attributable to the global recession, which adversely affected our international
revenue in the second half of 2008. We experienced greater revenue growth in many of our international markets
in 2008, compared with 2007, with particular strength in Australia and Japan. As a result of this continuing
international revenue growth, international revenue as a percentage of total revenue increased to 50% in 2008,
compared with 37% in 2007.

For 2008, our gross margin declined to 61%, compared to 66% in 2007. This decrease was primarily attributable
to reduced leverage of our manufacturing and service expenses due to lower than expected revenue, and lower
introductory margins for our Pearl Fractional-enabled systems and upgrades that started shipping in September
2008, and lower average selling prices for our Products and Product upgrades in 2008, compared with 2007.

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Sales and marketing expenses as a percentage of net revenue increased to 42% in 2008, compared to 38% in
2007, but decreased in total dollars to $35.4 million. The increase in percentage was primarily caused by lower
revenue in 2008, compared with 2007. The decrease in total dollars in 2008, compared with 2007, was primarily
caused by reduced personnel expenses in the United States due to lower sales commissions, resulting from lower
revenue, and lower headcount.

Research and development expenses as a percentage of net revenue increased to 9% in 2008, compared to 7% in
2007, and increased in total dollars to $7.6 million. These increases were primarily attributable to lower revenue
in 2008, compared with 2007, and higher personnel expenses associated with increased headcount.

General and administrative expenses as a percentage of net revenue increased to 14% in 2008, compared to 12%
in 2007, due primarily to lower revenue in 2008, compared with 2007. In absolute dollars, G&A expenses
decreased by $451,000 to $11.3 million in 2008, compared with 2007.

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 I, Item 1A “Risk Factors.”

Critical Accounting Policies and Estimates

The preparation of our 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. See Note 1 “Summary of Significant Accounting
Policies” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for a summary of
our significant accounting policies.

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. Our critical
accounting estimates are as follows:

Revenue Recognition

We recognize distributor and non-distributor revenue in accordance with the SEC’s Staff Accounting Bulletin
No. 104, Revenue Recognition (SAB 104). SAB No. 104 requires that four basic criteria must be met before
revenue can be recognized:

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Persuasive evidence of an arrangement exists;

• Delivery has occurred or services have been rendered;

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The fee is fixed or determinable; and

• Collectability is reasonably assured.

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Determination of whether persuasive evidence of an arrangement exists and whether delivery has occurred or
services have been rendered, are based on management’s judgments regarding the fixed nature of the fee charged
for services rendered and products delivered, and the collectability of those fees. In instances where final
acceptance of the product is specified by the customer or collectability has not been reasonably assured, revenue
is deferred until all acceptance criteria have been met. Revenue under service contracts is recognized on a
straight-line basis over the period of the applicable service contract. Service revenue, not under a service
contract, is recognized as the services are provided. Should changes in conditions cause management to
determine these criteria are not met for certain future transactions, revenue recognized for any reporting period
could be adversely affected.

Long-Term Auction Rate Securities Investments

We hold a variety of interest bearing auction rate securities (ARS) that represent investments in pools of student
loan assets. At the time of acquisition, these ARS investments were intended to provide liquidity via an auction
process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll
over their holdings or gain immediate liquidity by selling such interests at par. Since February 2008, uncertainties
in the credit markets affected our ARS investments and auctions for our investments in these securities have
failed to settle on their respective settlement dates. Consequently, the investments are not currently liquid and we
will not be able to access these funds until a future auction of these investments is successful, a buyer is found
outside of the auction process or the issuer refinances their debt. Maturity dates for these ARS investments range
from 2028 to 2043.

As of December 31, 2008, we had $9.6 million in long-term ARS investments. 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 discounted cash flow model as well as transaction data and bid-ask spread data for other similar
illiquid securities from a secondary market. Expected future cash flows were calculated using estimates for
interest rates ranging from 1.55% to 4.08%, timing and amount of cash flows through the maturity of the ARS.
Our most significant assumption made in the present value calculations was the estimated required rates of return
used to discount the estimated future cash flows. The rate selected to value each of the investments considered
and assigned an expected yield premium based on several factors, including:

•

Lack of liquidity due to failing auctions;

• Default risk arising from whether the security was issued by a federal backed agency (Federal Family

Education Loan Program) or a municipal agency (Maine Education Loan Authority);

• Underlying collateral coverage of the loan trust that issued the security;

• Underlying credit rating; and

•

Liquidation preferences based on the capital structure of the loan trust.

For the year ended December 31, 2008, using this assessment of fair value, we determined there was a decline in
the fair value of our ARS investments of approximately $3.6 million, which was recognized as a pre-tax other-
than-temporary impairment charge with a corresponding decrease in accumulated other comprehensive loss. The
primary cause of the decline in fair value of our long-term ARS was an increase in the estimated required rates of
return used to discount the estimated future cash flows over the life of each security.

We review our impairments on a quarterly basis in accordance with Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, and related guidance issued
by the Financial Accounting Standards Board (FASB), and the SEC in order to determine the classification of the
impairment as “temporary” or “other-than-temporary.” A temporary impairment charge results in an unrealized
loss being recorded in the other comprehensive loss component of stockholders’ equity. Such an unrealized loss
does not affect net loss for the applicable accounting period. An other-than-temporary impairment charge is

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recorded as an unrealized loss in the Consolidated Statement of Operations and is a component of the net loss for
the applicable accounting period. Once an other-than-temporary impairment is recorded, a new cost basis in the
investment is established. The primary differentiating factors we considered to classify our impairments between
temporary and other-than-temporary impairments are the length of the time and the extent to which the market
value has been less than cost, the financial condition and near-term prospects of the issuers and our intent and
ability to retain our investment in the issuer to maturity to allow for any anticipated recovery in market value.

The valuation of our investment portfolio is subject to uncertainties that are difficult to predict factors that may
impact its valuation include duration of time that the ARS remain illiquid, changes to credit ratings of the
securities, rates of default of the underlying assets, changes in the underlying collateral value, market discount
rates for similar illiquid investments, and ongoing strength and quality of credit markets. If the current market
conditions deteriorate further, or the recovery in market values does not occur, we may be required to record
additional other-than-temporary impairment charges in future quarters.

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 recovery in market values does not occur, we may be required to record
additional other-than-temporary impairment charges in future quarters.

Fair Value Measurements

On January 1, 2008, we adopted fair value measurement provisions of Statement SFAS, No. 157 Fair Value
Measurements, which established a framework for measuring fair value under GAAP and clarified the definition
of fair value within that framework. SFAS 157 does not require assets and liabilities that were previously
recorded at cost to be recorded at fair value. For assets and liabilities that are already required to be disclosed at
fair value, SFAS 157 introduced, or reiterated, a number of key concepts that form the foundation of the fair
value measurement approach to be used for financial reporting purposes. The fair values of our financial
instruments reflect the amounts that we estimate we would receive in connection with the sale of an asset or that
we would pay in connection with the transfer of a liability in an orderly transaction between market participants
at the measurement date (exit price). SFAS 157 also established a fair value hierarchy that prioritizes the inputs
used in valuation techniques into the following three levels:

Level 1 Prices in active markets for identical assets and liabilities

Level 2 Observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3 Unobservable inputs

The adoption of SFAS 157 did not have an effect on our financial condition or results of operations, but SFAS
157 introduced new disclosures about how we value certain assets and liabilities. Much of the disclosure focuses
on the inputs used to measure fair value, particularly in instances in which the measurement uses significant
unobservable (Level 3) inputs. A substantial majority of our financial instruments are Level 1 and Level 2 assets.

At December 31, 2008, total financial assets measured and recognized at fair value were $105.0 million and of
these assets, $9.6 million, or 9%, were ARS that were measured and recognized using significant unobservable
inputs (Level 3). There were no non-financial assets or liabilities measured at fair value as of December 31,
2008.

While our ARS 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. See Note 2 “Investment Securities,” in the Notes to
Consolidated Financial Statement in Part II, Item 8 of this Form 10-K for more information.

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Stock-based Compensation Expense

Under the provisions of FAS No. 123(R), “Share-Based Payment” (FAS 123R), employee stock-based
compensation is estimated at the date of grant based on the employee stock award’s fair value using the Black-
Scholes option-pricing model and is recognized as expense ratably over the requisite service period in a manner
similar to other forms of compensation paid to employees. The Black-Scholes option-pricing model requires the
use of certain subjective assumptions. The most significant of these assumptions are our estimates of the
expected volatility of the market price of our stock and the expected term of the award. The expected volatility is
a 50%/50% blend of implied and historical volatility. We have determined that this is a more reflective measure
of market conditions and a better indicator of expected volatility, than its limited historical volatility since the
initial public offering of our common stock. When establishing an estimate of the expected term of an award, we
consider historical experience of similar awards, giving consideration to the contractual terms of the awards,
vesting requirements, and expectation of future employee behavior, including post-vesting terminations. As
required under GAAP, we review our valuation assumptions at each grant date, and, as a result, our valuation
assumptions used to value employee stock-based awards granted in future periods may change.

As of December 31, 2008, the unrecognized compensation cost, net of expected forfeitures, related to stock
options, restricted stock unit awards and employee stock purchase plan awards was $6.9 million, $108,000 and
$57,000, which will be recognized using the straight-line attribution method over an estimated weighted-average
amortization period of 2.50 years, 0.42 years and 0.33 years, respectively. See Note 5 “Stockholders’ equity,
Stock Plans and Stock-Based Compensation Expense,” in the Notes to Consolidated Financial Statement in Part
II, Item 8 of this Form 10-K for more information.

Valuation of Inventories

We state our inventories at the lower of cost or market, computed on a standard cost basis, which approximates
actual cost on a first-in, first-out basis and market being determined as the lower of replacement cost or net
realizable value. Standard costs are monitored and updated quarterly or as necessary, to reflect changes in raw
material costs, labor to manufacture the product and overhead rates. We provide for excess and obsolete
inventories when conditions indicate that the selling price could be less than cost due to physical deterioration,
usage, obsolescence, reductions in estimated future demand and reductions in selling prices. Inventory provisions
are measured as the difference between the cost of inventory and estimated market value and charged to cost of
revenue to establish a lower cost basis for the inventories. We balance the need to maintain strategic inventory
levels with the risk of obsolescence due to changing technology and customer demand levels. Unfavorable
changes in market conditions may result in a need for additional inventory provisions that could adversely impact
our gross margins. Conversely, favorable changes in demand could result in higher gross margins when product
that has previously been reserved is sold.

Warranty Obligations

We provide a standard one-year or two-year warranty coverage on our systems. Warranty coverage provided is
for labor and parts necessary to repair the systems during the warranty period. We provide for the estimated
future costs of warranty obligations in cost of revenue when the related revenue is recognized. The accrued
warranty costs represent our best estimate at the time of sale, and as reviewed and updated quarterly, of the total
costs that we expect to incur in repairing or replacing product parts that fail while still under warranty. Accrued
warranty costs include costs of material, technical support labor and associated overhead. The amount of accrued
estimated warranty costs obligation for established products is primarily based on historical experience as to
product failures adjusted for current information on repair costs. For new products, estimates will include
historical experience of similar products, as well as reasonable allowance for start-up expenses. Actual warranty
costs could differ from the estimated amounts. On a quarterly basis, we review the accrued balances of our
warranty obligations and update the historical warranty cost trends. If we were required to accrue additional
warranty cost in the future due to actual product failure rates, material usage, service delivery costs or overhead
costs differing from our estimates, revisions to the estimated warranty liability would be required, which would
negatively impact our operating results.

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Provision for Income Taxes

We are subject to taxes on earnings in both the United States and numerous foreign jurisdictions. As a global
taxpayer, significant
judgments and estimates are required in evaluating our uncertain tax positions and
determining our provision for income taxes on earnings. Effective January 1, 2007, we adopted FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109
(FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted
for in accordance with SFAS No. 109, Accounting for Income Taxes. 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 is to measure the tax benefit as the largest amount that is more than 50% likely of being realized
upon settlement. Although we believe we have adequately reserved for our uncertain tax positions, no assurance
can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of
changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the
extent that the final tax outcome of these matters is different than the amounts recorded, such differences will
impact the provision for income taxes in the period in which such determination is made. The provision for
income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate,
as well as the related net interest.

Our effective tax rates have differed from the statutory rate primarily due to the tax impact of tax-exempt interest
income, foreign operations, research and development tax credits, state taxes, and certain benefits realized related
to stock option activity. Our current effective tax rate does not assume U.S. taxes on undistributed profits of
foreign subsidiaries. These earnings could become subject to incremental foreign withholding or U.S. federal and
state taxes, should they either be deemed or actually remitted to the United States. The effective tax rate was 22%
in 2008, 24% in 2007 and (126)% in 2006. Our future effective tax rates could be adversely affected by earnings
being lower than anticipated in countries where we have lower statutory rates and being higher than anticipated
in countries where we have higher statutory rates, or by changes in tax laws, accounting principles, or
interpretations thereof. In addition, we are subject to the examination of our income tax returns by the Internal
Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from
these examinations to determine the adequacy of our provision for income taxes.

Our deferred tax assets are recognized for the expected future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit
carryforwards. A valuation allowance reduces deferred tax assets to estimated realizable value, which assumes
that it is more likely than not that we will be able to generate sufficient future taxable income in certain tax
jurisdictions to realize the net carrying value. The four sources of taxable income to be considered in determining
whether a valuation allowance is required include:

•

•

•

•

Future reversals of existing taxable temporary differences (i.e., offset gross deferred tax assets against
gross deferred tax liabilities);

Future taxable income exclusive of reversing temporary differences and carryforwards;

Taxable income in prior carryback years; and

Tax planning strategies.

Determining whether a valuation allowance for deferred tax assets is necessary requires an analysis of both
positive and negative evidence regarding realization of the deferred tax assets. In general, positive evidence may
include:

• A strong earnings history exclusive of the loss that created the deductible temporary differences,
coupled with evidence indicating that the loss is the result of an aberration rather than a continuing
condition;

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• An excess of appreciated asset value over the tax basis of our net assets in an amount sufficient to

realize the deferred tax asset; and

In general, negative evidence may include:

• A history of operating loss or tax credit carryforwards expiring unused;

• An expectation of being in a cumulative loss position in a future reporting period;

•

The existence of cumulative losses in recent years; and

• A carryback or carryforward period that is so brief that it would limit the realization of tax benefits.

The weight given to the potential effect of negative and positive evidence should be 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.

In 2008, our loss before income taxes included unrealized capital losses resulting from other-than-temporary
impairment charges for our ARS investments. After considering both the positive and negative evidence as of
December 31, 2008, we determined that it was not more-likely-than-not that we would realize the full value of
our capital loss related deferred tax assets. As a result, we established a valuation allowance against this deferred
tax asset. At December 31, 2008, we had recognized deferred tax assets of $10.8 million relating to other
temporary differences between the financial reporting and tax bases of assets and liabilities, and tax credit
carryforwards. 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.

Long-Lived Asset Impairment

Long-lived assets, such as property and equipment and intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of such assets may not ultimately be
recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting
from the use of the asset and its ultimate disposition. If the sum of the expected future cash flows is less than the
carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount
over the fair value of the assets.

Litigation

We have been, and may in the future become, subject to legal proceedings related to securities litigation,
intellectual property and other matters such as the TCPA litigation and the securities class Action Lawsuit
described in Item 3—Legal Proceedings. Based on all available information at the balance sheet dates, we assess
the likelihood of any adverse judgments or outcomes for these matters, as well as potential ranges of probable
loss. If losses are probable and reasonably estimable, we record a reserve in accordance with Statement of
Financial Accounting Standards No. 5, Accounting for Contingencies. Currently we have no such reserves
recorded for any of the litigations mentioned in Item 3—Legal Proceedings.

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 Consolidated Financial Statements in Part II,
Item 8 of this Form 10-K.

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Results of Operations

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

Year Ended December 31,

2008

2007

2006

Operating Ratios:
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100%
39%

61%

Operating expenses:

42%
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9%
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14%
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — %

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

65%

100%
34%

66%

38%
7%
12%
— %

57%

Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairment of long-term investments . . . . . . . . . . . . . . . .

Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9%
(4)%
4%
4%
(4)% — %

(4)%
(1)%

(3)%

13%
3%

10%

100%
30%

70%

33%
6%
15%
19%

73%

(3)%
4%
— %

1%
(1)%

2%

Total Revenue

Year Ended December 31,

(Dollars in thousands)

2008

% Change

2007

% Change

2006

Revenue mix by geography:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$41,683

(35)% $ 64,084

(8)% $ 69,895

Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rest of the world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,297
10,522
9,877

Total international revenue . . . . . . . . . . . . . . . . . . . . . . .

41,696

19%
14%
(6)%

11%

17,898
9,258
10,486

37,642

13%
28%
35%

22%

15,781
7,239
7,777

30,797

Consolidated total revenue . . . . . . . . . . . . . . . . . . . . . . .

$83,379

(18%) $101,726

1% $100,692

United States as a percentage of total revenue . . . .
International as a percentage of total revenue . . . . .

50%
50%

63%
37%

69%
31%

Revenue mix by product category:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product upgrades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Titan hand piece refills . . . . . . . . . . . . . . . . . . . . . . . . . .

$57,998
8,361
11,358
5,662

(22)% $ 74,502
13,342
(37)%
9,128
24%
4,754
19%

(12)% $ 84,695
6,006
122%
5,890
55%
4,101
16%

Consolidated total revenue . . . . . . . . . . . . . . . . . . . . . . .

$83,379

(18)% $101,726

1% $100,692

U.S. sales decreased 35% in 2008, compared to 2007, and 8% in 2007, compared to 2006. We believe the
decrease in U.S. revenue in 2008 was primarily attributable to a U.S. recession that is causing our prospective
customers to delay their purchase decisions. We also believe that a segment of our business—those aesthetic

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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. 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 second half of 2007. In contrast, our Pearl Fractional product
started shipping in September 2008, which resulted in lower Upgrade revenue in the second half of 2008,
compared to the second half of 2007.

International sales increased 11% in 2008, compared to 2007, and increased 22% in 2007, compared to 2006. The
weaker international revenue growth in 2008, compared to international revenue growth in 2007, was primarily
attributable to the global recession, which adversely affected our international revenue in the second half of 2008.
We experienced revenue growth in many of our international markets in 2008, compared with 2007, with
particular strength in Australia and Japan. As a result of this continuing international revenue growth,
international revenue as a percentage of total revenue increased to 50% in 2008, compared with 37% in 2007.
The increase in 2007 was primarily attributable to continuing investments in building our international sales
distribution channels. As a result of this continuing international revenue growth, international revenue as a
percentage of total revenue increased to 50% in 2008, compared with 37% in 2007, and 31% in 2006.

Product revenue decreased 22% in 2008, compared to 2007, and 12% in 2007, compared to 2006. We believe the
decrease in product revenue in 2008 was primarily driven by prospective customers deferring their purchase
decisions due to the current global recession, partially offset by higher international product revenue. Upgrade
revenue decreased 37% in 2008, compared to 2007, and increased 122% in 2007, compared to 2006. We believe
the decrease in Upgrade revenue in 2008 and the increase in Upgrade revenue in 2007 are primarily due to our
launch of Pearl Fractional in 2008 and Pearl in 2007. We received FDA clearance for our Pearl product in early
2007, which allowed us to begin shipping it in June 2007, which provided significant Upgrade revenue for the
second half of that year. In contrast, our Pearl Fractional product started shipping in September 2008. We believe
that late timing, and the global recession, caused us to achieve lower Upgrade revenue in the second half of 2008,
compared to the second half of 2007.

Service revenue increased 24% in 2008, compared to 2007, and increased 55% in 2007, compared to 2006. We
believe that these increases were due primarily to a larger installed base of customers who are eligible to
purchase extended service contracts. However, our sequential service revenue growth rates are declining as a
result of fewer customers electing to purchase post-warranty service contracts. We believe this reduced customer
demand for service contracts is due to the challenging economic environment and the strong reliability of our
products.

Our Titan hand piece refill revenue increased 19% in 2008, compared to 2007, and increased 16% in 2007,
compared to 2006. We believe that these increases were due primarily to an increase in the installed base and as a
result of greater utilization of this application. Although we experienced modest growth in 2008, when compared
to 2007, we have experienced flat sequential revenue in this category during the past four quarters. This revenue
trend indicates a declining utilization level which we believe is caused by a softening economy.

Gross Profit

(Dollars in thousands)

2008

% Change

2007

% Change

2006

Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . . . . . . . . . . . . . . .

$51,021

(24)% $66,724

(6)% $70,833

61%

66%

70%

Year Ended December 31,

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Our cost of revenue consists primarily of material, labor, stock-based compensation, royalty expense, warranty
and manufacturing overhead expenses. Gross margin as a percentage of net revenue was 61% in 2008, 66% in
2007 and 70% in 2006. We believe this decrease in gross margin in 2008, compared to 2007 was primarily
attributable to:

•

Lower overall revenue, which reduced the leverage of our manufacturing and service department
expenses and was dilutive to our gross margin percentage;

• 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; and

•

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

The decrease in gross margin in 2007, compared to 2006, was primarily attributable to:

•

Lower introductory margins for our Pearl-enabled systems and upgrades that started shipping in June
2007;

• Reduced leverage of our manufacturing and service expenses due to lower than expected revenue in

2007; and

•

$764,000 of higher patent royalty expense. Royalty expenses were incurred for a full year in 2007, but
for only the last three quarters in 2006.

Sales and Marketing

(Dollars in thousands)

2008

% Change

2007

% Change

2006

Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . . . . . . . . . . . . . . .

$35,354

(8)% $38,277

16% $32,890

42%

38%

33%

Year Ended December 31,

Sales and marketing expenses consist primarily of labor, stock-based compensation, expenses associated with
customer-attended workshops and trade shows, and advertising. Sales and marketing expenses decreased $2.9
million in 2008, compared to 2007. This decrease was primarily attributable to lower personnel expenses for
North America of $3.3 million, resulting from lower sales commission expenses (resulting from lower sales) and
a reduction in head count. Sales and marketing expenses as a percentage of total revenue, increased to 42% in
2008, compared with 38% in 2007, due primarily to lower U.S. revenue in 2008.

Sales and marketing expenses increased $5.4 million, or 16%, in 2007, compared to 2006. The increase in sales
and marketing expenses was due primarily to $2.7 million of higher personnel expenses associated with the
team, $1.2 million of higher advertising and
expansion of our worldwide sales force and management
promotional expenses, and $756,000 of higher employee travel and entertainment expenses related to the
increased sales headcount. Sales and marketing expenses as a percentage of total revenue, increased to 38% in
2007, compared with 33% in 2006, due primarily to lower sales productivity.

Research and Development (R&D)

(Dollars in thousands)

Year Ended December 31,

2008 % Change

2007 % Change

2006

Research and development

. . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . . . . . . . . . . . . . . . . . .

$7,550

5%

$7,169

11% $6,473

9%

7%

6%

Research and development expenses consist primarily of labor, stock-based compensation, clinical, regulatory
and material costs. R&D expenses increased by $381,000 in 2008, compared to 2007. This increase was
primarily attributable to higher materials and consultant fees of $362,000, relating primarily to the research and

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development activities of our Pearl Fractional product and other projects in development. R&D expenses as a
percentage of total revenue, increased to 9% in 2008, compared with 7% in 2007, due primarily to lower U.S.
revenue in 2008.

R&D expenses increased by $696,000, or 11%, in 2007, compared to 2006. The increase was due primarily to
$463,000 of higher consulting and other services expense and $303,000 of higher expensed tools, equipment and
materials used primarily in the research and development activities related to our Pearl product. As a result of the
increased expenses, R&D expenses as a percentage of total revenue increased to 7% in 2007, compared to 6% in
2006.

General and Administrative (G&A)

(Dollars in thousands)

2008

% Change

2007

% Change

2006

General and administrative . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . . . . . . . . . . . . . . .

$11,270

(4)% $11,721

(23)% $15,192

14%

12%

15%

Year Ended December 31,

General and administrative expenses consist primarily of
fees,
accounting, audit and tax consulting fees, and other general and administrative expenses. G&A expenses
decreased $451,000 in 2008, compared to 2007. This slight decrease was primarily attributable to lower
personnel expenses for North America of $998,000, partially offset by higher North America professional
consulting fees related to legal, accounting and tax related matters of $508,000. G&A expenses as a percentage
of total revenue increased, to 14% in 2008, compared with 12% in 2007, due primarily to lower U.S. revenue in
2008.

labor, stock-based compensation,

legal

G&A expenses decreased by $3.5 million, or 23%, to $11.7 million in 2007, compared to 2006. This decrease
was primarily attributable to the following expenses incurred in 2006 but not in 2007: $3.3 million of legal
expenses related to the patent litigation matter settled in the second quarter ended June 30, 2006 and a charge of
approximately $505,000 relating to a liability for sales taxes in certain jurisdictions that we had determined we
did not have a taxable presence. As a result of the lower expenses, G&A expenses as a percentage of total
revenue decreased to 12% in 2007, compared to 15% 2006.

Litigation Settlement

On June 2, 2006, we settled all patent litigation brought against us by Palomar and MGH. Under the terms of the
settlement agreement, we owed Palomar $20.2 million relating to royalties on sales of infringing systems,
accrued interest and reimbursement of Palomar’s legal costs, through March 31, 2006. Of the $20.2 million, we
recorded $18.9 million as a litigation settlement expense and $1.2 million as an intangible asset representing the
value of the ongoing sublicense obtained as part of the settlement agreement.

Interest and Other Income, Net

The components of “Interest and Other Income, Net” are as follows:

(Dollars in thousands)

Year Ended December 31,

2008 % Change

2007 % Change

2006

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,170
(124)

(22)% $4,083
124
NA

29% $3,161
435
(71)%

Total Interest and other income, net . . . . . . . . . . . . . . . . .

$3,046

(28)% $4,207

17% $3,596

Interest income decreased 22% in 2008, compared to 2007, and increased 29% in 2007, compared to 2006. The
decrease in 2008 was due primarily to reduced tax-exempt interest yields resulting primarily from the Federal

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Reserve cutting interest rates. The increase of $922,000, or 29%, in interest income in 2007, compared to 2006,
was primarily attributable to improved tax-exempt interest yields on investments in government bonds and an
increased average amount
invested. Our cash, cash equivalents, marketable investments and long-term
investments measured and recognized at fair value were $106.8 million at December 31, 2008, $107.0 million at
December 31, 2007 and $108.1 million December 31, 2006.

Other-Than-Temporary Impairments of Long-Term Investments

(Dollars in thousands)

Year Ended December 31,

2008 % Change

2007 % Change

2006

Other-than-temporary impairment of long-term investments . . . . .

$3,554

NA

$—

— % $—

For the year ended December 31, 2008, we determined there was a decline in the fair value of our ARS
investments for which we recorded a $3.6 million other-than-temporary impairment charge. See the ‘Critical
Accounting Estimates’ section above, for additional details relating to the charge.

Provision (Benefit) for Income Taxes

(Dollars in thousands)

2008

$ Change

2007

$ Change

2006

Year Ended December 31,

Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(3,661) $(17,425) $13,764
3,260

(4,052)

(792)

$12,825
4,444

939
$
(1,184)

22%

24%

(126)%

Our effective tax rate reflects applicable United States federal and state tax rates and the tax impact of foreign
operations, offset by research and development tax credits, tax exempt interest income and certain benefits
realized related to stock option activity. The effective tax rate was 22% in 2008, 24% in 2007 and (126)% in
2006. The change in the effective tax rate for 2008, compared to 2007, was primarily attributable to tax exempt
interest income being a larger percentage of the pre-tax loss for fiscal year 2008. The change in the effective tax
rate for 2007, compared to 2006, was primarily attributable to the litigation settlement expense of $18.9 million
that resulted in a significantly lower level of income before income taxes, the impact of deductible permanent
items including, tax-exempt interest income, R&D tax credits and deductions for disqualifying incentive stock
option exercises, resulted in a substantially more pronounced impact on our effective income tax rate, as they
represented a larger percentage of our income before income taxes in 2006.

With respect to the $3.6 million other-than-temporary impairment charge for ARS investments recognized in
2008, we recorded a deferred tax asset. However, because we did not believe it is more likely than not realizable,
given this is a capital loss, we recorded a valuation allowance against the deferred tax asset. As a result, there
was no effect on our total tax provision in 2008 for this charge.

Net Income and Net Income Per Diluted Share

(Dollars in thousands, except per share data)

2008

% Change

2007

% Change

2006

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per diluted share . . . . . . . . . . . . . . . . . . . .

$(2,869)
$ (0.22)

NA
NA

$10,504
0.74
$

395% $2,123
393% $ 0.15

Year Ended December 31,

The $13.4 million decrease in net income (loss), and $0.96 decrease in net income (loss) per diluted share, in
2008, compared with 2007, was primarily attributable to $22.4 million in lower U.S. sales and $3.6 million in an
other-than-temporary impairment of long-term investments.

The $8.4 million increase in net income, and $0.59 increase in net income per diluted share, in 2007, compared
with 2006, was primarily due to $11.7 million of patent litigation settlement expense of $18.9 million, net of the

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marginal tax impact of $7.2 million being incurred in 2006 but not in 2007. The $11.7 million patent litigation
expense was offset in part by lower gross margins, higher operating expenses and a higher effective income tax
rate.

Liquidity and Capital Resources

Liquidity is the measurement of our ability to meet potential cash requirements, fund the planned expansion of
our operations and acquire businesses. Our sources of cash include operations, stock option exercises, employee
stock purchases and interest income. We actively manage our cash usage and investment of liquid cash to ensure
the maintenance of sufficient funds to meet our daily needs. The majority of our cash and investments are held in
U.S. banks and our foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short
term operating expenses.

The following table summarizes our cash and cash equivalents, marketable investments and long-term
investments (in thousands):

(Dollars in thousands)

Cash, cash equivalents and marketable securities:

As of December 31,

2008

2007

Change

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 36,540
60,653
9,627

$ 11,054
88,510
7,429

$ 25,486
(27,857)
2,198

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$106,820

$106,993

$

(173)

Cash Flows

In summary, our cash flows were as flows:

(Dollars in thousands)

Cash flows provided by (used in):

Year ended December 31,

2008

2007

2006

Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,340
20,644
502

$ 16,890 $ 12,466
(11,355)
5,429

(426)
(17,210)

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . .

$25,486

$

(746) $ 6,540

Cash Flows From Operating Activities

We generated net cash from operating activities of $4.3 million in 2008, which was primarily attributable to:

•

•

•

$5.1 million generated from net loss of $2.9 million after adjusting for non-cash related items of $8.0
million, primarily consisting of $5.2 million of stock-based compensation and $3.6 million of other-
than-temporary impairment of long-term investments, partially offset by $1.9 million increase in
deferred tax assets resulting from unutilized deductions for stock-based compensation expenses;

$4.9 million of cash generated from the collection of the higher accounts receivable balance as of
December 31, 2007; offset by

$4.7 million used to pay down the higher 2007 year-end accrued liabilities relating primarily to
personnel expenses of $2.0 million, reduction of the income taxes payable balance by $849,000,
reduction of accrued warranty expenses by $809,000 due primarily to fewer units remaining under

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warranty, and net reduction of $424,000 of accrued royalties due to the reduced revenue in the fourth
quarter of 2008, compared with the fourth quarter of 2007.

•

$2.8 million cash used as a result of the increase in inventories following the lower than expected
revenue in the fourth quarter of 2008.

We generated net cash from operating activities of $16.9 million in 2007, which was primarily attributable to:

•

•

•

•

$15.2 million generated from net income of $10.5 million after adjusting for non-cash related items of
$4.7 million, primarily consisting of $5.6 million of stock-based compensation and $4.2 million of tax
benefit from employee stock option exercises, partially offset by $3.6 million of excess tax benefits
related to stock-based compensation expenses reclassified from operating activities to financing
activities in accordance with FAS 123(R) and a $2.7 million increase in deferred tax assets resulting
from an increase in accrued liabilities and unutilized deductions for stock-based compensation expenses;
and

$3.8 million in deferred revenue due to the growth in service contracts sold to our expanding customer
installed base; offset by

$2.6 million increase in inventories to support a broader product offering and due to lower than expected
revenue in the fourth quarter 2007; and

$1.1 million cash generated resulting from a higher uncollected balance relating to fourth quarter 2007
revenue.

Cash Flows From Investing Activities

We generated net cash of $20.6 million from investing activities in 2008, which was primarily attributable to:

•

•

•

$85.2 million in net proceeds from the sales and maturities of marketable investments due to an attempt
to reduce our exposure to the auction rate and variable rate demand note markets during 2008; partially
offset by

$63.8 million of cash used to purchase marketable and long-term investments; and

$703,000 of cash used to purchase property and equipment primarily for the research and development
function.

We used cash of $426,000 in investing activities in 2007, which was primarily attributable to:

•

•

$1.0 million used to purchase capital equipment for R&D and manufacturing operations as well as a
trade show booth for marketing, and $20,000 used to purchase an intangible asset; partially offset by

$594,000, net from cash proceeds from the sales and maturities of marketable investments and cash used
to used to purchase marketable and long-term investments the cash generated from operations in
marketable securities of cash used to purchase marketable and long-term investments.

Cash Flows From Financing Activities

Net cash provided by financing activities in 2008 was $502,000, which resulted from $458,000 of cash generated
by the issuance of stock through our stock option and employee stock purchase plans and $44,000 of excess tax
benefits related to stock-based compensation expenses reclassified from operating activities to financing
activities in accordance with FAS 123(R).

Net cash used in financing activities in 2007 was $17.2 million, which primarily related to $25.0 million of cash
used to repurchase shares of our common stock pursuant to our stock repurchase program, which was partially
offset by $4.1 million of cash generated from the issuance of stock pursuant to our stock option and stock

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purchase plans and $3.7 million of excess tax benefits related to stock-based compensation expenses reclassified
from operating activities to financing activities in accordance with FAS 123(R).

Adequacy of cash resources to meet future needs

We had cash, cash equivalents, marketable and long-term investments of $106.8 million as of December 31,
2008. Of this amount, we had $9.6 million invested in long-term ARS investments (see ‘Critical Accounting
Estimates’ section above, for a full description of our long-term investments in ARS). We believe that our
existing cash resources are sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.

Off-Balance Sheet Arrangements

We do not participate in transactions that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities,
which would have been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As of December 31, 2008, we were not involved in any unconsolidated
transactions.

Commitments

See Note 11, “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements in Part II,
Item 8 of this Form 10-K.

Contractual Obligations

The following are our obligations for future minimum lease commitments related to facility leases as of
December 31, 2008:

Contractual Obligations

Payments Due by Period ($’000’s)

Total

Less Than
1 Year

1-3
Years

3-5
Years

More Than
5 Years

Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$7,147

$1,513

$2,660

$2,974

$—

Income Tax Liability

We adopted the provisions of FIN 48 on January 1, 2007. Implementation of FIN 48 did not result in any
adjustment to our Consolidated Statements of Income or a cumulative adjustment to retained earnings. As a
result of the adoption of FIN 48, as of December 31, 2008, we have included in our Consolidated Balance
Sheet $1.5 million in long-term income tax liability with respect to unrecognized tax benefits and accrued
interest. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in
individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes. As a result, this
amount is not included in the contractual obligations table above.

Purchase Commitments

We maintain certain open inventory purchase commitments with our suppliers to ensure a smooth and continuous
supply for key components. Our liability in these purchase commitments is generally restricted to a forecasted
time-horizon as agreed between the parties. These forecasted time-horizons can vary among different suppliers.
Our open inventory purchase commitments were not material at December 31, 2008. As a result, this amount is
not included in the contractual obligations table above.

Indemnifications

In the normal course of business, we enter into agreements that contain a variety of representations, warranties,
and indemnification obligations. For example, we have entered into indemnification agreements with each of our

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directors and executive officers. In 2007, two of our officers were named as defendants in securities class action
litigation—see Part I, Item 3—Legal Proceedings. Our exposure under the various indemnification obligations,
including those under the indemnification agreements with our directors and officers, is unknown since the
outcome of the securities litigation is unpredictable and the amount that could be payable thereunder is not
reasonably estimable, and since other indemnification obligations involve future claims that may be made against
us. We have not accrued or paid any amounts for any such indemnification obligations. However, we may record
charges in the future as a result of these potential indemnification obligations, including those related to the
securities class action litigation.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have
their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may
produce less income than expected if interest rates fall. Due in part to these factors, our future investment income
may fall short of expectation due to changes in interest rates or we may suffer losses in principal if forced to sell
securities which have declined in market value due to changes in interest rates. The primary objective of our
investment activities is to preserve principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we invest in debt instruments of the U.S. Government and its agencies
and municipal bonds, and, by policy, restrict our exposure to any single type of investment or issuer by imposing
concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at
a weighted average maturity (interest reset date for ARS) of generally less than eighteen months. Assuming a
hypothetical increase in interest rates of one percentage point, the fair value of our total investment portfolio
would have potentially declined by approximately $858,000 as of December 31, 2008.

We hold interest bearing ARS that represent investments in pools of student loans issued by either the Federal
Family Education Loan Program or the Maine Education Loan Authority. At the time of acquisition, these ARS
investments were intended to provide liquidity via an auction process that resets the applicable interest rate at
predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity
by selling such interests at par. Since February 2008, uncertainties in the credit markets affected all of our
holdings in ARS investments and auctions for our investments in these securities have continued to fail.
Consequently, the investments are not currently liquid and we will not be able to access these funds until a future
auction of these investments is successful, a buyer is found outside of the auction process or the ARS is
refinanced by the issuer into another type of debt instrument. Maturity dates for these ARS investments range
from 2028 to 2043. We currently classify all of these investments as long-term investments in our Consolidated
Balance Sheet because of our continuing inability to determine when these investments will settle. We have also
investment strategy and increased our investments in more liquid money market
modified our current
investments, United States Treasury securities, municipal bonds, and eliminated investments in corporate debt.
The valuation of our ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that
may impact its valuation include, duration of time that the ARS remain illiquid, changes to credit ratings of the
securities, rates of default of the underlying assets, changes in the underlying collateral value, market discount
rates for similar illiquid investments, ongoing strength and quality of credit markets. If the current market
conditions deteriorate further, or the recovery in market values does not occur, we may be required to record
additional other-than-temporary impairment charges in future quarters.

Foreign Currency Exchange Risk

We have international subsidiaries and operations and are, therefore, subject to foreign currency rate exposure.
Although the majority of our revenue and purchases are denominated in U.S. dollars, we have revenue to certain
international customers and expenses denominated in the Japanese Yen, Euro, Pounds Sterling, Australian
Dollars, Swiss Francs and Canadian Dollars. The net gains and losses from the revaluation of foreign

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denominated assets and liabilities was a loss of $132,000 for the year ended December 31, 2008 and is included
in operating loss in our Consolidated Statements of Operations. Movements in currency exchange rates could
cause variability in our revenues, expenses or interest and other income (expense). Though to date our exposure
to exchange rate volatility has not been significant, we cannot assure that there will not be a material impact in
the future. Future fluctuations in the value of the U.S. dollar may affect the price competitiveness of our
products. We do not believe, however, that we currently have significant direct foreign currency exchange rate
risk and have not hedged exposures denominated in foreign currencies.

We do not utilize derivative financial instruments, derivative commodity instruments or other market risk
sensitive instruments.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CUTERA, INC. AND SUBSIDIARY COMPANIES

ANNUAL REPORT ON FORM 10-K

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

The following Consolidated Financial Statements of the Registrant and its subsidiaries are required to be
included in Item 8:

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

56

57

58

59

60

61

The following Consolidated Financial Statement Schedule of the Registrant and its subsidiaries for the years
ended December 31, 2008, 2007 and 2006 is filed as a part of this Report as required to be included in Item 15(a)
and should be read in conjunction with the Consolidated Financial Statements of the Registrant and its
subsidiaries:

Schedule

Page

II

Valuation and Qualifying Accounts

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85

All other required schedules are omitted because of the absence of conditions under which they are required or
because the required information is given in the Consolidated Financial Statements or the Notes thereto.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Cutera, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all
material respects, the financial position of Cutera, Inc. and its subsidiaries at December 31, 2008 and 2007, and
the results of their operations and their cash flows for each of the three years in the period ended December 31,
2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial statements and the financial statement schedule, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Management’s Report on Internal Control over Financial
Reporting appearing under item 9A. Our responsibility is to express opinions on these financial statements, on
the financial statement schedule and on the Company’s internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it
accounts for uncertain tax positions in 2007.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

Because of its inherent
internal control over financial reporting may not prevent or detect
misstatements. Also, 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.

limitations,

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San Jose, California
March 13, 2009

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CUTERA, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

Assets
Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts in 2008 and 2007 of

$61 and $9, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2008

2007

$ 36,540
60,653

$ 11,054
88,510

5,792
9,927
4,257
1,771

118,940
1,357
9,627
1,025
6,527

10,692
7,533
8,058
1,955

127,802
1,361
7,429
1,227
834

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$137,476

$138,653

Liabilities and Stockholders’ Equity
Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,690
8,848
6,758

17,296
1,713
4,907
1,452

25,368

$

2,350
13,587
4,971

20,908
1,639
5,593
1,160

29,300

Commitments and contingencies (Note 11)

Stockholders’ equity:

Convertible preferred stock, $0.001 par value

Authorized: 5,000,000 shares; none issued and outstanding . . . . . . . . . . . . . . . . . .

—

—

Common stock, $0.001 par value:
Authorized: 50,000,000 shares;

Issued and outstanding: 12,806,035 and 12,738,449 shares in 2008 and 2007,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13
80,318
31,410
367

13
74,871
34,279
190

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

112,108

109,353

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .

$137,476

$138,653

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The accompanying notes are an integral part of these consolidated financial statements.

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CUTERA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

Year Ended December 31,

2008

2007

2006

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$83,379
32,358

$101,726
35,002

$100,692
29,859

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51,021

66,724

70,833

Operating expenses:

Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35,354
7,550
11,270
—

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54,174

Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairments of long-term investments . . . . . . . . . . . . . .

Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,153)
3,046
(3,554)

(3,661)
(792)

38,277
7,169
11,721
—

57,167

9,557
4,207
—

13,764
3,260

32,890
6,473
15,192
18,935

73,490

(2,657)
3,596
—

939
(1,184)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (2,869) $ 10,504

$

2,123

Net income (loss) per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (0.22) $

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (0.22) $

0.80

0.74

$

$

0.17

0.15

Weighted-average number of shares used in per share calculations:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,770

13,153

12,558

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,770

14,228

14,278

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The accompanying notes are an integral part of these consolidated financial statements.

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CUTERA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)

Common Stock

Shares

Amount

Additional
Paid-in
Capital

Deferred
Stock-Based
Compensation

Retained
Earnings

Accumulated
Other
Comprehensive
Income (loss)

Total
Stockholders’
Equity

Balance at December 31, 2005 . . . . . . . . . 12,213,474
Issuance of common stock for employee

$ 12

$ 77,705

$(2,171)

$21,743

$(112)

$ 97,177

purchase plan . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . .
Issuance of common stock in settlement
of restricted stock units, net of shares
withheld for employee taxes . . . . . . . . .
Share-based compensation expense . . . . .
Change in deferred stock-based

compensation, net of terminations . . . .
Tax benefit from exercises of stock-based
payment awards . . . . . . . . . . . . . . . . . .

Components of other comprehensive

income:

Net income . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . .

Comprehensive income . . . . . . .

40,651 —
673,940

1

881
3,515

11,324 —
—

—

(112)
3,973

—
—

—
569

—

—

—
—

—

—

—

—
—

—

(1,271)

1,271

1,551

—
—

—

—

—
—

—

—
—

—
—

—

—

2,123
—

—

Balance at December 31, 2006 . . . . . . . . . 12,939,389
Issuance of common stock for employee

13

86,242

(331)

23,866

42,868 —
854,147

1

954
3,321

purchase plan . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . .
Issuance of common stock in settlement
of restricted stock units, net of shares
withheld for employee taxes . . . . . . . . .

9,901 —

Repurchase of common stock . . . . . . . . . . (1,107,856)
Share-based compensation expense . . . . .
Change in deferred stock-based

—

compensation, net of terminations . . . .
Tax benefit from exercises of stock-based
payment awards . . . . . . . . . . . . . . . . . .

Adjustment to retained earnings upon

adoption of FIN 48 . . . . . . . . . . . . . . . .

Components of other comprehensive

income:

Net income . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . .

Comprehensive income . . . . . . .

—

—

—

—
—

—

(1)

—

—

—

—

—
—

—

(138)
(24,999)
5,305

(9)

4,195

—

—
—

—

Balance at December 31, 2007 . . . . . . . . . 12,738,449
Issuance of common stock for employee

13

74,871

purchase plan . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . .
Issuance of common stock in settlement
of restricted stock units, net of shares
withheld for employee taxes . . . . . . . . .
Share-based compensation expense . . . . .
Tax deficit from exercises of stock-based
payment awards . . . . . . . . . . . . . . . . . .
Components of other comprehensive loss:
Net loss . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of
tax of $230 . . . . . . . . . . . . . . . . . .

Comprehensive loss . . . . . . . . .

50,693 —
8,449 —

8,444 —
—

—

—

—

—

—

—

—

—

—

464
45

(51)
5,220

(231)

—

—

—

—
—

—
—
322

9

—

—

—
—

—

—

—
—

—
—

—

—

—

—

—
—

—
—
—

—

—

(91)

10,504
—

—

34,279

—
—

—
—

—

(2,869)

—

—

—
—

—
—

—

—

—
54

—

(58)

—
—

—
—
—

—

—

—

—
248

—

190

—
—

—
—

—

—

177

—

881
3,516

(112)
4,542

—

1,551

2,123
54

2,177

109,732

954
3,322

(138)
(25,000)
5,627

—

4,195

(91)

10,504
248

10,752

109,353

464
45

(51)
5,220

(231)

(2,869)

177

(2,692)

Balance at December 31, 2008 . . . . . . . . . 12,806,035

$ 13

$ 80,318

$ —

$31,410

$ 367

$112,108

The accompanying notes are an integral part of these consolidated financial statements.

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CUTERA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Year Ended December 31,

2008

2007

2006

Cash flows from operating activities:

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash provided by

$ (2,869) $ 10,504

$

2,123

operating activities:
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit (deficit) from stock-based compensation . . . . . . . . . . . . . . .
Excess tax benefit related to stock-based compensation . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairments of long-term investments . . . . . . . .
Change in deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,220
(231)
(44)
904
3,554
(1,892)
467

4,848
(2,803)
1,348
(660)
(4,739)
74
1,101
62

5,627
4,195
(3,652)
913
—
(2,662)
248

(1,066)
(2,592)
747
138
367
215
3,792
116

4,542
1,808
(1,032)
869
—
(2,765)
(53)

(2,980)
(65)
1,026
860
4,175
328
3,630
—

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . .

4,340

16,890

12,466

Cash flows from investing activities:

Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of marketable investments . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities of marketable investments . . . . . . . . . . . . . . . . .
Purchase of marketable and long-term investments . . . . . . . . . . . . . . . . . . .

(703)
—
55,104
30,065
(63,822)

(1,000)
(20)
69,103
31,508
(100,017)

(642)
(1,218)
23,522
99,439
(132,456)

Net cash provided by (used in) investing activities . . . . . . . . . . . . .

20,644

(426)

(11,355)

Cash flows from financing activities:

Proceeds from exercise of stock options and employee stock purchase

plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit related to stock-based compensation . . . . . . . . . . . . .

Net cash provided by (used in) financing activities . . . . . . . . . . . . .

458
—
44

502

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . .

25,486
11,054

4,138
(25,000)
3,652

(17,210)

(746)
11,800

4,397
—
1,032

5,429

6,540
5,260

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 36,540

$ 11,054

$ 11,800

Supplemental and non-cash disclosure of cash flow information:

Change in deferred stock-based compensation, net of terminations . . . . . .

$ — $

(9) $

(1,271)

Cash paid (received) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,098

$

(808) $

(1,990)

The accompanying notes are an integral part of these consolidated financial statements.

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CUTERA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Operations and Principles of Consolidation.

Cutera, Inc. (Cutera or the Company) is a global provider of laser and other light-based aesthetic systems for
practitioners worldwide. The Company designs, develops, manufactures, and markets the CoolGlide, Xeo and
Solera product platforms for use by physicians and other qualified practitioners to allow its customers to offer
safe and effective aesthetic treatments to their customers.

Headquartered in Brisbane, California, the Company has wholly-owned subsidiaries in Australia, Canada,
France, Japan, Spain, Switzerland and United Kingdom that market, sell and service its products outside of the
United States. The Consolidated Financial Statements include the accounts of the Company and its subsidiaries.
All inter-company transactions and balances have been eliminated.

Use of Estimates.

The preparation of Consolidated Financial Statements in conformity with generally accepted accounting
principles in the United States of America (GAAP) requires the Company’s management to make estimates and
assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying
notes. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates
their estimates, including those related to the, warranty obligation, sales commission, accounts receivable and
sales allowances, fair values of long-term investments, fair values of acquired intangible assets, useful lives of
intangible assets and property and equipment, fair values of options to purchase the Company’s common stock,
recoverability of deferred tax assets, and effective income tax rates, among others. Management bases their
estimates on historical experience and on various other assumptions that are believed to be reasonable, the results
of which form the basis for making judgments about the carrying values of assets and liabilities.

Cash, Cash Equivalents, Marketable Investments, and Long-Term Investments.

The Company invests its cash primarily in money market funds and in highly liquid debt instruments of U.S.
federal and municipal governments and their agencies. All highly liquid investments with stated maturities of
three months or less from date of purchase are classified as cash equivalents; all highly liquid investments with
stated maturities of greater than three months are classified as marketable investments. The majority of the
Company’s cash and investments are held in U.S. banks and its foreign subsidiaries maintain a limited amount of
cash in their local banks to cover their short term operating expenses.

The Company determines the appropriate classification of its investments in marketable securities at the time of
purchase and re-evaluates such designation at each balance sheet date. The Company’s marketable securities
have been classified and accounted for as available-for-sale. The Company may, or may not, hold securities with
stated maturities greater than 12 months until maturity. In response to changes in the availability of and the yield
on alternative investments as well as liquidity requirements, it occasionally sells these securities prior to their
stated maturities. As these securities are viewed by the Company as available to support current operations, based
on the provisions of Accounting Research Bulletin No. 43, Chapter 3A, Working Capital-Current Assets and
Liabilities, securities with maturities beyond 12 months (such as variable rate demand notes) are classified as
current assets under the caption marketable investments in the accompanying Consolidated Balance Sheets.
These securities are carried at fair value, with the unrealized gains and losses reported as a component of
stockholders’ equity. Any realized gains or losses on the sale of marketable securities are determined on a
specific identification method, and such gains and losses are reflected as a component of interest income and
other, net.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

The Company holds a variety of interest bearing auction rate securities (ARS) that represent investments in pools
of student loan assets. The ARS held by the Company have been issued either by the Federal Family Education
Loan Program (FELP), or the Maine Education Loan Authority (MELA). At the time of acquisition, these ARS
investments were intended to provide liquidity via an auction process that resets the applicable interest rate at
predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity
by selling such interests at par. Since February 2008, uncertainties in the credit markets affected these ARS
investments and auctions for the Company’s investments in these securities have failed to settle on their
respective settlement dates. Consequently, the investments are not currently liquid and the Company will not be
able to access these funds until a future auction of these investments is successful, a buyer is found outside of the
auction process or the issuer refinances their debt. Maturity dates for these ARS investments range from 2028 to
2043.

As of December 31, 2008, the Company had $9.6 million of ARS classified as long-term investments and
$250,000 included in marketable investments representing the ARS that were refinanced by the issuers at par in
January 2009. The Company has classified its non-refinanced ARS investment balance as long-term investments
in the accompanying Consolidated Balance Sheet because of the Company’s belief that it could take more than
one year before they are readily marketable. The Company’s ARS have been classified and accounted for as
available-for-sale. These securities are carried at fair value with the unrealized gains and losses reported as a
component of stockholders’ equity. The estimated fair value of the Company’s ARS investments was $9.9
million at December 31, 2008 and $21.5 million at December 31, 2007.

The Company reviews the impairment of its investments on a quarterly basis in accordance with Statement of
Financial Accounting Standards (SFAS), No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and related guidance issued by the Financial Accounting Standards Board (FASB), and the Securities
and Exchange Commission (SEC), in order to determine the classification of the impairment as “temporary” or
“other-than-temporary.” A temporary impairment charge results in an unrealized loss being recorded in the other
comprehensive loss component of stockholders’ equity. An other-than-temporary impairment charge is recorded
as an unrealized loss in the Consolidated Statement of Operations and is a component of the net loss for the
applicable accounting period. Once an other-than-temporary impairment is recorded, a new cost basis in the
investment is established. The primary differentiating factors considered by the Company to classify their
impairments between temporary, and other-than-temporary, are the length of the time and the extent to which the
market value has been less than cost, the financial condition and near-term prospects of the issuers and the
Company’s intent and ability to retain the investment in the issuer to maturity to allow for any anticipated
recovery in market value. Using this assessment, the Company determined that there was an other-than-
temporary decline in the fair value of its ARS investments of approximately $3.6 million, which was recognized
as n other-than-temporary impairment charge in the Consolidated Statement of Operations for the year ended
December 31, 2008. In 2007 and 2006, the Company had not incurred any losses that were other-than-temporary.

Fair Value of Financial Instruments.

Carrying amounts of the Company’s financial instruments, including cash and cash equivalents, marketable
investments, accounts receivable, accounts payable and accrued liabilities, approximate their fair values as of the
balance sheet dates because of their generally short maturities. The fair value of marketable investments is based
on quoted market prices.

Concentration of Credit Risk and Other Risks and Uncertainties.

Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash,
cash equivalents, marketable investments and accounts receivable. The Company’s cash and cash equivalents are

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

primarily invested in deposits and money market accounts with two major banks in the United States. In addition,
the Company has operating cash balances in banks in each of the international locations in which it operates.
Deposits in these banks may exceed the amount of insurance provided on such deposits, if any. Management
believes that these financial institutions are financially sound and, accordingly, believes that minimal credit risk
exists. The Company has not experienced any losses on its deposits of cash and cash equivalents. Accounts
receivable are typically unsecured and are derived from revenue earned from worldwide customers. The
Company performs credit evaluations of its customers and maintains reserves for potential credit
losses.
Concentrations of accounts receivable balances are presented in Note 3 and segment, geographic and major
customer information is presented in Note 10.

The Company invests in debt instruments—including bonds and ARS—of the U.S. Government, its agencies and
municipalities, and in bonds of high-quality corporate issuers. By policy, the Company restricts its exposure to
any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in
interest rates, the Company maintains investments at an average maturity (interest reset date for auction-rate
securities and variable rate demand notes) of generally less than eighteen months.

The Company is subject to risks common to companies in the medical device industry, including, but not limited
to, new technology innovations, dependence on key personnel, dependence on key suppliers, protection of
proprietary technology, product liability and compliance with government regulations. To continue profitable
operations, the Company must continue to successfully design, develop, manufacture and market its products.
There can be no assurance that current products will continue to be accepted in the marketplace. Nor can there be
any assurance that any future products can be developed or manufactured at an acceptable cost and with
appropriate performance characteristics, or that such products will be successfully marketed, if at all. These
factors could have a material adverse effect on the Company’s future financial results and cash flows.

Future products developed by the Company may require additional approvals from the Food and Drug
Administration or international regulatory agencies prior to commercial sales. There can be no assurance that the
Company’s products will continue to meet the necessary regulatory requirements. If the Company was denied
such approvals or such approvals were delayed, it may have a materially adverse impact on the Company.

Inventories.

Inventories are stated at the lower of cost or market, cost being determined on a standard cost basis (which
approximates actual cost on a first-in, first-out basis) and market being determined as the lower of replacement
cost or net realizable value.

The Company includes demonstration units within inventories. Demonstration units are carried at cost and
amortized over their estimated economic life of two years. Amortization expense related to demonstration units is
recorded in cost of revenue or in the respective operating expense line based on which function and purpose it is
being used for. Proceeds from the sale of demonstration units are recorded as revenue and all costs incurred to
refurbish the systems prior to sale are charged to cost of revenue.

Property and Equipment.

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives
of the related assets, which is generally three years. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of the remaining lease term or the estimated useful life of the related
assets. Upon sale or retirement of assets, the costs and related accumulated depreciation and amortization are
removed from the balance sheet and the resulting gain or loss is reflected in operating expenses. Maintenance and
repairs are charged to operations as incurred.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

Intangible Assets.

Purchased technology sublicense and other intangible assets are presented at cost, net of accumulated
amortization. The technology licenses are being amortized on a straight-line basis over their expected useful life
of 9-10 years and the other intangibles are being amortized over their expected useful life of two years.

Impairment of Long-lived Assets.

In accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived
Assets, the Company reviews long-lived assets, including property and equipment, and intangible assets, for
impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets
may not be fully recoverable. Under SFAS No. 144, an impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less
than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long-
lived asset exceeds its fair value. Through December 31, 2008, there have been no such impairments.

Warranty Obligations.

The Company provides standard one-year or two-year warranty coverage on its systems. Warranty coverage
provided is for labor and parts necessary to repair the systems during the warranty period. The Company
accounts for the estimated warranty cost of the standard warranty coverage as a charge to costs of revenue when
revenue is recognized. The estimated warranty cost is based on historical product performance. To determine the
estimated warranty reserve, the Company utilizes actual service records to calculate the average service expense
per system and applies this to the equivalent number of units exposed under warranty. The Company updates
these estimated charges every quarter.

Revenue Recognition.

The Company recognizes distributor and non-distributor revenue in accordance with the SEC’s Staff Accounting
Bulletin, No. 104, Revenue Recognition (SAB 104). Product revenue, including upgrade revenue, and revenue
from Titan hand piece refills, is recognized when title and risk of ownership has been transferred, provided that:

•

•

•

Persuasive evidence of an arrangement exists;

The price is fixed or determinable;

The remaining obligations are insignificant; and

• Collectability is reasonably assured.

Transfer of title and risk of ownership occurs when the product is shipped to the customer or when the customer
receives the product, depending on the nature of the arrangement. Revenue is recorded net of customer and
the Company
distributor discounts. For sales transactions when collectability is not reasonably assured,
recognizes revenue upon receipt of cash payment. Sales to customers and distributors do not include any return
or exchange rights. In addition the Company’s distributor agreements obligate the distributor to pay the Company
for the sale regardless of whether the distributor is able to resell the product. Shipping and handling charges are
invoiced to customers based on the amount of products sold. Shipping and handling fees are recorded as revenue
and the related expense as a component of cost of revenue.

The Company also offers customers extended service contracts. Revenue under service contracts is recognized on
a straight-line basis over the period of the applicable service contract. Service revenue, from customers whose
systems are not under a service contact, is recognized as the services are provided. Service revenue for the years
ended December 31, 2008, 2007 and 2006 was $11.4 million, $9.1 million and $5.9 million, respectively

64

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

Research and Development Expenditures.

Costs related to research, design, development and testing of products are charged to research and development
expense as incurred. Expenses incurred primarily relate to employees, facilities, material, third party contractors
and clinical and regulatory fees.

Advertising Costs.

Advertising costs are included as part of sales and marketing expense and are expensed as incurred. Advertising
expense for the years ended December 31, 2008, 2007 and 2006 were $1.9 million, $2.1 million and $1.5 million,
respectively.

Stock-based Compensation.

The Company accounts for stock-based payments under SFAS 123(R), Share-Based Payment (revised 2004,)
(SFAS 132(R)), which requires the recognition of compensation expense for all share-based payment awards
made to the Company’s employees and directors, including stock options, employee stock purchases related to
the Employee Stock Purchase Plan and restricted stock unit awards (RSUs). SFAS 123(R) requires that
compensation cost relating to share-based payment transactions be measured based on the fair value for all
awards. The Company uses the Black-Scholes method of valuation to determine the fair value of share-based
payments. The Company applied the modified prospective application method under which the provisions of
SFAS 123(R) apply to new awards and to awards modified, repurchased or cancelled after the adoption date.
Changes in the estimated forfeiture rates are reflected prospectively.

Upon the vesting of RSUs, stock is issued on the dates of vesting, net of the statutory withholding requirements
to be paid by the Company on behalf of its employees. As a result, the actual number of shares issued is less than
the actual number of RSUs vested. Furthermore, in accordance with SFAS 123(R), the liability for withholding
amounts to be paid by the Company is recorded as a reduction to additional paid-in capital when paid.

In compliance with SFAS 123R, the Company included as part of its cash flows from financing activities the
benefits of tax deductions in excess of the tax-effected compensation of the related stock-based awards vested
during the years ended December 31, 2008, 2007 and 2006. During the year ended December 31, 2008, 2007 and
2006, the amount of cash received from the grant of ESPP shares and exercise of stock options was $458,000,
$4.1 million and $4.4 million, respectively, and the total direct tax benefit (deficit) realized, including the excess
tax benefit (deficit), from stock based award activity was ($231,000), $4.2 million and $1.8 million, respectively.
The Company elected to account for the indirect effects of stock-based awards—primarily the research and
development tax credit—through the statement of operations.

Income Taxes.

The Company accounts for income taxes under the liability method in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires that deferred tax assets and liabilities be recognized using enacted
statutory tax rates for the effect of temporary differences between the book and tax bases of recorded assets and
liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more
likely than not that a portion of the deferred tax asset will not be realized. The Company has determined that its
future taxable income will be sufficient to recover all of the deferred tax assets. However, should there be a
change in their ability to recover the deferred tax assets, the Company could be required to record a valuation
allowance against its deferred tax assets. This would result in an increase to the Company’s tax provision in the
period in which they determined that the recovery was not probable.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

In addition, effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109, (FIN 48), which requires the
Company to calculate tax liabilities dealing with uncertainties in the application of complex tax regulations and
recognizes liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions pursuant to FIN 48.
Under FIN 48, the impact of an uncertain income tax position on income tax expense must be recognized at the
largest amount that is more-likely-than-not to be sustained. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained. The Company has provided taxes and related
interest and penalties due for potential adjustments that may result from examinations of open U.S. Federal, state
and foreign tax years. If the Company ultimately determines that payment of these amounts are not more-likely-
than-not, the Company will reverse the liability and recognize a tax benefit during the period in which the
Company makes the determination. The Company will record an additional charge in the Company’s provision
for taxes in the period in which the Company determines that the recorded tax liability is less than the Company
expects the ultimate assessment to be.

Comprehensive Income (loss).

Comprehensive income (loss) generally represents all changes in stockholders’ equity except those resulting
from investments or contributions by stockholders. The Company’s unrealized gains and losses on marketable
investments represent the only component of other comprehensive income that is excluded from net income
(loss).

Foreign Currency.

The U.S. dollar is the functional currency of the Company’s subsidiaries. Monetary and non-monetary assets and
liabilities are remeasured into U.S. dollars at period end and historical exchange rates, respectively. Sales and
operating expenses are remeasured at average exchange rates in effect during each period, except for those
expenses related to non-monetary assets which are remeasured at historical exchange rates. Gains or losses
resulting from foreign currency transactions are included in net income (loss) and are insignificant for each of the
three years ended December 31, 2008. The effect of exchange rate changes on cash and cash equivalents was
insignificant for each of the three years presented in the period ended December 31, 2008.

Recent Accounting Pronouncements.

In April 2008, the FASB issued FASB Staff Position (FSP), FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 removes the requirement of SFAS 142, Goodwill and Other
Intangible Assets for an entity to consider, when determining the useful life of an acquired intangible asset,
whether the intangible asset can be renewed without substantial cost or material modifications to the existing
terms and conditions associated with the intangible asset. FSP FAS 142-3 replaces the previous useful-life
assessment criteria with a requirement
that an entity considers its own experience in renewing similar
it would consider market participant assumptions
arrangements. If the entity has no relevant experience,
regarding renewal. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The
Company does not expect the adoption of FSP FAS 142-3 to have a material effect on its Consolidated Financial
Statements for 2009.

In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2),
to partially defer SFAS 157. FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after
November 15, 2008. The Company does not expect the adoption of the provisions of FSP 157-2 for non-financial
assets and non-financial liabilities to have a material effect on its Consolidated Financial Statements for 2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R), and
SFAS No. 160, Accounting and Reporting of Non-controlling Interest in Consolidated Financial Statements, an
amendment of ARB 51 (SFAS 160), which will change the accounting for and reporting of business combination
transactions and noncontrolling interests in consolidated financial statements. The provisions of SFAS 141R and
SFAS 160 were effective for the Company on January 1, 2009. SFAS 160 requires changes in classification and
presentation of minority interests in the consolidated balance sheets, statements of income, and statements of
stockholders’ equity. The adoption of the provisions of SFAS 141R is not expected to have any impact on the
Company’s Consolidated Financial Statements for 2009.

NOTE 2—INVESTMENT SECURITIES:

Cash and cash equivalents, marketable investments and long-term investments at December 31, 2008 and 2007
consist of the following (in thousands):

December 31, 2008

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . .
Marketable investments:

Municipal securities . . . . . . . . . . . . . . . . . . . .
ARS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total marketable investments . . . . . . . . .
Long-term investments in ARS . . . . . . . . . . . . . . . .

December 31, 2007

Cash and cash equivalents:

Cash and money market funds . . . . . . . . . . . .
Marketable securities—municipal bonds . . . .

Total cash and cash equivalents . . . . . . .

Marketable investments:

Municipal securities . . . . . . . . . . . . . . . . . . . .
ARS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total marketable investments . . . . . . . . .
Long-term investments in ARS . . . . . . . . . . . . . . . .

Amortized
Cost

$ 36,540

59,837
219

60,056
9,627

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Market
Value

$—

$—

$ 36,540

566
31

597
—

—
—

—
—

60,403
250

60,653
9,627

$106,223

$597

$—

$106,820

Amortized
Cost

$

6,405
4,649

11,054

74,229
14,091

88,320
7,429

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Market
Value

$—
—

—

190
—

190
—

$—
—

—

—
—

—
—

$

6,405
4,649

11,054

74,749
14,091

88,510
7,429

$106,803

$190

$—

$106,993

The contractual maturities of marketable investment in municipal securities and ARS classified as available for
sale as of December 31, 2008, are as follows (in thousands):

December 31, 2008

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in less than one year (fiscal year 2009)
Due in 1 to 3 years (fiscal year 2010- 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 3 to 5 years (fiscal year 2012-2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 5 to 10 years (fiscal year 2014-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in greater than 10 years (fiscal year 2019 and beyond) . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount

$21,074
33,087
—
—
16,119

$70,280

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

Fair Value Measurements

On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS 157), as it relates to
financial assets and financial liabilities. In February 2008, the Financial Accounting Standards Board (FASB)
issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the
effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are
recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009
for calendar year-end entities. SFAS 157 defines fair value, establishes a framework for measuring fair value in
GAAP and expands disclosures about fair value measurements.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. This standard is now the single source
in GAAP for the definition of fair value, except for the fair value of leased property as defined in SFAS No. 13,
Accounting for Leases. SFAS 157 establishes a fair value hierarchy that distinguishes between (1) market
participant assumptions developed based on market data obtained from independent sources (observable inputs)
and (2) an entity’s own assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad
levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value
hierarchy under SFAS 157 are described below:

•

•

•

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for
assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market
data, including quoted prices for similar assets and liabilities in active markets and quoted prices in
markets that are not active. Level 2 also includes assets and liabilities that are valued using models or
other pricing methodologies that do not require significant judgment since the input assumptions used in
the models, such as interest rates and volatility factors, are corroborated by readily observable data from
actively quoted markets for substantially the full term of the financial instrument.

Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of
significant management judgment. These values are generally determined using pricing models for
which the assumptions utilize management’s estimates of market participant assumptions.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs
and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in
its assessment of fair value.

As of December 31, 2008, financial assets measured and recognized at fair value on a recurring basis and
classified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands):

Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short term marketable investments:

Level 1

Level 2

Level 3

Total

$34,702

$ — $ — $ 34,702

Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

60,653

—

60,653

Long-term investments:

Available-for-sale ARS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
$34,702

—
$60,653

9,627
$9,627

9,627
$104,982

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

The Company’s Level 1 financial assets are money market funds and highly liquid debt instruments of U.S.
federal and municipal governments and their agencies with stated maturities of three months or less from the date
of purchase, whose fair values are based on quoted market prices. The Company’s Level 2 financial assets are
highly liquid debt instruments of U.S. federal and municipal governments and their agencies with stated
maturities of greater than three months, whose fair values are obtained from readily-available pricing sources for
the identical underlying security that may, or may not, be actively traded.

At December 31, 2008, observable market information was not available to determine the fair value of the
Company’s ARS investments. Therefore, the fair value is based on broker-provided valuation models that relied
on Level 3 inputs including those that are based on expected cash flow streams and collateral values, assessments
of counterparty credit quality, default risk underlying the security, market discount rates and overall capital
market liquidity. The valuation of the Company’s ARS investment portfolio is subject to uncertainties that are
difficult to predict. Factors that may impact the valuations 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. These financial instruments are classified within Level 3 of the fair value hierarchy.

The table presented below summarizes the change in carrying value associated with Level 3 financial assets,
which represents the Company’s investment in ARS and classified as long-term investments, for the year ended
December 31, 2008 (in thousands):

Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers into Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers from Level 3 to Level 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains or losses (realized or unrealized)

Included in earnings (other-than-temporary impairment of non-current ARS

December 31,
2008

$ —
13,400
(250)

investments) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,554)
31

Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,627

NOTE 3—BALANCE SHEET DETAIL:

Accounts Receivable:

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for
doubtful accounts is the Company’s best estimate of the amount of probable credit losses existing in accounts
receivable and is based on historical write-off experience and any specific customer issues that have been
identified. Account balances are charged off against the allowance when it is probable the receivable will not be
recovered. As of December 31, 2008 and 2007, one customer accounted for 25% and 35% of the Company’s
total accounts receivable balance, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

Inventories:

Inventories consist of the following (in thousands):

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,071
4,856

$3,313
4,220

December 31,

2008

2007

Property and Equipment, net:

Property and equipment, net consists of the following (in thousands):

$9,927

$7,533

December 31,

2008

2007

Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office equipment and furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment

$

347
2,572
2,403

$

152
2,541
1,987

Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,322
(3,965)

4,680
(3,319)

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,357

$ 1,361

Depreciation expense related to property and equipment was $702,000, $674,000 and $628,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.

Intangible Assets:

Intangible assets were principally comprised of a patent sublicense acquired from Palomar in 2006, a technology
sublicense acquired in 2002 and other intangible assets acquired in 2007. The components of intangible assets at
December 31, 2008 and 2007 were as follows (in thousands):

Gross
Carrying
Amount

Accumulated
Amortization
Amount

December 31, 2008 (in thousands)
Patent sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31, 2007 (in thousands)
Patent sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,218
538
20

$1,776

$1,218
538
185

$1,941

$379
356
16

$751

$241
302
171

$714

Net
Amount

$ 839
182
4

$1,025

$ 977
236
14

$1,227

70

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

For the year ended December 31, 2008, 2007 and 2006, amortization expense for intangible assets was $202,000,
$239,000 and $241,000, respectively.

Based on intangible assets recorded at December 31, 2008, and assuming no subsequent additions to, or
impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as
follows (in thousands):

Year ending December 31,

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount

$ 196
192
192
158
138
149

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,025

Accrued Liabilities:

Accrued liabilities consist of the following (in thousands):

Payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Royalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2008

2007

$3,523
1,916
623
432
285
200
806
225
838

$ 5,547
2,725
1,047
328
1,134
588
809
208
1,201

$8,848

$13,587

NOTE 4—WARRANTY AND SERVICE CONTRACTS:

The Company has a direct field service organization in the United States. Internationally, the Company provides
direct service support through its wholly-owned subsidiaries in Australia, Canada, France, Japan, Spain and
Switzerland as well as through a network of distributors and third-party service providers in several other
countries where it does not have a direct presence. The Company provides a warranty with its products,
depending on the type of product. After the original warranty period, maintenance and support are offered on a
service contract basis or on a time and materials basis. The Company currently provides for the estimated cost to
repair or replace products under warranty at the time of sale.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

Warranty Accrual (in thousands):

Balance at beginning of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Accruals for warranties issued during the year . . . . . . . . . . . . . . . . . . . . . . .
Less: Settlements made during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,725
4,560
(5,369)

$ 3,055
5,087
(5,417)

Balance at end of year

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,916

$ 2,725

Year Ended
December 31,

2008

2007

Deferred Service Contract Revenue (in thousands):

Year Ended
December 31,

2008

2007

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Payments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Revenue recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,564
9,915
(8,814)

$ 6,652
10,498
(6,586)

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$11,665

$10,564

Costs incurred under service contracts during the years ended December 31, 2008, 2007 and 2006 amounted to
$4.4 million, $2.4 million and $1.6 million, respectively, and are recognized as incurred.

NOTE 5—STOCKHOLDERS’ EQUITY, STOCK PLANS AND STOCK-BASED COMPENSATION
EXPENSE:

Stock Option Plans.

As of December 31, 2008, the Company had the following stock-based employee compensation plans.

2004 Employee Stock Purchase Plan.

On January 12, 2004, the Board of Directors adopted the 2004 Employee Stock Purchase Plan. A total of 200,000
shares of common stock were reserved for issuance pursuant to the 2004 Employee Stock Purchase Plan. Under
the 2004 Employee Stock Purchase Plan, or 2004 ESPP, eligible employees are permitted to purchase common
stock at a discount through payroll deductions. Prior to November 1, 2006, the Company had a rolling one-year
offering period, each with two six-month purchase periods. Beginning with the offering period that started on
November 1, 2006, all future offering periods will run for approximately six months, each with one purchase
period. Shares of common stock eligible for purchase are increased on the first day of each fiscal year by an
amount equal to the lesser of (i) 600,000 shares, (ii) 2.0% of the outstanding shares of common stock on such
date or (iii) an amount as determined by the Board of Directors. The Company added 254,769 and 258,788
reserved shares to the 2004 ESPP on January 1, 2008 and January 1, 2007, respectively. The price of the common
stock purchased shall be the lower of 85% of the fair market value of the common stock at the beginning of an
offering period or at the end of the offering period. The Company issued 50,693 and 42,868 shares of common
stock under the 2004 ESPP in fiscal years 2008 and 2007, respectively. At December 31, 2008, 949,200 shares
remained available for future issuance.

72

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

2004 Equity Incentive Plan and 1998 Stock Plan.

In 1998, the Company adopted the 1998 Stock Plan, or 1998 Plan, under which 4,650,000 shares of the
Company’s common stock have been reserved for issuance to employees, directors and consultants.

On January 12, 2004, the Board of Directors adopted the 2004 Equity Incentive Plan. A total of 1,750,000 shares
of common stock were originally reserved for issuance pursuant to the 2004 Equity Incentive Plan. In addition,
the shares reserved for issuance under the 2004 Equity Incentive Plan included shares reserved but un-issued
under the 1998 Plan and shares returned to the 1998 Plan as the result of termination of options or the repurchase
of shares.

Shares of common stock approved under the 2004 Equity Incentive Plan was increased on the first day of each
fiscal year, commencing in 2005, by an amount equal to the lesser of: (i) 5% of the outstanding shares on the first
day of such year; (b) 2 million shares; or, (c) an amount determined by the Board of Directors. The Company
added 636,922 and 646,969 shares to the 2004 Equity Incentive Plan on January 1, 2008 and January 1, 2007,
respectively. During 2008, the 2004 Equity Incentive Plan was amended to remove this feature beginning in
2009.

Options granted under the 1998 Plan and 2004 Equity Incentive Plan may be incentive stock options or
non-statutory stock options. Stock purchase rights may also be granted under the 2004 Equity Incentive Plan.
Incentive stock options may only be granted to employees. The Board of Directors determines the period over
which options become exercisable, however, except in the case of options granted to officers, directors and
consultants, options shall become exercisable at a rate of no less than 20% per year over five years from the date
the options are granted. Options are to be granted at an exercise price not less than the fair market value per share
on the grant date for incentive options or 85% of fair market value for nonqualified stock options. For employees
holding more than 10% of the voting rights of all classes of stock, the exercise price shall not be less than 110%
of the fair market value per share on the grant date. Options granted under the Plan to employees generally
become exercisable 25% on the first anniversary of the vesting commencement date and an additional 1/48th of
the total number of shares subject to the option shares shall become exercisable on the last day of each calendar
month thereafter until all of the shares have become exercisable. In June 2008 and 2007, the Company granted
options to non-employee Board of Directors that become exercisable 100% on the first anniversary of the vesting
commencement date. Unvested options that have been exercised are subject to repurchase upon termination of
the holder’s status as an employee, director or consultant. The contractual term of the options granted is either
five, seven or ten years.

During the year ended December 31, 2006, under the 2004 Equity Incentive Plan, the Company’s Board of
Directors approved the grant of 71,500 shares of RSUs to certain members of the Company’s management. The
RSUs generally vest in four equal, annual installments on the anniversaries of the date of grant. The Company
measured the fair market values of the underlying stock on the dates of grant and recognizes the share-based
compensation expense using the straight-line method over the vesting period.

The Company issues new shares upon the exercise of options, restricted stock units and ESPP shares.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

Option Activity.

Activity under the 1998 Plan and 2004 Equity Incentive Plan is summarized as follows:

Options Outstanding

Balances as of December 31, 2007 . . . . . . . . . .
Additional shares reserved . . . . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . .
Options cancelled or forfeited . . . . . . . . . . . . . . .
Restricted stock units cancelled or forfeited . . . .

Shares
Available
for Grant

2,047,649
636,922
(888,150)

—
215,543
1,125

Number of
Shares

2,417,575

—

888,150
(8,449)
(215,543)

—

Weighted-
Average
Exercise
Price

$14.22
—
$10.77
$ 5.39
$18.69
—

Weighted-
Average
Remaining
Contractual
Life
(in years)

Aggregate
Intrinsic
Value
(in $ millions)*

Balances as of December 31, 2008 . . . . . . . . . .

2,013,089

3,081,733

$12.94

Exercisable as of December 31, 2008 . . . . . . . .

1,842,485

$11.44

4.58

3.77

$6.0

$6.0

*

Based on the closing stock price of $8.87 for the Company’s common stock on December 31, 2008, the
last day of trading for the 2008 fiscal year.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate
difference between the Company’s closing stock price on the last trading day of the fiscal year 2008 and the
exercise price, multiplied by the number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on December 31, 2008. This amount changes based on the
fair market value of the Company’s common stock. Total intrinsic value of options exercised in the twelve
months ended December 31, 2008, 2007 and 2006 was $57,000, $23.9 million and $13.5 million, respectively.

The options outstanding and exercisable at December 31, 2008 were in the following exercise price ranges:

Options Outstanding

Options Exercisable

Range of Exercise Prices

$ 0.10–$ 0.10 . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.50–$ 4.25 . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5.50–$10.00 . . . . . . . . . . . . . . . . . . . . . . . . .
$10.43–$10.43 . . . . . . . . . . . . . . . . . . . . . . . . .
$12.14–$13.80 . . . . . . . . . . . . . . . . . . . . . . . . .
$14.00–$20.25 . . . . . . . . . . . . . . . . . . . . . . . . .
$21.84–$23.75 . . . . . . . . . . . . . . . . . . . . . . . . .
$24.46–$25.39 . . . . . . . . . . . . . . . . . . . . . . . . .
$25.73–$27.36 . . . . . . . . . . . . . . . . . . . . . . . . .
$34.45–$34.45 . . . . . . . . . . . . . . . . . . . . . . . . .

Number
Outstanding

433,333
337,658
143,819
610,250
340,547
396,839
357,953
315,896
137,125
8,313

$ 0.10–$34.45 . . . . . . . . . . . . . . . . . . . . . . . . .

3,081,733

Weighted-
Average
Remaining
Contractual
Life (in years)

0.70
3.12
5.22
6.38
5.45
6.15
4.86
3.72
6.33
3.57

4.58

Number
Outstanding

433,333
337,658
76,132
—
203,985
370,281
186,358
135,425
94,646
4,667

1,842,485

Weighted-
Average
Exercise
Price

$ 0.10
2.90
7.32
—
13.49
17.14
23.70
24.66
26.26
34.45

$11.44

As of December 31, 2007 there were 1,494,100 options that were exercisable at a weighted average exercise
price of $8.99.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

Restricted Stock Unit Awards.

Information with respect to outstanding restricted stock unit activity is as follows:

Outstanding at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number
of
Shares

27,372
—
(13,436)
(1,125)

Outstanding at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . .

12,811

Weighted
Average
Grant-
Date Fair
Value

$20.25
$ —
$20.25
$20.25

$20.25

Aggregate
Fair Value (1)
(in thousands)

$138 (3)

(1) Represents the value of the Company’s stock on the date that the restricted stock units vest.
(2) The number of restricted stock units vested includes shares that the Company withheld on behalf of the

employees to satisfy the statutory tax withholding requirements.
(3) On the grant date, the fair value for these vested awards was $272,000.

Stock-Based Compensation.

Stock-based compensation expense for stock options, restricted stock units and ESPP shares for the year ended
December 31, 2008 and 2007 was as follows (in thousands):

Year Ended
December 31,

2008

2007

Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,783
257
180

$ 4,982
294
351

Total share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect on share-based compensation at the marginal tax rates . . . . . . . . . . . .

5,220
(1,788)

5.627
(1,963)

Net share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,432

$ 3,664

Total pre-tax stock-based compensation expense by department recognized during the year ended December 31,
2008 and 2007 was as follows (in thousands):

Year Ended
December 31,

2008

2007

Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 846
1,657
628
2,089

$ 891
1,678
752
2,306

Total share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,220

$5,627

As of December 31, 2008, the unrecognized compensation cost, net of expected forfeitures, related to stock
options, RSUs and ESPP was $6.9 million, $108,000 and $57,000, which will be recognized using the straight-
line attribution method over an estimated weighted-average amortization period of 2.50 years, 0.42 years and
0.33 years, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

Valuation Assumptions and Fair Value of Stock Option and ESPP Grants.

The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted under its
equity incentive plans and rights to acquire stock granted under its employee stock purchase plan. The Company
based the weighted average estimated values of employee stock option grants and rights granted under the
employee stock purchase plan, as well as the weighted average assumptions used in calculating these values, on
estimates at the date of grant, as follows:

Stock Options

Stock Purchase Plan

2008

2007

2006

2008

2007

2006

$14.16
Estimated fair value of grants during the year
. . . . . . . . . . . . .
5.05
Expected term (in years) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.9% 1.90% 4.7% 4.4%
Risk-free interest rate (2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64% 51% 59% 58%
Volatility (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — % — % — % — % — % — %

$11.42
3.76
4.9%
56%

$5.29
4.68
3.2%
55%

$9.20
0.62

$4.52
0.50

$8.97
0.75

(1) The expected term represents the period during which the Company’s stock-based awards are expected
to be outstanding. The estimated term is based on historical experience of similar awards, giving
consideration to the contractual terms of the awards, vesting requirements, and expectation of future
employee behavior,
the Company used the
simplified method of calculating expected life described in SAB 107, Share Based Payment, due to
significant differences in the vesting and contractual life of current option grants compared to its
historical grants, as well as limited data of historical exercise patterns since the Initial Public Offering
(IPO) of its common stock.

including post-vesting terminations. Prior to 2008,

(2) The risk-free interest rate is based on U.S. Treasury debt securities with maturities close to the

expected term of the option as of the date of grant.

(3) Expected volatility is a 50%/50% blend of implied and historical volatility. The Company has
determined that this is a more reflective measure of market conditions and a better indicator of
expected volatility, than its limited historical volatility since the IPO, of its common stock.

(4) The Company has not historically issued any dividends and does not expect to do so in the foreseeable

future.

The Company periodically estimates forfeiture rates based on its historical experience within separate groups of
employees and adjusts the share-based payment expense accordingly.

NOTE 6: COMMON STOCK REPURCHASES

Common Stock Repurchase Program

In the year ended December 31, 2007, the Company repurchased 1,107,856 shares of its common stock at an
average price of $22.57. The stock repurchased under the Rule 10b5-1 trading plan was cancelled and returned to
authorized share status.

Restricted Stock Unit Withholdings

The Company issues restricted stock units as part of its equity incentive plans, which are described more fully in
“Note 5—Stockholders’ Equity, Stock Plans and Stock-Based Compensation Expense.” For the majority of
restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the
statutory withholding requirements paid on behalf of the employees. The Company withheld 4,992 and 5,288
shares of common stock to satisfy approximately $51,000 and $139,000 of its employees’ tax obligations, during
2008 and 2007, respectively. The Company paid this amount in cash to the appropriate taxing authorities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

Although shares withheld are not issued, they are treated as common stock repurchases for accounting and
disclosure purposes, as they reduce the number of shares that would have been issued upon vesting.

NOTE 7—INCOME TAXES:

The Company files income tax returns in the U.S. federal and various state and local jurisdictions and foreign
jurisdictions. The components of the provision for income taxes are as follows (in thousands):

December 31,

2008

2007

2006

Current:

Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,009
305
382

$ 4,904
626
260

$ 1,024
176
382

1,696

5,790

1,582

Deferred:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,313)
(78)
(97)

(2,052)
(416)
(62)

(2,457)
(309)
—

(2,488)

(2,530)

(2,766)

Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (792)

$ 3,260

$(1,184)

The Company’s deferred tax asset consists of the following (in thousands):

Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accruals and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net deferred tax asset before valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance against capital loss related deferred tax asset . . . . . . . . . . . .

December 31,

2008

2007

$

922
737
4,458
4,056
514
226
1,133

12,046
105

12,151
(1,367)

$ 857
1,075
3,450
2,780
419
130
—

8,711
181

8,892
—

Net deferred tax asset after valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,784

$8,892

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

The differences between the U.S. federal statutory income tax rate to the Company’s effective tax are as follows:

U.S. federal statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
State tax rate, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Meals and entertainment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit for research and development credit . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2008

2007

2006

35.00% 35.00% 35.00%
4.58
(2.38)
0.92
(3.45)
(10.62)
11.07
1.90
(5.65)
(9.61)
27.85
—
(37.34)
1.51
(3.47)

4.98
11.80
(109.81)
19.89
(112.08)
—
24.07

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21.63% 23.68% (126.15)%

The Company recognizes deferred tax assets for the expected future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit
carryforwards. The Company records a valuation allowance to reduce the deferred tax assets to their estimated
realizable value, when it is more likely than not that it will not be able to generate sufficient future taxable
income to realize the net carrying value.

In 2008, the Company loss before income taxes included an unrealized capital loss resulting from an other-than-
temporary impairment charge relating to ARS investments. After considering both the positive and negative
evidence as of December 31, 2008, the Company determined that it was not more-likely-than-not that it would
realize the full value of its capital loss related deferred tax assets. As a result, the Company established a
valuation allowance against this deferred tax asset. The Company believes that it is more likely than not that it
will be able to generate sufficient future taxable income to realize the carrying value of the remaining deferred
tax assets. The Company reviews the deferred tax asset and valuation allowance on a quarterly basis, and
considers whether positive and negative evidence exists to effect the realization of deferred tax assets.

Undistributed earnings of the Company’s foreign subsidiaries of approximately $2.1 million at December 31,
2008, are considered to be indefinitely reinvested and, accordingly, no provision for federal and state income
taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to various foreign countries.

As of December 31, 2008, the Company had cumulative carry-forwards for research and development credits for
federal and state income tax purposes of approximately $2.8 million and $2.7 million, respectively. These federal
research and development tax credits expire through the year 2028. The state research and development credits
can be carried forward indefinitely, except for $284,000, which will expire at various dates through the year
2020. Furthermore, the Company has federal alternative minimum tax credits of approximately $1.1 million that
can be carried forward indefinitely. Certain tax credit carryovers are attributable to excess tax benefits from
employee stock option exercises and have not been recorded in the Company’s deferred tax assets in accordance
with FAS 123(R). The Company will record $4.5 million as a credit to additional paid in capital as and when
such excess tax benefits are ultimately realized.

As of December 31, 2008, the Company did not have any cumulative net operating loss carry-forwards for
federal and state income tax purposes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

During 2008, the IRS completed its examination of the Company’s U.S. income tax returns for 2005 and 2006.
The net adjustment resulting from the examination did not have a material effect on the Company’s net loss or
financial position and has been reflected in the 2008 tax provision.

Uncertain Tax Positions

Effective January 1, 2007, the Company adopted the provisions of FIN 48. This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with
SFAS No. 109 and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination.
Upon adoption of FIN 48, the Company’s policy to include interest and penalties related to gross unrecognized
tax benefits within the provision for income taxes did not change.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits
December 31, 2007 to December 31, 2008 (in thousands):

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases related to current year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases related to settlements with taxing authorities . . . . . . . . . . . . . . . . . . . . .
Decreases related to lapsing of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2008

2007

$1,500
—
(98)
258
—
(20)

$1,067
588
(59)
—
—
(96)

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,640

$1,500

The Company’s total unrecognized tax benefits that, if recognized, would affect its effective tax rate were
approximately $810,000 and $664,000 as of December 31, 2008 and 2007, respectively. The Company had
accrued approximately $104,000 and $109,000 for payment of interest as of December 31, 2008 and 2007,
respectively. Interest included in the provision for income taxes was not material in all the periods presented. The
Company has not accrued any penalties related to its uncertain tax positions as it believes that it is more likely
than not
the amount of
there will not be any assessment of penalties. The Company expects that
unrecognized tax benefits will not change within the next 12 months.

that

NOTE 8—NET INCOME (LOSS) PER SHARE:

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of
common shares outstanding during the year. Diluted net income per share is calculated by using the weighted-
average number of common shares outstanding during the year increased to include the number of additional
shares of common stock that would have been outstanding if the dilutive potential shares of common stock had
been issued. The dilutive effect of outstanding options, Employee Stock Purchase Plan shares and restricted stock
units is reflected in diluted net income per share by application of the treasury stock method, which includes
consideration of stock-based compensation required by SFAS No. 123(R) and SFAS No. 128, Earnings Per
Share.

For years presented with a net diluted net loss per common share is the same as basic net loss per common share,
as the effect of the potential common stock equivalents is anti-dilutive and as such is excluded from the
calculations of the diluted net loss per share.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

The following table sets forth the computation of basic and diluted net income (loss) and the weighted average
number of shares used in computing basic and diluted net income (loss) per share (in thousands):

Year Ended December 31,

2008

2007

2006

Numerator:

Net income (loss)—Basic and Diluted . . . . . . . . . . . . . . . . . . . .

$ (2,869)

$10,504

$ 2,123

Denominator:

Weighted-average number of common shares outstanding used
in computing basic net income (loss) per share . . . . . . . . . . .

Dilutive potential common shares used in computing diluted

12,770

13,153

12,558

net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

1,075

1,720

Total weighted-average number of shares used in computing

diluted net income (loss) per share . . . . . . . . . . . . . . . . . . . . .

12,770

14,228

14,278

Anti-dilutive Securities

The following number of weighted shares outstanding, prior to the application of the treasury stock method, were
excluded from the computation of diluted net income (loss) per common share for the years presented because
including them would have had an anti-dilutive effect (in thousands):

Options to purchase common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2008

2,882
19
94

2,995

2007

—
—
829

829

2006

—
—
621

621

NOTE 9—DEFINED CONTRIBUTION PLAN:

In the United States, the Company has an employee savings plan (401(k) Plan) that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. Eligible employees may make voluntary
contributions to the 401(k) Plan up to 100% of their annual compensation, subject to statutory annual limitations.
Since April 1999, the Company has made discretionary matching contributions of 50% to 75% of all employees’
contributions in each 401(k) Plan year. During the years ended December 31, 2008, 2007 and 2006, the Company
made discretionary contributions of $572,000, $597,000 and $557,000, respectively, under the 401(k) Plan.

For the Company’s Japanese subsidiary, it has established an employee retirement plan at its discretion. In
addition, for some of the Company’s other foreign subsidiaries, the Company deposits funds with insurance
companies, third-party trustees, or into government-managed accounts consistent with the requirements of local
laws. The Company has fully funded or accrued for its obligations as of December 31, 2008, and the related
expense was not material in each of the years ended December 31, 2008, 2007 and 2006.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

NOTE 10—SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION:

The Company operates in one business segment, which encompasses the designing, developing, manufacturing,
marketing and servicing of aesthetic laser and other light-based systems for physicians and other qualified
practitioners worldwide. Management uses one measurement of profitability and does not segregate its business
for internal reporting.

The Company’s long-lived assets maintained outside the United States are insignificant.

Revenue is attributed to geographical regions based on the shipping location of where the product is delivered.

The Company had one customer that represented net revenue of 14% in 2008 and 2007, and 15% in 2006 and
accounted for 25% and 35% of the Company’s total accounts receivable balance, as of December 31, 2008 and
2007, respectively.

The following table summarizes revenue by geographic region and product category (in thousands):

Year Ended December 31,

2008

2007

2006

Revenue mix by geography:

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia, excluding Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rest of the world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$41,683
10,929
10,368
10,522
9,877

$ 64,084
8,453
9,445
9,258
10,486

$ 69,895
7,396
8,385
7,239
7,777

Consolidated total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$83,379

$101,726

$100,692

Revenue mix by product category:

Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product upgrades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Titan hand piece refills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$57,998
8,361
11,358
5,662

$ 74,502
13,342
9,128
4,754

$ 84,695
6,006
5,890
4,101

Consolidated total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$83,379

$101,726

$100,692

NOTE 11—COMMITMENTS AND CONTINGENCIES:

Facility Leases.

The Company leases its Brisbane, California, office and manufacturing facility under a non-cancelable operating
lease which expires in 2013. In addition, the Company has leased office facilities in certain international
countries as follows:

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Japan

Approximately 5,790

Square Footage

Lease termination or Expiration

Switzerland

Approximately 2,884

France
Spain

Approximately 1,240
Approximately 175

Three leases which expire in May 2009, May 2010 and July
2010
Lease can be terminated by either party at the end of any
calendar quarter upon six months’ written notice
Lease expires in December 2009
Lease automatically renews at the end of each six-month
period

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

As of December 31, 2008, the Company was committed to minimum lease payments for facilities and other
leased assets under long-term non-cancelable operating leases as follows (in thousands):

Year Ending December 31,

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount

$1,513
1,341
1,319
1,430
1,544
—

Future minimum rental payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$7,147

For the years ended December 31, 2008, 2007 and 2006, gross rent expense was $1.7 million, $1.5 million and
$1.3 million, respectively.

Purchase Commitments.

The Company maintains certain open inventory purchase commitments with its suppliers to ensure a smooth and
continuous supply for key components. The Company’s liability in these purchase commitments is generally
restricted to a forecasted time-horizon as agreed between the parties. These forecasted time-horizons can vary
among different suppliers. The Company’s open inventory purchase commitments were not material at
December 31, 2008.

Indemnifications

In the normal course of business, the Company enters into agreements that contain a variety of representations,
warranties, and indemnification obligations. For example,
the Company has entered into indemnification
agreements with each of its directors and executive officers. In 2007, two of the Company’s executive officers
were named as defendants in securities class action litigation—see “Litigation” and “Litigation Settlement”
below. The Company’s exposure under its various indemnification obligations, including those under the
indemnification agreements with its directors and executive officers, is unknown since the outcome of that
securities litigation is unpredictable and the amount that could be payable thereunder is not reasonably estimable,
and since other indemnification obligations involve future claims that may be made against the Company. The
Company has not accrued or paid any amounts for any such indemnification obligations. However, the Company
may record charges in the future as a result of these potential indemnification obligations, including those related
to the securities class action litigation.

Litigation

Two securities class action lawsuits were filed against the Company and two of the Company’s executive officers
in April 2007 and May 2007, respectively, in the U.S. District Court for the Northern District of California
following declines in the Company’s stock price. The plaintiffs claim to represent purchasers of the Company’s
common stock from January 31, 2007 through May 7, 2007. The complaints generally allege that materially false
statements and omissions were made regarding the Company’s financial prospects, and seek unspecified
monetary damages. On November 1, 2007, the Court ordered the two cases consolidated. On December 17, 2007,
the plaintiffs filed a consolidated, amended complaint, and on January 31, 2008, the Company filed a motion to
dismiss that complaint. On September 30, 2008, in response to the Company’s motion, the Court issued an order
dismissing the plaintiffs’ amended complaint without prejudice. On October 28, 2008, the plaintiffs filed a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CUTERA, INC.

Notice Of Intention Not to File A Second Amended Consolidated Complaint. On November 25, 2008, the Court
closed the case on its own initiative. On November 26, 2008, the plaintiffs filed a Notice of Appeal to the U.S.
Court of Appeals for the Ninth Circuit. The Company intends to continue to defend this case vigorously,
regardless of the stage of litigation. Although the Company retains director and officer liability insurance, there is
no assurance that such insurance will cover the claims that are made or will insure the Company fully for all
losses on covered claims. Since the Company does not believe that a significant adverse result in this litigation is
probable and since the amount of potential damages in the event of an adverse result is not reasonably estimable,
no expense has been recorded with respect to the contingent liability associated with this matter.

A Telephone Consumer Protection Act, or TCPA, class action lawsuit was filed against the Company in January
2008 in the Illinois Circuit Court, Cook County, by Bridgeport Pain Control Center, Ltd., seeking monetary
damages, injunctive relief, costs and other relief. The complaint alleges that the Company violated the TCPA by
sending unsolicited advertisements by facsimile to the plaintiff and other recipients nationwide during the four-
year period preceding the lawsuit without the prior express invitation or permission of the recipients. Two state
law claims, limited to Illinois recipients, allege a class period of three and five years, respectively. Under the
TCPA, recipients of unsolicited facsimile advertisements may be entitled to damages of $500 per violation for
inadvertent violations and $1,500 per violation for knowing or willful violations. On February 22, 2008, the
Company removed the case to federal court in the Northern District of Illinois, and filed its response to the
complaint on February 29, 2008. Although it is unclear how many facsimiles were transmitted during the period
for which the plaintiff seeks class certification and unclear how many of these facsimiles were “unsolicited”
within the meaning of the TCPA, the Company expects that the number of unsolicited facsimiles could be large
and potential liability may be substantial as a result. The Company retained general liability insurance, with one
insurer covering the first two years of the four-year period preceding the lawsuit, and a second insurer covering
the latter two years of that four-year period. The first carrier has agreed to defend the Company subject to a
reservation of rights. The second carrier has declined coverage. The Company intends to defend this case
vigorously, including the plaintiff’s allegations seeking class certification, regardless of the stage of litigation.
Since the Company does not believe that a significant adverse result in this litigation is probable and since the
amount of potential damages in the event of an adverse result is not reasonably estimable, no expense has been
recorded with respect to the contingent liability associated with this matter.

Litigation Settlement

In June 2006, the Company settled its patent litigation with Palomar Medical Technologies and Massachusetts
General Hospital with Palomar granting the Company an irrevocable sublicense to the subject patents. In
connection with this settlement, the Company recorded a litigation settlement charge of $18.9 million relating to
past royalties, interest and legal settlement costs and $1.2 million as an intangible asset representing the value of
the on-going sublicense agreement which expires in February 2015.

Other Legal Matters

In addition to the foregoing lawsuits, the Company is named from time to time as a party to product liability and
contractual lawsuits in the normal course of its business. As of December 31, 2008, the Company was not a party
to any material pending litigation other than those described above in the “Litigation” section.

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SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)

Quarter ended:

Dec. 31,
2008

Sept. 30,
2008

June 30,
2008

March 31,
2008

Dec. 31,
2007

Sept. 30,
2007

June 30,
2007

March 31,
2007

Net revenue . . . . . . . . . . . . . . . $ 17,897 $ 19,110 $ 24,754 $ 21,618 $ 26,453 $28,143 $ 23,873 $ 23,257
7,781
Cost of revenue . . . . . . . . . . . .

8,219

9,607

9,704

7,823

7,045

9,271

7,910

Gross profit

. . . . . . . . . . . . . . .

10,852

11,287

15,483

13,399

16,749 18,536

15,963

15,476

Operating expenses:
Sales and marketing . . . . . . . . .
Research and development
. . .
General and administrative . . .

6,568
1,933
2,723

8,076
1,828
2,583

10,361
2,004
3,023

10,349
1,785
2,941

9,438 10,586
1,764
1,735
3,078
2,725

9,190
1,923
2,900

9,063
1,747
3,018

Total operating expense . . . . . .

11,224

12,487

15,388

15,075

13,898 15,428

14,013

13,828

Income (loss) from

operations . . . . . . . . . . . . . . .

(372)

(1,200)

95

(1,676)

2,851

3,108

1,950

1,648

Interest and other income,

net

. . . . . . . . . . . . . . . . . . . .

555

733

857

901

1,001

1,096

1,108

1,002

Other-than-temporary

impairment of long-term
investments . . . . . . . . . . . . .

Income (loss) before income

(1,182)

(2,372)

—

—

—

—

—

—

taxes . . . . . . . . . . . . . . . . . . .

(999)

(2,839)

Provision (benefit) for income

taxes . . . . . . . . . . . . . . . . . . .

(764)

(86)

952

291

(775)

3,852

4,204

3,058

2,650

(233)

229

1,112

1,024

895

Net income (loss) . . . . . . . . . . . $

(235)$ (2,735)$

661 $

(542)$

3,623 $ 3,092 $

2,034 $

1,755

Net income (loss) per share—

basic . . . . . . . . . . . . . . . . . . . $

(0.02)$

(0.22)$

0.05 $

(0.04)$

0.28 $

0.24 $

0.15 $

0.13

Net income (loss) per share—

diluted . . . . . . . . . . . . . . . . . $

(0.02)$

(0.22)$

0.05 $

(0.04)$

0.27 $

0.22 $

0.14 $

0.12

Weight-average number of
shares used in per share
calculations:

Basic . . . . . . . . . . . . . . . .

12,797

12,780

12,764

12,740

12,714 13,026

13,610

13,216

Diluted . . . . . . . . . . . . . . .

12,797

12,780

13,465

12,740

13,561 13,970

14,666

14,629

Cash and cash equivalents,

marketable investments and
long-term investments . . . . . $106,820 $109,373 $107,814 $104,490 $106,993 $99,536 $115,415 $111,239

84

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SCHEDULE II

CUTERA, INC.

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
For the Year Ended December 31, 2008, 2007 and 2006

Allowance for doubtful accounts receivable

Year ended December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . .

Reserve for excess and obsolete inventories

Year ended December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . .

Valuation allowance for deferred tax assets

Balance at
Beginning
of Year

9
$
34
$
$ 177

$1,051
$ 851
$ 992

Additions Deductions

$ 191
$ 222
$ 221

$ 409
$ 279
90
$

$139
$247
$364

$593
$ 79
$231

Balance
at End of
Year

$
$
$

61
9
34

$ 867
$1,051
$ 851

Year ended December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —

$1,367

$—

$1,367

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Attached as exhibits to this Annual Report are certifications of the Company’s Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), which are required in accordance with Rule 13a-14 of the Securities
Exchange Act of 1934, as amended (Exchange Act). This Controls and Procedures section includes the
information concerning the controls evaluation referred to in the certifications, and it should be read in
conjunction with the certifications for a more complete understanding of the topics presented.

The Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls
and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange Act) (Disclosure Controls)
as of the end of the period covered by this Report required by Exchange Act Rules 13a-15(b) or 15d-15(b). The
controls evaluation was conducted under the supervision and with the participation of the Company’s
management, including the CEO and CFO. Based on this evaluation, the CEO and our CFO have concluded that
as of the end of the period covered by this report the Company’s disclosure controls and procedures were
effective at a reasonable assurance level.

Definition of Disclosure Controls

Disclosure Controls are controls and procedures designed to reasonably assure that information required to be
disclosed in the Company’s reports filed under the Exchange Act, such as this Report, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are
also designed to reasonably assure that such information is accumulated and communicated to the Company’s
management,
including the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure. The Company’s Disclosure Controls include components of its internal control over financial
reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability
of its financial reporting and the preparation of financial statements in accordance with generally accepted
accounting principles in the U.S. To the extent that components of the Company’s internal control over financial
reporting are included within its Disclosure Controls, they are included in the scope of the Company’s annual
controls evaluation.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision
and with the participation of the Company’s management, including the CEO and CFO, the Company conducted
an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in
the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, the Company’s management concluded
that the Company’s internal control over financial reporting was effective as of December 31, 2008. The
effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by
PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm, as stated in their report,
which is included herein.

Limitations on the Effectiveness of Controls

The Company’s management, including the CEO and CFO, does not expect that the Company’s disclosure
controls or internal control over financial reporting will prevent all error and all fraud. A control system, no

86

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matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision making can be faulty and that breakdowns can occur because of
simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion
of two or more people, or by management override of the controls. The design of any system of controls is based
in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the most
recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

The Company has established that the 2009 Annual Meeting of Stockholders will be held at their principal
executive offices located at 3240 Bayshore Blvd., Brisbane, CA 94005-1021 on May 5, 2009 at 10:00 a.m. and
the record date for the purposes of voting in that meeting shall be March 9, 2009.

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87

PART III

Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file a
Definitive Proxy Statement (the “Proxy Statement”) for our 2009 Annual Meeting of Stockholders with the
Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2008.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is incorporated herein by reference to the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated herein by reference to the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE

The information required by this Item is incorporated herein by reference to the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item is incorporated herein by reference to the Proxy Statement.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(1) The financial statements required by Item 15(a) are filed as Item 8 of this annual report.

(2) The financial statement schedule required by Item 15(a) filed as Item 8 of this annual report.

(3) Exhibits.

Exhibit No.

Description

3.2(1)

3.4(1)

4.1(4)

10.1(1)

10.2(1)

10.3(1)

10.4(5)

10.6(1)

Amended and Restated Certificate of Incorporation of the Registrant (Delaware).

Bylaws of the Registrant.

Specimen Common Stock certificate of the Registrant.

Form of Indemnification Agreement for directors and executive officers.

1998 Stock Plan.

2004 Equity Incentive Plan.

2004 Employee Stock Purchase Plan.

Brisbane Technology Park Lease dated August 5, 2003 by and between the Registrant
and Gal-Brisbane, L.P. for office space located at 3240 Bayshore Boulevard, Brisbane,
California.

10.10(2)

Settlement Agreement and Non-Exclusive Patent License, each between the Registrant
and Palomar Medical Technologies, Inc. dated June 2, 2006.

10.11(3)

Form of Performance Unit Award Agreement.

10.13(4)†

Distribution Agreement between the Registrant and PSS World Medical Shared
Services, Inc., a subsidiary of PSS World Medical dated October 1, 2006.

23.1

24.1

31.1

31.2

32.1

Consent of Independent Registered Public Accounting Firm.

Power of Attorney (see page 90).

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

(1)

(2)
(3)
(4)
(5)
†

Incorporated by reference from our Registration Statement on Form S-1 (Registration No. 333-111928)
which was declared effective on March 30, 2004.
Incorporated by reference from our Current Report on Form 8-K filed on June 2, 2006.
Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 14, 2005.
Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 8, 2006.
Incorporated by reference from our 2006 Annual Report on Form 10-K filed on March 16, 2007.
Confidential Treatment has been requested for certain portions of this exhibit.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of The Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of
Brisbane, State of California, on the 16th day of March, 2009.

CUTERA, INC.

By:

/s/ KEVIN P. CONNORS

Kevin P. Connors
President and Chief Executive Officer

Power of Attorney

KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kevin P. Connors, his attorney-in-fact, for him or her in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute, may do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ KEVIN P. CONNORS

President, Chief Executive Officer and

March 16, 2009

Kevin P. Connors

Director (Principal Executive
Officer)

/s/ RONALD J. SANTILLI

Ronald J. Santilli

Chief Financial Officer and Executive
Vice President (Principal Financial
and Accounting Officer)

March 16, 2009

/s/ DAVID A. GOLLNICK

David A. Gollnick

Executive Vice President of Research
and Development and Director

March 16, 2009

/s/ DAVID B. APFELBERG

Director

March 16, 2009

David B. Apfelberg

/s/ ANNETTE J. CAMPBELL-WHITE

Director

March 16, 2009

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Annette J. Campbell-White

/s/ MARK LORTZ

Mark Lortz

/s/ TIM O’SHEA
Tim O’Shea

/s/

JERRY P. WIDMAN
Jerry P. Widman

Director

Director

Director

90

March 16, 2009

March 16, 2009

March 16, 2009

Corporate Information (as of December 31, 2008)

BOARD OF DIRECTORS
Kevin P. Connors, President and Chief

Executive Officer, Cutera, Inc.

David A. Gollnick1, Former Vice President of
Research and Development, Cutera, Inc.
David B. Apfelberg, MD3, 5, Clinical Professor

of Plastic Surgery, Stanford University Medical
Center

Annette J. Campbell-White3, Managing

General Partner, MedVenture Associates I-V.

Mark Lortz2, Former Chief Executive Officer,

TheraSense, Inc.

Timothy J. O’Shea2, Managing Director, Oxo

Capital

Jerry P. Widman2, 3, 4, Former Chief Financial

Officer, Ascension Health

1—Mr. Gollnick resigned as Executive Vice President of
Research and Development on March 20, 2009 and
continues to be a member of our Board of Directors.

2—Audit Committee member
3—Compensation Committee member
4—Chairman of Audit Committee
5—Chairman of Compensation Committee

MANAGEMENT TEAM
Kevin P. Connors, President, Chief Executive

Officer and Director

Ronald J. Santilli, Chief Financial Officer and

Executive Vice President

David A. Gollnick1, Executive Vice President of

Research and Development and Director
John J. Connors, Vice President of Sales
Robert Shine, Vice President of Worldwide

ANNUAL MEETING
Annual meeting of stockholders will be

held on May 20, 2009, 10:00 a.m. (PDT)

STOCK LISTING
AND MARKET DATA
Our common stock is traded on The

at: 3240 Bayshore Blvd., Brisbane,

NASDAQ Global Market under the symbol

California 94005.

TRANSFER AGENT
Computershare Trust Company, Inc.

350 Indiana St., Suite 800

Golden, Colorado 80401

303-262-0600

INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP

San Jose, California

“CUTR.” We have not declared or paid

any cash dividends on our capital stock

since our inception. We currently expect to

retain future earnings, if any, for use in the

operation and expansion of our business

and do not anticipate paying any cash

dividends in the foreseeable future. As of

March 24, 2009, we believe there were

approximately 5,200 holders of record of

our common stock. The following table

sets forth quarterly high and low closing

sales prices per share of our common

CORPORATE LEGAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati, P.C.

stock as reported on The NASDAQ Global

Market for the periods indicated.

Palo Alto, California

CORPORATE/STOCKHOLDER
INFORMATION
Our Form 10-K was filed with the

Securities and Exchange Commission on

March 16, 2009. For additional copies of

this report, Form 10-K, or other financial

information, without charge, please visit

the Investor Relations page on our

website at: www.cutera.com or write to

2008

2007

HIGH

LOW

HIGH

LOW

4th Qtr. $10.58 $ 7.47 $27.04 $14.44

3rd Qtr.

12.28

2nd Qtr. 13.91

9.10

8.98

26.55

20.84

38.39

23.40

1st Qtr.

15.53

11.70

37.48

27.06

Marketing and International Business

ir@cutera.com.

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG CUTERA, INC.,
NASDAQ COMPOSITE INDEX (U.S.) AND NASDAQ MEDICAL EQUIPMENT INDEX

S
R
A
L
L
O
D

300

250

200

150

100

H
F
B

H
B
F

B
H
F

H
B
F

50

0

F

H
B

F

H
B

F

H
B

F
H
B

F

H
B

F

H
B

F

H
B

F
H
B

F

H
B

F

H
B

F
H
B

H
B
F

H
B
F

H
B

F

H
B
F

H
B
F

3
/
3

6
/
3

9
/
3

1
/
0

0
/
0

0
/
0

4

4

4

1

2
/
3

1
/
0

4

3
/
3

6
/
3

9
/
3

1
/
0

0
/
0

0
/
0

5

5

5

1

2
/
3

1
/
0

5

3
/
3

6
/
3

9
/
3

1
/
0

0
/
0

0
/
0

6

6

6

1

2
/
3

1
/
0

6

3
/
3

6
/
3

9
/
3

1
/
0

0
/
0

0
/
0

7

7

7

1

2
/
3

1
/
0

7

3
/
3

6
/
3

9
/
3

1
/
0

0
/
0

0
/
0

8

8

8

1

2
/
3

1
/
0

8

CUTERA, INC.

NASDAQ COMPOSITE

NASDAQ MEDICAL EQUIPMENT

ASSUMES $100 INVESTED ON MAR. 31, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2008