Edgar Filing: ALIGN TECHNOLOGY INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-32259

Align Technology, Inc.

(Exact name of registrant as specified in its charter)

Delaware		94-3267295
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

881 Martin Avenue

Santa Clara, California 95050

(Address of principal executive offices)

(408) 470-1000

(Registrant’s telephone number, including area code)

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 that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value, as of October 30, 2009 was 74,461,321.

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ALIGN TECHNOLOGY, INC.

INDEX

PART I	FINANCIAL INFORMATION	3
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED):	3
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	3
	CONDENSED CONSOLIDATED BALANCE SHEETS	4
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	5
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	31
ITEM 4.	CONTROLS AND PROCEDURES	31
PART II	OTHER INFORMATION	31
ITEM 1.	LEGAL PROCEEDINGS	31
ITEM 1A.	RISK FACTORS	34
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	45
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	45
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	46
ITEM 5.	OTHER INFORMATION	46
ITEM 6.	EXHIBITS	46
SIGNATURES		47

Invisalign, Align, ClinCheck, Invisalign Assist, Invisalign Teen and Vivera, amongst others, are trademarks belonging to Align Technology, Inc. and are pending or registered in the United States and other countries.

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PART I—FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009			2008		2009			2008

Net revenues	$	79,269		$	75,173	$	225,717		$	229,851

Cost of revenues	20,268			18,766		56,031			58,617

Gross profit	59,001			56,407		169,686			171,234

Operating expenses:

Sales and marketing	27,687			28,214		84,649			88,737
General and administrative	16,224			14,395		46,231			45,905
Research and development	5,611			5,918		16,471			20,214
Restructurings	—			2,189		1,319			2,189
Litigation settlement	69,673			—		69,673			—

Total operating expenses	119,195			50,716		218,343			157,045

Profit (loss) from operations	(60,194		)	5,691		(48,657		)	14,189

Interest and other income (expense), net	(271		)	264		434			1,673

Net profit (loss) before provision for income taxes	(60,465		)	5,955		(48,223		)	15,862
Provision for (benefit from) income taxes	(10,523		)	798		(5,462		)	1,371

Net profit (loss)	$	(49,942	)	$	5,157	$	(42,761	)	$	14,491

Net profit (loss) per share:
Basic	$	(0.72	)	$	0.08	$	(0.64	)	$	0.21
Diluted	$	(0.72	)	$	0.08	$	(0.64	)	$	0.21

Shares used in computing net profit (loss) per share:
Basic	69,528			67,367		67,278			68,330
Diluted	69,528			68,704		67,278			69,906

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

	September 30,			December 31,
	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	135,961		$	87,100
Marketable securities, short-term	18,979			23,066
Accounts receivable, net of allowance for doubtful accounts of $1,446 and $612, respectively	55,035			52,362
Inventories, net	1,892			1,965
Prepaid expenses and other current assets	25,671			13,414
Total current assets	237,538			177,907

Property and equipment, net	24,429			26,979
Goodwill	478			478
Intangible assets, net	5,688			7,788
Deferred tax asset	61,048			61,696
Other assets	1,603			4,493
Total assets	$	330,784		$	279,341

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,498		$	5,580
Accrued liabilities	37,484			38,282
Deferred revenues	27,920			16,710
Total current liabilities	72,902			60,572
Other long-term liabilities	202			229
Total liabilities	73,104			60,801
Commitments and contingencies (Notes 5 and 8)
Stockholders’ equity:
Preferred stock, $0.0001 par value (5,000 shares authorized; none issued)	—			—
Common stock, $0.0001 par value (200,000 shares authorized; 74,329 and 65,633 shares issued and outstanding, respectively.)	7			7
Additional paid-in capital	521,133			439,494
Accumulated other comprehensive income, net	531			269
Accumulated deficit	(263,991		)	(221,230		)
Total stockholders’ equity	257,680			218,540
Total liabilities and stockholders’ equity	$	330,784		$	279,341

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended
	September 30,
	2009			2008
Cash Flows from Operating Activities:
Net profit (loss)	$	(42,761	)	$	14,491
Adjustments to reconcile net profit (loss) to net cash provided by operating activities:
Deferred taxes	740			—
Depreciation and amortization	7,582			7,365
Amortization of intangibles	2,100			2,127
Stock-based compensation	12,011			13,176
Litigation settlement costs and amortization of prepaid royalties	58,430			—
Provision from doubtful accounts	958			—
Loss on retirement and disposal of fixed assets	20			206
Excess tax benefit from share-based payment arrangements	—			(188		)
Non-cash restructuring charges	—			411
Changes in assets and liabilities:
Accounts receivable	(3,167		)	(4,093		)
Inventories	74			(109		)
Prepaid expenses and other current assets	(7,036		)	1,491
Accounts payable	816			(733		)
Accrued and other long-term liabilities	(912		)	(6,269		)
Deferred revenues	11,051			3,116
Net cash provided by operating activities	39,906			30,991

Cash Flows from Investing Activities:
Purchase of property and equipment	(4,084		)	(12,361		)
Proceeds from sale of equipment	—			189
Purchases of marketable securities	(33,940		)	(65,094		)
Maturities of marketable securities	40,910			66,463
Other assets	35			272
Net cash provided by (used in) investing activities	2,921			(10,531		)

Cash Flows from Financing Activities:
Proceeds from issuance of common stock	6,376			10,222
Payments on short-term obligations	(136		)	(271		)
Repurchased shares of common stock	—			(39,432		)
Excess tax benefit from share-based payment arrangements	—			188
Employees’ taxes paid upon the vesting of restricted stock units	(264		)	(347		)
Net cash provided by (used in) financing activities	5,976			(29,640		)

Effect of foreign exchange rate changes on cash and cash equivalents	58			(204		)

Net increase (decrease) in cash and cash equivalents	48,861			(9,384		)
Cash and cash equivalents at beginning of period	87,100			89,140
Cash and cash equivalents at end of period	$	135,961		$	79,756

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ALIGN TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Align Technology, Inc. (the “Company” or “Align”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and contain all adjustments, including normal recurring adjustments, necessary to present fairly Align’s financial position as of September 30, 2009, its results of operations for the three and nine months ended September 30, 2009 and 2008, and its cash flows for the nine months ended September 30, 2009 and 2008. The Condensed Consolidated Balance Sheet as of December 31, 2008 was derived from the December 31, 2008 audited financial statements. Certain prior period amounts have been reclassified to conform with the current period presentation. These reclassifications had no impact on previously reported net earnings or financial position.

The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 or any other future period, and the Company makes no representations related thereto. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and the Consolidated Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

In connection with the preparation of the condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of September 30, 2009 through the financial statement issuance date of November 5, 2009.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in Align’s Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standard No. 157 (“FAS 157”) or Accounting Standard Codification (“ASC”) 820 which provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. FAS 157 (ASC 820) applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. FAS 157 (ASC 820), as originally issued, was effective for fiscal years beginning after November 15, 2007, except that under FASB Staff Position, or, “Effective Date of FASB Statement 157” (“FSP 157-2) or ASC 820 companies are allowed to delay the effective date of FAS 157(ASC 820) for non-financial assets and non-financial liabilities that are not recognized or disclosed at fair value on a recurring basis until fiscal years beginning after November 15, 2008. In October 2008, FASB Staff Position 157-3 “Determining the Fair Value of a Financial Asset When the Market for that Asset is not Active,” (FASP 157-3 or ASC 820), was issued and effective upon issuance, including prior periods for which financial statements have not been issued FSP 157-3(ASC 820), clarified the application of FAS 157 (ASC 820) in a market that is not active. Effective January 1, 2008, the Company adopted the provisions of FAS 157(ASC 820) for all financial assets and liabilities. Effective January 1, 2009, the Company adopted FSP 157-2 (ASC 820) and 157-3(ASC 820). The adoption of these Topics did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP No. 157-4 “FSP 157-4”or ASC 820 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, which provides guidance on determining fair value when there is no active market or where the price inputs being used represent distressed sales. FSP 157-4 (ASC 820) is effective for interim and annual periods ending after June 15, 2009 and was adopted by the Company in the second quarter of 2009. The adoption did not have a material impact on the Company’s consolidated financial statements.

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In April 2009, the FASB issued FSP No. 115-2 “FSP 115-2” or ASC 320, “Recognition and Presentation of Other-Than-Temporary Impairments”, which is effective for the Company for the quarterly period beginning April 1, 2009. FSP 115-2 (ASC 320) amends existing guidance for determining whether an other than temporary impairment of debt securities has occurred. Among other changes, the FASB replaced the existing requirement that an entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert (a) it does not have the intent to sell the security, and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. The adoption of this pronouncement did not have a material effect on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP 107-1 and ABP 28-1 or ASC 825, “Interim Disclosures about Fair Value of Financial Instruments.” This pronouncement require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and also requires those disclosures in summarized financial information at interim reporting periods. FSP 107-1 and ABP 28 (ASC 825) are effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted this pronouncement and provided the required disclosures in Note 2.

In April 2009, the FASB issued FSP 141(R)-1 or ASC 805, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP 141(R)-1 (ASC 805) requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with FASB Statement No. 5 or ASC 450, “Accounting for Contingencies”, and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss.” This pronouncement is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of FSP 141(R)-1 (ASC 805) did not have a material effect on the Company’s consolidated financial statements.

In May 2009, the FASB issued FAS 165, “Subsequent Events” (FAS 165”) or ASC 855. FAS 165 (ASC 855) establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FAS 165 (ASC 855), which includes a new required disclosure of the date through which an entity has evaluated subsequent events, is effective for interim or annual periods ending after June 15, 2009. The Company has adopted this standard as of June 30, 2009; however, the adoption of FAS 165 (ASC 855) had no impact to the Company’s consolidated financial statements.

In June 2009, the FASB issued FAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB 140” (“FAS 166”). FAS 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. FAS 166 will be effective for transfers of financial assets in annual reporting periods beginning after November 15, 2009 and in interim periods within those first annual reporting periods with earlier adoption prohibited. The Company is currently assessing the potential impact, if any, on the adoption of FAS 166 on its consolidated financial statements.

In June 2009, the FASB issued FAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“FAS 167”). FAS 167 amends FIN 46(R), “Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51” (“FIN 46(R)”) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as one with the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the variable interest. FAS 167 will be effective as of the beginning of the annual reporting period commencing after November 15, 2009. The Company is assessing the potential impact, if any, of the adoption of FAS 167 on its consolidated financial statements.

In June 2009, the FASB issued FAS No. 168 “FAS 168” or ASC 105, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB No. 162”. FAS 168 (ASC 105) establishes the FASB Accounting Standards Codification (“Codification”), as the single source of authoritative accounting and reporting standards in the United States for all non-government entities, with the exception of the Securities and Exchange Commission and its staff. It does not include any new guidance or interpretations of US GAAP, but merely eliminates the existing hierarchy and codifies the previously issued standards and pronouncements into specific topic areas. The Codification was adopted on July 1, 2009 for the Company’s consolidated financial statements for the period ended

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September 30, 2009.

In September 2009, FASB amended the ASC as summarized in Accounting Standards Update (“ASU”) 2009-13, “Revenue Recognition (ASC 605): Multiple-Deliverable Revenue Arrangements.” Guidance in ASC 605-25 on revenue arrangements with multiple deliverables has been amended to require an entity to allocate revenue to deliverables in an arrangement using its best estimate of selling prices if the vendor does not have vendor-specific objective evidence or third-party evidence of selling prices, and to eliminate the use of the residual method and require the entity to allocate revenue using the relative selling price method. The new guidance also requires expanded quantitative and qualitative disclosures about revenue from arrangements with multiple deliverables. The update is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis for new revenue arrangements entered into after adoption of the update, or by retrospective application. The Company is assessing the potential impact of the update on its consolidated financial statements and is planning to adopt the update effective January 1, 2011.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

Note 2. Marketable Securities and Fair Value Measurements

The Company’s short-term marketable securities as of September 30, 2009 and December 31, 2008 are as follows (in thousands):

			Gross
	Amortized		Unrealized
September 30, 2009	Costs		Gains		Fair Value
U.S. government notes and bonds	$	17,971	$	6	$	17,977
Corporate bonds	1,000		2		1,002
Total	$	18,971	$	8	$	18,979

			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2008	Costs		Gains		Losses			Fair Value
U.S. government notes and bonds	$	9,971	$	25	$	—		$	9,996
Corporate bonds and certificates of deposit	3,774		1		(24		)	3,751
Agency bonds and discount notes	8,499		20		—			8,519
Commercial paper	800		—		—			800
Total	$	23,044	$	46	$	(24	)	$	23,066

As of September 30, 2009, all short-term investments have maturity dates of less than one year. For the nine months ended September 30, 2009 and 2008, no significant losses were realized on the sale of marketable securities.

The Company’s long-term marketable securities as of December 31, 2008 are as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2008	Costs		Gains		Losses			Fair Value
Agency bonds	$	1,000	$	1	$	—		$	1,001
Corporate bonds	1,897		—		(35		)	1,862
Total	$	2,897	$	1	$	(35	)	$	2,863

The long-term marketable securities are included in Other assets in the consolidated balance sheet. As of September 30, 2009, the Company did not hold any long-term marketable securities.

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Fair Value Measurements

The Company measures the fair value of its cash equivalents and marketable securities as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the GAAP fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value:

Level 1—Quoted (unadjusted) prices in active markets for identical assets or liabilities.

The Company’s Level 1 assets consist of U.S. government debt securities and money market funds. The Company does not hold any Level 1 liabilities.

Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

The Company’s Level 2 assets consist of agency bonds and discount notes, corporate bonds, and certificates of deposit. The Company does not hold any Level 2 liabilities.

Level 3—Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

The Company did not hold any Level 3 assets or liabilities during the quarter ended September 30, 2009.

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2009 (in thousands):

			Quoted Prices in
			Active Markets for		Significant Other
	Balance as of		Identical Assets		Observable Inputs
Description	September 30, 2009		(Level 1)		(Level 2)
Cash equivalents:
Money market funds	$	99,464	$	99,464	$	—
U.S. government debt securities	7,000		7,000
Short-term investments:
U.S. government debt securities	17,977		17,977		—
Corporate bonds	1,002		—		1,002
	$	125,443	$	124,441	$	1,002

Note 3. Balance Sheet Components

Inventories, net are comprised of (in thousands):

	Septmber 30,		December 31,
	2009		2008
Raw materials	$	1,000	$	1,066
Work in process	399		416
Finished goods	493		483
	$	1,892	$	1,965

Work in process includes costs to produce the Invisalign product. Finished goods primarily represent ancillary products that support the Invisalign system.

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Accrued liabilities consist of the following (in thousands):

	September 30,		December 31,
	2009		2008
Accrued payroll and benefits	$	20,873	$	17,795
Accrued income taxes	2,300		2,492
Accrued sales and marketing expenses	3,108		2,449
Accrued sales rebate	2,082		2,205
Accrued sales tax and value added tax	2,153		1,823
Accrued warranty	2,115		2,031
Accrued professional fees	872		922
Accrued restructuring	292		2,501
Other	3,689		6,064
	$	37,484	$	38,282

Note 4. Intangible Assets

The intangible assets represent non-compete agreements received in conjunction with the October 2006 OrthoClear Agreement at gross value of $14 million. These assets are amortized on a straight-line basis over the expected useful life of five years. As of September 30, 2009 and December 31, 2008, the net carrying value of these non-compete agreements was $5.7 million (net of $8.3 million of accumulated amortization) and $7.8 million (net of $6.2 million of accumulated amortization), respectively.

The Company performs an impairment test whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Examples of such events or circumstances include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for its business, significant negative industry or economic trends, and/or a significant decline in the Company’s stock price for a sustained period. Impairments are recognized based on the difference between the fair value of the asset and its carrying value, and fair value is generally measured based on discounted cash flow analyses. There were no impairments of intangible assets during the periods presented.

The total estimated annual future amortization expense for these intangible assets as of September 30, 2009 is as follows (in thousands):

Fiscal Year
2009 (remaining 3 months)	$	700
2010	2,800
2011	2,188
Total	$	5,688

Note 5. Legal Proceedings

Consumer Class Action

On May 18, 2007, Debra A. Weber filed a consumer class action lawsuit against Align, OrthoClear, Inc. and OrthoClear Holdings, Inc. (d/b/a OrthoClear, Inc.) in Syracuse, New York, U.S. District Court. The complaint alleges two causes of action against the OrthoClear defendants and one cause of action against Align for breach of contract. The cause of action against the Company, titled “Breach of Third Party Benefit Contract” references Align’s agreement to make Invisalign treatment available to OrthoClear patients, alleging that the Company failed “to provide the promised treatment to Plaintiff or any of the class members”.

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On July 3, 2007, the Company filed an answer to the complaint and asserted 17 affirmative defenses. On July 20, 2007, the Company filed a motion for summary judgment on the Third Cause of Action (the only cause of action alleged against Align). On August 24, 2007, Weber filed a motion for class certification. On October 1, 2007, the Company filed an opposition to the motion for class certification and it is currently awaiting rulings from the Court. OrthoClear has filed a motion to dismiss. The initial case management conference and all discovery has been stayed pending the Court’s decision on the motion for class certification, OrthoClear’s motion to dismiss and the Company’s motion for summary judgment. The Company believes the lawsuit to be without merit and intends to vigorously defend itself. Accordingly, the Company believes there is not sufficient evidence to conclude that a reasonable possibility exists that a loss had been incurred as of September 30, 2009.

Securities Litigation

In August 2009, Plaintiff Charles Wozniak filed a lawsuit against the Company and its Chief Executive Officer and President, Thomas M. Prescott (“Mr. Prescott”), in District Court for the Northern District of California on behalf of a claimed class consisting of all persons or entities who purchased the common stock of Align between January 30, 2007 and October 24, 2007. The complaint alleges that Align and Mr. Prescott violated Section 10(b) of the Securities Exchange Act of 1934 and that Mr. Prescott violated Section 20(a) of the Securities Exchange Act of 1934. Specifically, the complaint alleges that during the class period Align failed to disclose that it had shifted the focus of the sales force to clearing backlog, causing a significant decrease in the number of new case starts.

Two plaintiffs have filed motions to be appointed lead plaintiff. A hearing on these two motions is set for November 20, 2009. The Company believes the lawsuit to be without merit and intends to vigorously defend itself. Accordingly, the Company believes there is not sufficient evidence to conclude that a reasonable possibility exists that a loss had been incurred as of September 30, 2009.

Note 6. Ormco Litigation Settlement

On August 16, 2009, Align entered into three agreements with Ormco Corporation (“Ormco”), an affiliate of Danaher Corporation (“Danaher”): a Settlement Agreement, a Stock Purchase Agreement, and a Joint Development, Marketing and Sales agreement (“Collaboration Agreement”). The Settlement Agreement ended all pending litigation between the parties, and Align agreed to (1) make a cash payment of $13.2 million upon the execution of the agreement and (2) issue a total of 7.6 million non-assessable shares of common stock pursuant to the Stock Purchase Agreement. Under the Collaboration Agreement, Align and Ormco agreed to jointly develop and market an orthodontic product for the most complex orthodontic cases that combine the Invisalign system with Ormco’s orthodontic brackets and arch wire systems over the next seven years. Because the Company entered into several agreements with Ormco on the same date, the guidance related to multiple element arrangements was considered in determining the allocation of the total settlement amount to the various elements of this arrangement.

In accordance with the Collaboration Agreement, each party will retain ownership of its pre-existing intellectual property, and each party will be granted intellectual property licenses in their respective field for jointly-developed combination products. The Collaboration Agreement, among other things, ensures mutual and equal participation, and equal share of the risks, costs, and benefits associated with developing the combination product. With the assistance of a third party valuation firm, Align concluded there was no value on the execution date of this agreement, as the Company has not contributed any assets or tendered any consideration. In addition, as part of its long-term strategic plan, the Company had the intention of collaborating with other orthodontic industry leaders to offer Invisalign in combination with traditional wires and brackets therapy, and it believes that the terms of such an agreement would have been similar to those it reached with Ormco.

Upon execution of the Settlement Agreement, 5.6 million shares were issued to Danaher and the remaining 2.0 million shares were issued upon the expiration of the waiting period under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act, which occurred on September 21, 2009. In addition to other provisions of the Settlement Agreement, these shares may not be resold except pursuant to an effective registration statement under the Securities Act or an available exemption from registration. The Company is not obligated to affect any such registration prior to the one year anniversary of this agreement. In order to determine the fair value of the stock issued to Danaher, the Company considered the fair value guidance from FASB ASC 820-10-55-52. The fair value of the shares should reflect the value that market participants would demand because of the risk relating to the inability to access a public market for these securities for the specified period. With the assistance of a third party valuation firm, Align has concluded that 25% is an appropriate discount based on review of published restricted stock studies, comparison to restricted stock transactions of other companies in the industry in which Align operates, and the cost of hedging the restricted stock using the Black-Scholes option pricing model. The fair value of the unregistered shares was determined as of the market closing price on the dates the share were issued less the 25% discount rate, for a total value of $76.7 million, including the cash payment.

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In accordance with the Settlement Agreement, Ormco released Align from any and all past and future claims of infringement for the period September 9, 2003 through the expiration of the patent on January 19, 2010 (“infringement period”). In order to determine how to allocate the settlement value between past infringement and the future use of the patent, Align considered both past and estimated future case shipment volumes during the infringement period, and allocated the total settlement value across all case shipments. The value attributed to past infringement claims was recorded as litigation settlement costs and was based on case shipments from September 9, 2003 through August 16, 2009, totaling $69.7 million. The remaining $7.0 million was recorded to the balance sheet as prepaid royalties, and will be amortized to cost of revenues until the expiration of the patent in January 2010.

Note 7. Credit Facilities

On December 5, 2008, the Company renegotiated and amended its existing credit facility with Comerica Bank. Under this revolving line of credit, the Company has $25.0 million of available borrowings with a maturity date of December 31, 2010. This credit facility requires a quick ratio covenant and also requires the Company to maintain a minimum unrestricted cash balance of $10.0 million. The interest rate on borrowings will range from Libor plus 1.5% to 2.0% depending upon the amount of unrestricted cash the Company maintains at Comerica Bank above the $10.0 million minimum.

As of September 30, 2009, the Company had no outstanding borrowings under this credit facility and is in compliance with the financial covenants.

Note 8. Commitments and Contingencies

As of September 30, 2009, minimum future lease payments for non-cancelable leases are as follow (in thousands):

Years Ending December 31,
2009 (remaining 3 months)	$	1,166
2010	3,156
2011	2,741
2012	1,813
2013 and thereafter	973
Total	$	9,849

In April 2009, the Company terminated its third party shelter services arrangement with IMS for order acquisition, the fabrication of aligner molds and finished aligners and the shipment of the completed product to customers. The Company is now a direct manufacturer of its clear aligners at the facility in Juarez, Mexico and directly coordinates order acquisition, including, (1) order entry, (2) digital scanning, (3) aligner manufacturing as well as product shipment from this location. IMS has assigned the lease for the facility in Juarez, Mexico to Align Mexico, a wholly-owned subsidiary of Align, and the Company guarantees the lease payments for its subsidiary which are included in the table above.

The Company warrants its products against material defects until the Invisalign case is completed. The Company accrues for warranty costs in cost of revenues upon shipment of products. The amount of accrued estimated warranty costs is primarily based on historical experience as to product failures as well as current information on replacement costs. The Company regularly reviews the accrued balances and updates these balances based on historical warranty trends. Actual warranty costs incurred have not materially differed from those accrued. However, future actual warranty costs could differ from the estimated amounts.

The following table reflects the change in the Company’s warranty accrual during the nine months ended September 30, 2009 and 2008, respectively (in thousands):

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	Nine Months Ended
	September 30,
	2009			2008
Balance at beginning of period	$	2,031		$	2,035
Charged to cost of revenues	2,046			1,910
Actual warranty expenses	(1,962		)	(1,850		)
Balance at end of period	$	2,115		$	2,095

Note 9. Stock-based Compensation

Summary of stock-based compensation expense

Stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008 is based on options ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. The following table summarizes stock-based compensation expense related to all of the Company’s stock-based options and employee stock purchases for the three and nine months ended September 30, 2009 and 2008:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2009		2008		2009		2008
Cost of revenues	$	359	$	437	$	1,150	$	1,298
Sales and marketing	1,243		1,390		3,559		4,069
General and administrative	1,885		2,009		5,839		6,122
Research and development	500		554		1,463		1,687
Total stock-based compensation expense	$	3,987	$	4,390	$	12,011	$	13,176

The fair value of stock options granted and the option component of the Purchase Plan shares were estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Stock Options:
Expected term (in years)	4.4			4.4			4.4			4.4
Expected volatility	64.0		%	60.2		%	61.6		%	59.8		%
Risk-free interest rate	2.1		%	3.1		%	1.6		%	2.8		%
Expected dividend	—			—			—			—
Weighted average fair value at grant date	$	5.42		$	5.49		$	4.15		$	6.46

Employee Stock Purchase Plan:
Expected term (in years)	1.2			1.2			1.3			1.2
Expected volatility	72.8		%	64.7		%	74.6		%	67.2		%
Risk-free interest rate	0.68		%	2.2		%	0.63		%	2.2		%
Expected dividend	—			—			—			—
Weighted average fair value at grant date	$	5.10		$	4.49		$	3.78		$	4.89

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Options

The Company grants options for periods not exceeding ten years and generally vest over 4 years with 25% vesting one year from the date of grant and 1/48th each month thereafter. Stock option activity for the nine months ended September 30, 2009 under the stock incentive plans is set forth below:

	Total Shares Underlying Stock Options					In-The-Money Options
	Number of Shares				Weighted Average	Number of Shares	Weighted
	Underlying		Weighted		Remaining	Underlying	Average		Aggregate
	Stock Options		Average		Contractual Term	Stock Options	Exercise		Intrinsic Value
	(in thousands)		Exercise Price		(in years)	(in thousands)	Price		(in thousands)
Outstanding as of December 31, 2008	7,309		$	11.63
Granted	1,088		8.30
Cancelled or expired	(309	)	12.35
Exercised	(389	)	6.19
Outstanding as of September 30, 2009	7,699		$	11.40	6.58	5,797	$	9.07	$	29,826
Vested and expected to vest at September 30, 2009	7,499		$	11.41	6.52	5,619	$	9.03	$	29,139
Exercisable at September 30, 2009	4,897		$	11.21	5.46	3,424	$	8.04	$	21,169

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 2009 of $14.22 and the number of in-the-money options multiplied by the respective exercise price) that would have been received by the option holders had all option holders exercised their options on September 30, 2009. This amount changes based on the fair market value of the Company’s stock.

The total intrinsic value of stock options exercised for the three and nine months ended September 30, 2009 was $0.6 million and $1.7 million, respectively. As of September 30, 2009, the Company expects to recognize $15.7 million of total unamortized compensation cost related to stock options over a weighted average period of 2.3 years. The Company did not recognize tax benefits from exercised options for the nine months ended September 30, 2009 as the amount was not material to the consolidated financial statements.

Restricted Stock Units

The Company grants restricted stock units (RSUs) that generally vest over 4 years. Prior to October 2007, 25% of the grant vested on the one year anniversary of the date of grant and 6.25% vested quarterly thereafter. In October 2007, the Compensation Committee of the Board of Directors approved to change the vesting for prospective grants of RSUs to 25% annually. The fair value of each award is based on the Company’s closing stock price on the date of grant. A summary of the nonvested shares for the nine months ended September 30, 2009 is as follows:

					Weighted Average
	Number of Shares		Weighted		Remaining	Aggregate
	Underlying RSUs		Average Grant		Contractual	Intrinsic Value
	(in thousands)		Date Fair Value		Term (in years)	(in thousands)
Nonvested as of December 31, 2008	872		$	13.69
Granted	314		8.25
Vested and released	(202	)	13.01
Forfeited	(50	)	12.45
Nonvested as of September 30, 2009	934		$	12.08	1.37	$	13,281

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (calculated by using Align’s closing stock price on the last trading day of the third quarter of 2009 of $14.22 multiplied by the number of nonvested restricted stock units) that would have been received by the award holders had all restricted stock units been vested and released on September 30, 2009. This amount changes based on the fair market value of the Company’s stock.

The total intrinsic value of restricted stock units vested and released for the three and nine months ended September 30, 2009 was $0.5 million and $2.0 million, respectively. As of September 30, 2009, the total unamortized compensation cost related to restricted stock units was $10.9 million, which the Company expects to recognize over a weighted average period of 2.3 years. The Company did not recognize tax benefits from restricted stock units that vested during the nine months ended September 30, 2009 as the amount was not material to the consolidated financial statements.

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Employee Stock Purchase Plan

Align’s Employee Stock Purchase Plan (the “Purchase Plan”) consists of overlapping twenty-four month offering periods with four six-month purchase periods in each offering period. Employees purchase shares at 85% of the fair market value of the common stock at either the beginning of the purchase period or the end of the purchase period, whichever price is lower. The Company accounts for the Purchase Plan as a compensatory plan and has valued the option component of the Purchase Plan shares at the date of grant using the Black-Scholes option pricing model.

As of September 30, 2009, the Company expects to recognize $2.2 million of total unamortized compensation cost related to employee stock purchases over a weighted average period of 0.4 years.

Note 10. Accounting for Income Taxes

The financial statement recognition of the benefit for an uncertain tax position is dependent upon the benefit being more-likely-than-not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement.

During the third quarter of fiscal 2009, the amount of unrecognized tax benefits was increased by approximately $0.5 million. The total amount of unrecognized tax benefits was $4.2 million as of September 30, 2009, which would impact the Company’s effective tax rate if recognized. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income taxes. Interest and penalties are immaterial and are included in the unrecognized tax benefits. There were no significant changes to this amount as of September 30, 2009.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. All of the Company’s tax years will be open to examination by the U.S. federal and most state tax authorities due to the Company’s net operating loss and overall credit carryforward position. With few exceptions, the Company is no longer subject to examination by foreign tax authorities for years before 2005.

Note 11. Net Profit (Loss) Per Share

Basic net profit (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net profit (loss) per share is computed using the weighted average number of shares of common stock, adjusted for the dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method, include options, restricted stock units, and the dilutive component of Purchase Plan shares.

The following table sets forth the computation of basic and diluted net profit (loss) per share attributable to common stock (in thousands, except per share amounts):

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	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009			2008		2009			2008
Net profit (loss)	$	(49,942	)	$	5,157	$	(42,761	)	$	14,491

Weighted-average common shares outstanding, basic	69,528			67,367		67,278			68,330

Effect of potential dilutive common shares	—			1,337		—			1,576
Total shares, diluted	69,528			68,704		67,278			69,906

Basic net profit (loss) per share	$	(0.72	)	$	0.08	$	(0.64	)	$	0.21
Diluted net profit (loss) per share	$	(0.72	)	$	0.08	$	(0.64	)	$	0.21

For the three and nine months ended September 30, 2009, stock options and restricted stock units totaling 4.0 million and 5.1 million, respectively, were excluded from diluted net profit per share because of their anti-dilutive effect. For the three and nine months ended September 30, 2008, stock options and restricted stock units totaling 5.0 million and 4.5 million, respectively, were excluded from diluted net profit per share because of their anti-dilutive effect.

Note 12. Comprehensive Income

Comprehensive income includes net profit, foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. The components of comprehensive income are as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Net profit	$	(49,942	)	$	5,157		$	(42,761	)	$	14,491
Foreign currency translation adjustments	214			(429		)	20			(176		)
Change in unrealized gain/(loss) on available-for-sale securities	—			(43		)	242			(34		)
Comprehensive income	$	(49,728	)	$	4,685		$	(42,499	)	$	14,281

Note 13. Segments and Geographical Information

Segment

The Company reports segment data based on the internal reporting that is used by management for making operating decisions and assessing performance. During all periods presented, the Company operated as a single business segment.

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Geographical Information

Net revenues and long-lived assets are presented below by geographic area (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Net revenues:
North America	$	60,054	$	59,627	$	172,577	$	182,910
Europe	18,206		15,056		50,986		45,522
Other international	1,009		490		2,154		1,419
Total net revenues	$	79,269	$	75,173	$	225,717	$	229,851

	As of September 30,		As of December 31,
	2009		2008
Long-lived assets:
North America	$	90,893	$	99,086
Europe	1,113		960
Other international	1,240		1,388
Total long-lived assets	$	93,246	$	101,434

Note 14. Restructuring

In July and October 2008, the Company announced restructuring plans to increase efficiencies across the organization and lower the overall cost structure. The July 2008 plan reduced full time headcount primarily through a phased-consolidation of order acquisition operations from the corporate headquarters in Santa Clara, California to Juarez, Mexico, which was completed by the end of 2008. In addition to headcount reductions, the October restructuring plan included the phased relocation of the Company’s shared services organizations from Santa Clara, California to its facility in Costa Rica, which was completed during the second quarter of 2009.

Activity and liability balances related to restructuring activity for nine months ended September 30, 2009 are as follows (in thousands):

	Severance and Benefits
Balance at December 31, 2008	$	2,501
Restructuring accrual	1,319
Cash payments	(3,528		)
Balance at September 30, 2009	$	292

The Company has included this amount in Accrued liabilities in the Consolidated Balance Sheets.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, our expectations regarding the Proficiency Requirements and its impact on our case volume and revenues, including our belief that the Proficiency Requirements will not have a material impact on our 2009 revenues and results of operations, the anticipated impact our new products and product enhancements will have on doctor utilization and our market share, our expectations regarding product mix and product adoption, our expectations regarding the existence and impact of seasonality, our expectation that our utilization rate will improve over time, our expectations regarding our average selling prices and gross profits in 2009, our expectations regarding the continued growth of our international markets, our expectations regarding the impact of increased consumer marketing programs in Europe, our expectations that the decline in general economic conditions in 2009 may result in a decline in our North America product volumes and revenues, particularly in the GP channel, compared to 2008, the anticipated level of our

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operating expenses, and other factors beyond our control, as well as other statements regarding our future operations, financial condition and prospects and business strategies. These statements may contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and in particular, the risks discussed below in Part II, Item 1A “Risk Factors”. We undertake no obligation to revise or update these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read together with our Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Align Technology, Inc. designs, manufactures and markets the Invisalign system, a proprietary method for treating malocclusion, or the misalignment of teeth. Invisalign corrects malocclusion using a series of clear, nearly invisible, removable appliances that gently move teeth to a desired final position. Because it does not rely on the use of metal or ceramic brackets and wires, Invisalign significantly reduces the aesthetic and other limitations associated with metal arch wires and brackets, commonly referred to as braces. We received the United States Food and Drug Administration (“FDA”) clearance to market Invisalign in 1998. The Invisalign system is regulated by the FDA as a Class II medical device.

We distribute the vast majority of our products directly to our customers: the orthodontist and the general practitioner dentist, or GP. Orthodontists and GPs must complete an Invisalign training course in order to provide the Invisalign treatment solution to their patients. The Invisalign system is sold in North America, Europe, Asia Pacific, Latin America and Japan. We use a distributor model for the sale of our products in parts of the Asia Pacific and Latin American region.

Each Invisalign treatment plan is unique to the individual patient. Our Invisalign Full treatment consists of as many aligners as indicated by ClinCheck in order to achieve the doctors’ treatment goals. Our Invisalign Express is a dual arch orthodontic treatment for cases that meet certain predetermined clinical criteria and consist of up to ten sets of aligners. Invisalign Express treatment is intended to assist dental professionals to treat a broader range of patients by providing a lower-cost option for adult relapse cases, for minor crowding and spacing, or as a pre-cursor to restorative or cosmetic treatments such as veneers. Invisalign Teen, which was launched in July 2008, is designed to meet the specific needs of the non-adult comprehensive or teen treatment market. Invisalign Assist, launched in October 2008, is intended to help newly-trained and low volume Invisalign GPs accelerate the adoption and frequency of use of Invisalign into their practice. Upon completion of an Invisalign or non-Invisalign treatment, the patient may be prescribed our traditional retainer product, or our Vivera retainers, a clear aligner set designed for ongoing retention.

Our goal is to establish Invisalign as the standard method for treating malocclusion ultimately driving increased product adoption by dental professionals by focusing on four key objectives: driving product innovation, enhancing the customer experience, generating consumer demand and expanding into international markets.

Product innovation and enhancements to existing products. We believe that product performance and innovation is a cornerstone to our future long-term goal to drive and sustain product adoption. Until 2008, the Invisalign system was a single offering used by our primary channels—GPs and orthodontists—each with distinct and separate needs. In 2008, we launched additional products to better meet those distinct needs. Specifically, orthodontists want a more robust set of tools for greater predictability, wider applicability and more flexibility in the use of the Invisalign system. On the other hand, typical GPs want greater ease of use, more efficient and simplified diagnostic tools, guidance through the case set-up process, minimal treatment intervention and self-help tools designed to simplify treatment of cases of mild to moderate malocclusion. Based on this knowledge, in July 2008, we announced the release of Invisalign Teen, predominantly marketed to the orthodontist. In October 2008, we announced the release of Invisalign Assist, predominantly marketed to the GP. More recently, in September 2009, we introduced new and enhanced features in all Invisalign products: Invisalign Full, Invisalign Teen, Invisalign Assist and Invisalign Express. The new product line features are designed to overcome barriers to treatment by addressing clinical issues that some orthodontists and GPs have traditionally perceived as challenging in Invisalign treatment, such as extrusion and rotation of teeth, root movements and interproximal reduction (IPR). These new and enhanced features include:

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· New optimized attachments for extrusions and rotations custom designed to be patient-specific and tooth-specific to consistently deliver the correct aligner forces to the teeth, helping to increase predictability of the movement.

· Power Ridges ™, previously available only with Invisalign Teen, have been expanded across all products for cases requiring certain types of movements, including lingual root torque.

· Velocity Optimization designed to provide more controlled movements for the entire tooth, including the root, and is designed to limit the speed of tooth movements to optimal ranges.

· Interproximal Reduction (IPR) Protocol Improvements designed to address a frequent doctor request regarding timing of IPR during treatment. IPR can now be set up in later stages of treatment when teeth are better aligned and contact points may be easier to access.

· New Invisalign Attachment Kit and attachment material designed to deliver greater bond strength, wear resistance, accuracy and ease of use.

Invisalign Teen

With the introduction of Invisalign Teen, our Invisalign product family includes a product designed to meet the specific needs of the non-adult comprehensive or younger teen market. Invisalign Teen features include an aligner wear indicator to help gauge patient compliance and specially engineered aligner features to address the natural eruption of key teeth and lingual root control. Predominantly marketed to orthodontists who treat the vast majority of malocclusion in teen patients, these features make it easier and more efficient for orthodontists to treat those younger patients. The launch of a teen-specific product makes the Invisalign system more applicable to an orthodontist’s patient base, which we believe will increase our penetration into and our share of the teen treatment market over time. In addition, some of our customers believe the additional product features included in Invisalign Teen are desirable to use on all of their patients regardless of age. As a result, these customers are increasingly using Invisalign Teen rather than Invisalign Full on their adult patients. Although Invisalign Teen has grown from 11% of our total case volume in the second quarter of 2009 to 14% of our total case volume in the third quarter of 2009, we expect that orthodontists will continue to adopt Invisalign Teen slowly, after they experience multiple successful treatment outcomes.

Invisalign Assist

Invisalign Assist, is intended to help newly-trained and lower volume Invisalign GPs accelerate the adoption and frequency of use of Invisalign into their practice. Invisalign Assist features are intended to make it easier for doctors to select appropriate cases for their experience level or treatment approach. In addition, GPs can plan and submit cases efficiently, manage appointments with suggested tasks, and receive batch shipments of aligners based on treatment progress. In addition to the new features announced in September 2009 to our entire product line, additional features were added or enhanced in Invisalign Assist. These features are intended to expand the capabilities of Invisalign Assist and give doctors the confidence and control necessary to treat a wider range of patients. To date, Invisalign Assist has been used primarily for simple anterior alignment and aesthetically-oriented cases that can be treated with aligners only. We believe that with the introduction of these new and enhanced product features, Invisalign Assist can now be used to treat a broader range of cases while maintaining the benefits of built-in support. Additional enhancements include:

· More doctor input and control regarding case set-up and ClinCheck modifications.

· Improved progress tracking reports with more tooth-specific detail.

· More information for case-specific clinical tasks, including bonding attachments, performing IPR, and monitoring treatment progress.

· More tooth-specific details explaining why a case falls outside the Invisalign Assist treatment parameters.

We believe that Invisalign Assist will help GPs increase their confidence in prescribing Invisalign treatment.

We believe continuing to introduce new products and product features as well as enhancing the user experience will keep us at the forefront of the market and increase adoption of Invisalign. The launch of Invisalign Teen, Invisalign Assist and the recent launch of the new and enhanced features in all Invisalign products as well as other future products will rely on new features, tools and delivery options to meet specific clinical demands while providing a family of end-to-end solutions for our customers. Enhanced product performance and innovation should continue to drive the adoption and frequency of use (what we call utilization). Although we believe new product introduction to be a cornerstone to our future long-term growth, we expect that adoption of these new products will increase gradually over a number of years.

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Enhancing the customer experience. We are committed to enhancing the customer experience by focusing on specific customer “touch points”, or areas where we interact directly with our customers. Specifically, we are focused on improving our pre-selection process in order to attract new doctors that are motivated to become Invisalign providers and committed to making Invisalign a key part of their practices and strengthening our training programs in order to increase the rate that these newly trained customers submit Invisalign cases, as well as increase the rate that they move up the adoption curve to ultimately become leading Invisalign providers, or what we call promoters.

· Improving Training Programs. Ensuring Invisalign trained doctors are confident in using the Invisalign system is a key driver toward our ultimate goal of increasing product adoption. We continuously update our training programs to address the needs of our customers. For instance, we developed a pre-training course intended to familiarize doctors with the Invisalign system prior to attending the full training course. In addition, we recently updated our initial training program by focusing on Invisalign Assist, instead of Invisalign Full, since we believe Invisalign Assist is the right product for newly trained GPs. We anticipate that by using Invisalign Assist, newly trained GPs will exit this initial training program with increased confidence in prescribing Invisalign treatment. We have also incorporated the Invisalign technique into the curriculum of 38 university programs. By educating dental students and orthodontic residents on the benefits of the Invisalign technique, we believe they will be more likely to use this technology in their future practices and offer Invisalign as a treatment option.

· Moving from Invisalign provider to a leading Invisalign provider. Once a doctor is trained, our goal is to assist the doctor to move up the adoption curve to ultimately become a leading Invisalign provider, or a promoter. In order to increase the number of Invisalign promoters, we provide additional services to help our customers increase their confidence in using the Invisalign system through continuing education and clinical support as well as improving their practice management skills.

Furthermore, on June 2, 2009, we announced the implementation of the Invisalign Product Proficiency Requirements (or the Proficiency Requirements) in North America to help ensure that Invisalign-trained doctors have the experience and confidence necessary to achieve high quality treatment outcomes for Invisalign patients. Under the Proficiency Requirements, every Invisalign provider in North America must start 10 Invisalign cases (measured by case shipments) and complete at least 10 Invisalign-specific continuing education (CE) credits each calendar year. Doctors who do not meet the annual case start and CE requirements by the end of each calendar year will be able to continue treating in-progress cases but will not be able to submit new Invisalign cases or use Invisalign branding or marketing resources.

In September 2009, we updated the Proficiency Requirements in order to further support our customers through this significant change, (1) including launching a program to recognize doctors who achieve the annual proficiency requirements by December 31, 2009 and (2) providing an additional six-month qualification period to assist doctors who are unable to meet the proficiency requirements by December 31, 2009, but demonstrate a desire to continue using Invisalign. Doctors who achieve the annual proficiency requirements as of December 31, 2009, will benefit from a new addition to our consumer marketing program that encourages prospective patients to seek out “Invisalign Preferred Providers” on the Invisalign website and in television ads as a way to recognize doctors’ commitment to proficiency with Invisalign. For those doctors who are unable to achieve the proficiency requirements by December 31, 2009, we announced a one-time, additional six-month qualification period that will enable those doctors to secure their Invisalign provider status for 2010. The additional six-month qualification period stipulates that:

· Doctors who do not meet the proficiency requirements for 2009 but have at least one shipped case and at least one Invisalign CE hour at the end of calendar year 2009 will be allowed to maintain their active provider status through June 30, 2010.

· Doctors who qualify for the additional six-month qualification period can secure their provider status for the second half of 2010 by meeting half of the annual proficiency requirements (at least five shipped cases and five Invisalign CE hours) between January 1 and June 30, 2010.

· Doctors will still be responsible for meeting the total annual requirements of at least ten shipped cases and ten Invisalign CE hours by the end of 2010 to qualify as providers for the following year.

· Doctors that have not submitted any cases nor obtained any Invisalign CE hours during 2009 will not be eligible for the additional qualification period.

Doctors can reactivate their provider status by retaking Invisalign Clear Essentials I training and meeting the Proficiency Requirements during the new calendar year. In conjunction with the Proficiency Requirements, we have defined a Proficiency Pathway consisting of Invisalign educational opportunities that matches clinical education to case experience levels in order to help doctor’s gain confidence with case selection and treatment planning, case submission and treatment management. We expect that the Proficiency Requirements will enable us to focus more effectively on those doctors who want to make Invisalign a key part of their practice and consequently increase the rate that they move up the adoption curve to ultimately become promoters.

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Other resources that we offer our doctors include the Aligntech Institute program (www.aligntechinstitute.com), which is an interactive website that provides clinical education and practice development training. These clinical education and practice development training opportunities include instructor-led training classes, seminars and workshops, conference calls, web-based videos, case studies, and other clinical resources. Many of these courses and resources are eligible for continuing education (CE) credits. Additionally, our VIP portal (Virtual Invisalign Practice) provides our trained doctors and their staff access to thousands of Invisalign cases and best practices as well as up-to-date support information, programs and marketing materials for continuous support and information access. By participating in these programs and the various events and educational offerings, we believe that our customers will emerge with a better understanding of the product and its applicability, and with a greater aptitude for starting and finishing Invisalign cases successfully.

Consumer demand generation for Invisalign. Marketing to the consumer and creating demand is one of our key strategic objectives to driving long-term growth. Our market research indicates that the majority of people with malocclusion who desire treatment forgo treatment rather than elect traditional treatment due to its many limitations, such as compromised aesthetics and oral discomfort. By communicating the benefits of Invisalign to both dental professionals and consumers, we intend to increase the number of patients who seek treatment using Invisalign. Historically, our marketing programs have been directed to an adult audience, however, with the introduction of Invisalign Teen, we will for the first time direct our communication efforts directly to teens and their parents. Despite the continuing challenges in the U.S. economy and weak consumer spending, we believe that consumer demand creation is a key component to our long-term growth. As a result, we will continue to invest in efforts to increase consumer awareness of Invisalign through a variety of media outlets. We will continue to drive consumer demand among the adult population through our traditional TV advertising, as well as digital online media. In 2009, we are focusing our efforts on the introduction of a new public relations program for Invisalign Teen intended to access print, TV and online media. We also have a teen specific website and will increasingly leverage online and mobile widgets, social media and blogs to directly target teens.

Growth of international markets. We will continue to focus our efforts towards increasing adoption of Invisalign by dental professionals in our key international markets, Europe and Japan. Similar to the North America market, our objective internationally is to increase the number of doctors that are motivated to becoming an Invisalign provider and committed to making Invisalign a key part of their practices. Through September 30, 2009, we have trained over 15,300 doctors, predominantly orthodontists in Europe, our primary international market. Product line expansion is key to providing doctors a solution that addresses a wider range of potential patient needs with greater treatment flexibility. In October 2008, we launched Invisalign Express in Europe expanding our international product offerings. In Europe, the vast majority of orthodontic case starts are children and teens. With the introduction of Invisalign Teen in Europe in March 2009, we expect the addressable market for our product to expand and ultimately increase adoption. In addition, we will carry on our efforts to increase brand awareness and consumer demand in Europe by continuing our consumer advertising campaign. Our overall brand awareness and consumer demand is lower in Europe, and thus, we expect customers to adopt Invisalign Teen more slowly than in North America. Additionally, although the vast majority of our international revenues are from direct sales, approximately 10% of our international sales are through distributors covering smaller international markets, specifically Asia Pacific and Latin America. We will consider selling through distributors in other markets as well as consider expanding directly into additional countries on a case-by-case basis. With these efforts, we expect our international revenues and case volumes to continue to increase in the foreseeable future.

In addition to whether we successfully execute our business strategy, a number of other factors, the most important of which are set forth below, may affect our results during the remainder of 2009 and beyond.

· Introduction of Proficiency Requirements. We have a large number of low volume doctors that make up a significant portion of our customer base. As awareness and acceptance of Invisalign has grown, so has consumer demand and the size of our trained doctor base. Today, there are more than 44,000 Invisalign-trained doctors in North America, and approximately 3,000,000 prospective patients visit our web site during the 12 month period. We want to direct these potential patients to an Invisalign practice and feel comfortable that the patient will receive the best treatment experience possible. To further this goal, on June 2, 2009, we announced the implementation of the Invisalign Product Proficiency Requirements in North America to help ensure that Invisalign-trained doctors have the experience and confidence necessary to achieve high quality treatment outcomes for Invisalign patients. For a further description of the Proficiency Requirements see “Moving from Invisalign provider to a leading Invisalign provider” above. Although we want every doctor to achieve and maintain the Proficiency

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Requirements with Invisalign, we expect that a number of our lower volume doctors may be unwilling or unable to meet the requirements by the June 2010 qualification deadline. Although we believe that the Proficiency Requirements will not have a material impact on our results of operations in fiscal year 2009, if the number of customers that meet the Proficiency Requirements is less than we anticipate, our case volumes will decrease and our revenues will be harmed. See Part I, Item 1A—“Risk Factors” for risks related to our Proficiency Requirements.

· Impact on consumer spending due to a decline in the U.S. economy. Consumer spending habits are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, gas prices, consumer confidence and consumer perception of economic conditions. A general slowdown in the United States economy as well as an uncertain economic outlook have adversely affected U.S. consumer spending habits. As a result of the decline in general economic conditions, we expect that our North American product volumes and revenues will decline in 2009 compared to 2008, particularly in the GP channel.

· Utilization Rates. Our goal is to establish Invisalign as the standard method for treating malocclusion ultimately driving increased product adoption and frequency of use by dental professionals, or utilization. Our quarterly utilization rates from the second quarter of 2007 through the third quarter 2009 are as follows.

Utilization rates = # of cases shipped divided by # of doctors cases were shipped to

As set forth in the chart above, utilization rates improved sequentially for our North America channels from the second quarter to the third quarter of 2009, whereas utilization rates historically declined between the second to third quarters in both 2007 and 2008. The availability of Invisalign Teen and doctors striving to meet the Proficiency Requirements were the primary factors for the increase in the third quarter of 2009. For our international channel our utilization rate has declined slightly due to the summer holiday schedules in Europe. In addition, although we believe that the introduction of the Proficiency Requirements will not have a material impact on our results of operations in 2009, if a lesser number of our customers than we anticipate fail to maintain and/or increase utilization to meet the Proficiency Requirements, our utilization will decrease further and our revenues will be harmed.

· Impact of new products on deferred revenue. We launched three new products in 2008: Vivera retainers in January 2008, Invisalign Teen in July 2008, and Invisalign Assist in October 2008. As a result of and depending upon customer adoption of these new products, our mix of products is shifting gradually. These new products will have a significantly higher amount of deferred revenue as a percentage of their average selling prices compared to Invisalign Full. The Vivera retainer includes four shipments per year; revenue is deferred upon the first shipment and then recognized as each shipment occurs. Revenue for the six replacement aligners included in the price of Invisalign Teen is deferred based on their fair market value until the earlier of the replacement aligners being used or until the case is completed. For Invisalign Assist, when the progress tracking feature is selected, aligners are shipped to the dental professional after every nine stages. As a result, for these cases, revenue and cost are deferred upon the first staged shipment and are recognized upon shipment of the final

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staged shipment. In addition, included in the price of Invisalign Full treatment, we offer case refinement, which is a finishing tool used to adjust a patient’s teeth to the desired final position. Invisalign Teen, Invisalign Assist, and Invisalign Full include a deferral for case refinement. As these new products increase as a percentage of our total case volume, deferred revenue on our balance sheet will increase.

· Reliance on international manufacturing operations. Our manufacturing efficiency has been and will continue to be an important factor in our future profitability. Currently, two of our key production steps are performed in operations located outside of the U.S.—San Jose, Costa Rica and Juarez, Mexico. At our facility in Costa Rica, dental technicians use a sophisticated, internally developed computer-modeling program to prepare digital treatment plans. In April 2009, we terminated our third party shelter services arrangement with IMS for order acquisition, the fabrication of aligner molds and finished aligners and the shipment of the completed product to customers. We are now a direct manufacturer of our clear aligners at our facility in Juarez, Mexico with approximately 495 employees and directly coordinate order acquisition and product shipment from this location. Our success will depend in part on the efforts and abilities of management to effectively manage these international operations, including any difficulties encountered by us with respect to a transition from a third party shelter services arrangement to a direct manufacturer, including difficulties hiring and retaining qualified personnel. If our management fails in any of these respects, we could experience production delays and lost or delayed revenue. In addition, even if we have case submissions, we may not have a sufficient number of trained dental technicians in Costa Rica to create the ClinCheck treatments, or if we are unable to ship our product to our customers on a timely basis, our revenue will be delayed or lost, which will cause our operating results to fluctuate. See Part I, Item 1A—“Risk Factors” for risks related to our international operations.

· Seasonal Fluctuations. Seasonal fluctuations in the number of doctors in their offices and available to take appointments have affected, and are likely to continue to affect our business. Specifically, our customers often take vacation during the summer months and therefore tend to start fewer cases. In addition, summer is typically the busiest season for orthodontists with practices that have a high percentage of adolescent and teenage patients. Many parents want to get their teens started in treatment before the start of the school year. As a result, adult appointments, including adult Invisalign patient starts, are often pushed further into late summer or early fall. This year we did not experience the normal seasonality in our business and had sequential case growth in both the North American orthodontic and International channels. This year, with the availability of Invisalign Teen, was the first summer we were able to actively compete for a share of teen patient starts and believe that Invisalign Teen may have helped moderate the historical trend we have typically seen for our North American orthodontic and International customers during the summer months. We expect teenage case starts to be seasonally down in the fourth quarter of 2009, which is consistent with historical trends. These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.

· Foreign Exchange Rates. Although the U.S. dollar is our reporting currency, a portion of our revenues and profits are generated in foreign currencies. Revenues and profits generated by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates effective during the respective period and as a result are affected by changes in exchange rates. We have generally accepted the exposure to exchange rate movements without using derivative financial instruments to manage this risk. Therefore, both positive and negative movements in currency exchanges rates against the U.S. dollar will continue to affect the reported amount of revenues and profits in our consolidated financial statements.

· Restructuring. During 2008, we announced restructuring plans in July and October to increase efficiencies across the organization and lower the overall cost structure. In July 2008, we implemented a restructuring plan to reduce our full time headcount including a phased consolidation of order acquisition from our corporate headquarters in Santa Clara, California, to Juarez, Mexico, which was completed by the end of 2008. In October 2008, we implemented a restructuring plan to reduce full time headcount in Santa Clara, California and created a new shared services organization in our existing Costa Rica facility that consolidates customer care, accounts receivable, credit and collections, and customer event registration organizations, which were previously located in Santa Clara, California. The relocation was completed during the second quarter of 2009. The relocation is accompanied by a number of risks and uncertainties that may affect our results of operations and statement of cash flows. See Part II, Item 1A—“Risk Factors” for risks related to the October restructuring, including the phased-relocation of our customer facing operations to Costa Rica.

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· Ormco Litigation Settlement. On August 16, 2009, the Company and Ormco entered into a Settlement Agreement, pursuant to which the Company (1) paid Ormco a cash amount equal to approximately $13.2 million, and (2) agreed to issue to Danaher Corporation (“Danaher”), an affiliate of Ormco, 7.6 million fully paid and nonassessable shares of the Company’s Common Stock, 5.6 million and 2.0 million of which were issued to Danaher on August 16, 2009 and September 22, 2009, respectively, pursuant to the Stock Purchase Agreement entered into between the Company and Danaher on August 16, 2009.

Joint Development, Marketing and Sales Agreement. In connection with the settlement reached with Ormco, on August 16, 2009, Align and Ormco entered into the Joint Development, Marketing and Sales Agreement, pursuant to which the parties have agreed to an exclusive collaboration over the next seven years to jointly develop and commercialize a combination orthodontic treatment system involving the use of both Align’s clear aligner system and Ormco’s brackets and arch wire system, which system will be capable of treating even the most complex orthodontic cases. A copy of the Joint Development, Marketing and Sales Agreement is attached as an exhibit to this Form 10-Q.

See Footnote 6 “Ormco Litigation Settlement” for additional information about the settlement accounting.

· Effective Tax Rate. Our effective tax rate may vary significantly from period to period. Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations and /or rates, changing interpretations of existing tax laws or regulations, the future levels of tax benefits of stock option deductions relating to incentive stock options and employee stock purchase plans and changes in overall levels of pretax earnings.

Results of Operations

Net revenues:

Invisalign product revenues by channel and other non-case revenues, which represents training, retainer and ancillary products, for the three and nine months ended September 30, 2009 and 2008 are as follows (in millions):

	Three Months Ended September 30,								Nine Months Ended September 30,
					Net								Net
Net revenues	2009		2008		Change		% Change		2009		2008		Change			% Change
North America:
Ortho	$	22.7	$	22.0	$	0.7	3.2	%	$	65.4	$	67.5	$	(2.1	)	(3.1	%)
GP	33.9		33.9		—		0.0	%	96.6		103.4		(6.8		)	(6.6	%)
Total North American Invisalign	56.6		55.9		0.7		1.3	%	162.0		170.9		(8.9		)	(5.2	%)
International Invisalign	18.5		15.1		3.4		22.5	%	50.8		45.8		5.0			10.9	%
Total Invisalign revenues	75.1		71.0		4.1		5.8	%	212.8		216.7		(3.9		)	(1.8	%)
Non-case revenues	4.2		4.2		—		0.0	%	12.9		13.2		(0.3		)	(2.3	%)
Total net revenues	$	79.3	$	75.2	$	4.1	5.5	%	$	225.7	$	229.9	$	(4.2	)	(1.8	%)

Case volume data which represents Invisalign case shipments by channel, for the three and nine months ended September 30, 2009 and 2008 are as follows (in thousands):

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	Three Months Ended September 30,						Nine Months Ended September 30,
			Net		%				Net		%
Invisalign case volume	2009	2008	Change		Change		2009	2008	Change		Change
North America:
Ortho	18.8	18.0	0.8		4.4	%	53.2	53.6	(0.4	)	(0.7	%)
GP	25.6	25.7	(0.1	)	(0.4	%)	72.4	78.7	(6.3	)	(8.0	%)
Total North American Invisalign	44.4	43.7	0.7		1.6	%	125.6	132.3	(6.7	)	(5.1	%)
International Invisalign	12.1	9.1	3.0		33.0	%	33.9	27.1	6.8		25.1	%
Total Invisalign case volume	56.5	52.8	3.7		7.0	%	159.5	159.4	0.1		0.1	%

Our total net revenues increased for the three months ended September 30, 2009 compared to the same period in 2008 mainly due to higher International Invisalign volumes partially offset by unfavorable exchange rates against the US dollar. Revenues for North American Invisalign improved slightly due to increased case volume and the impact of the price increases effective at the beginning of 2009 partially offset by the mix shift towards new products which have a greater proportion of revenue that is deferred.

Our total net revenues decreased slightly for the nine months period ended September 30, 2009 compared to the same period in 2008. In North America, revenue decreased due to lower case volumes particularly in the GP channel as well as higher promotional discounts. The price increases effective at the beginning of 2009 partially offset the reduction in revenue. International Invisalign revenue increased over the prior period mainly due to improved case volumes partially offset by unfavorable exchange rates.

For 2009, we expect our total net revenues to be comparable to 2008. North American revenues are expected to decrease due to lower case volumes and product mix shift toward products with higher amounts of deferred revenue. International revenue is expected to increase compared to 2008 due to increased case shipments.

Cost of revenues and gross profit:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
(In millions)	2009			2008			Change		2009			2008			Change
Cost of revenues	$	20.3		$	18.8		$	1.5	$	56.0		$	58.6		$	(2.6	)
% of net revenues	25.6		%	25.0		%			24.8		%	25.5		%

Gross profit	$	59.0		$	56.4		$	2.6	$	169.7		$	171.2		$	(1.5	)
Gross margin	74.4		%	75.0		%			75.2		%	74.5		%

Cost of revenues includes salaries for staff involved in the production process, the cost of materials, packaging, shipping costs, depreciation on capital equipment used in the production process, training costs and stock-based compensation expense. Cost of revenues also includes the cost of the third party shelter service provider, we utilized in Juarez, Mexico until April 2009.

Gross margin declined slightly for the three months ended September 30, 2009 compared to the same period in 2008 primarily due to the amortization of royalties of $1.9 million that were paid to Ormco in August 2009 in connection with the litigation settlement. This decrease was partially offset by reduced headcount and cost savings relating to the phased-consolidation of our order acquisition operations from Santa Clara, California to Juarez, Mexico, which was completed in December 2008. Furthermore, since the termination of our relationship with IMS in April 2009, we became a direct manufacturer of our aligners, which resulted in additional cost savings.

Gross margin improved for the nine months ended September 30, 2009 compared to the same period in 2008 primarily due to improved manufacturing efficiencies, including reduced headcount and cost savings relating to the phased-consolidation of order acquisition operations from Santa Clara, California to Juarez, Mexico, which was completed in December 2008. Furthermore, since the termination of our relationship with IMS in April 2009, we became a direct manufacturer of our aligners, which resulted in additional cost savings. These savings were reduced by the amortization of royalties paid to Ormco.

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We anticipate our gross margin in 2009 to be consistent with 2008 as we benefit from the 2008 restructuring and the transition from a third party shelter service provider to directly manufacturing our clear aligners. However, those benefits will be offset by the amortization of the prepaid Ormco royalties.

Sales and marketing:

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
(In millions)	2009			2008			Change			2009			2008			Change
Sales and marketing	$	27.7		$	28.2		$	(0.5	)	$	84.6		$	88.7		$	(4.1	)
% of net revenues	34.9		%	37.5		%				37.5		%	38.6		%

Sales and marketing expense includes sales force compensation (including travel-related costs), marketing personnel-related costs, media and advertising, clinical education, product marketing, customer care and stock-based compensation expense.

Our sales and marketing expense decreased in the three months ended September 30, 2009 as compared to the same period in 2008, as a result of a reduction of $1.8 million in marketing, travel, and other sales and marketing administrative costs. These costs were primarily offset by increases of $1.3 million related to media, clinical education, and public relations expenses.

For the nine months ended September 30, 2009 compared to the same period in 2008, the decrease in sales and marketing expense was due to a $3.5 million decrease in media and marketing, and $1.5 million decrease in other sales and marketing administrative costs. These decreases were partially offset by higher public relations expenses and payroll related costs.

We expect sales and marketing expense levels in 2009 to be slightly lower than 2008 as we benefit from the transition of our customer care organization from Santa Clara, California to Costa Rica, which was completed in the second quarter of 2009. These benefits will be partially offset by the continued investment in our international channel and consumer marketing programs.

General and administrative:

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
(In millions)	2009			2008			Change		2009			2008			Change
General and administrative	$	16.2		$	14.4		$	1.8	$	46.2		$	45.9		$	0.3
% of net revenues	20.5		%	19.1		%			20.5		%	20.0		%

General and administrative expense includes salaries for administrative personnel, outside consulting services, legal expenses and stock-based compensation expense.

General and administrative expense increased for the three months ended September 30, 2009 as compared to the same period in 2008 primarily due to increased legal fees and outside consulting services of approximately $0.8 million related to the Ormco litigation, and bad debt and other general and administration expenses of $0.7 million.

General and administrative expense increased slightly for the nine months ended September 30, 2009 compared to the same period in 2008. Increased depreciation, bad debt, and other general expenses of $3.7 million was offset by a reduction in payroll-related expenses of $1.5 million, resulting from a decrease in headcount and lower legal expense due to an insurance reimbursement of $1.5 million received in the first quarter of 2009.

We expect general and administrative expense for 2009 to be comparable to 2008 levels as we benefit from the October 2008 restructuring, including the transition of our shared services organizations to Costa Rica, which was completed in the second quarter of 2009.

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Research and development:

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
(In millions)	2009			2008			Change			2009			2008			Change
Research and development	$	5.6		$	5.9		$	(0.3	)	$	16.5		$	20.2		$	(3.7	)
% of net revenues	7.1		%	7.8		%				7.3		%	8.8		%

Research and development expense includes the personnel-related costs and outside consulting expenses associated with the research and development of new products and enhancements to existing products, conducting clinical and post-marketing trials and stock-based compensation expense.

Research and development expense was comparable for the three months ended September 30, 2009 compared to the same period in 2008.

Research and development expense decreased during the nine months ended September 30, 2009 compared to the same period in 2008 primarily due to decreases in payroll-related expenses of $2.4 million, as well as decreases in outside consulting, depreciation and other administration costs totaling approximately $1.2 million.

We expect research and development expense levels in 2009 will be lower than 2008 as a result of reduced headcount from the 2008 restructuring programs and lower consulting expenses.

Restructuring:

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
(In millions)	2009			2008			Change			2009			2008			Change
Restructuring	$	—		$	2.2		$	(2.2	)	$	1.3		$	2.2		$	(0.9	)
% of net revenues	0.0		%	2.9		%				0.6		%	1.0		%

During 2008, we announced restructuring plans in July and October to increase efficiencies across the organization and lower the overall cost structure. In July 2008, we implemented a restructuring plan to reduce our full time headcount including a phased-consolidation of order acquisition operations from our corporate headquarters in Santa Clara, California to Juarez, Mexico, which was completed by the end of 2008.

In addition to headcount reductions, the October restructuring plan included the phased relocation of our shared services organizations from Santa Clara, California to our facility in Costa Rica, which we completed during the second quarter of 2009. For the three months ended September 30, 2009, we did not incur any restructuring expenses. We incurred approximately $1.3 million during the nine months ended September 30, 2009, which were related to severance and termination benefits. We do not expect to incur any additional restructuring charges under the October 2008 Plan for the remainder of 2009. Additionally, at the time the plans were implemented, we expected total net cost savings of approximately $3.5 million per quarter starting in the first quarter of 2009 as a result these restructuring plans.

Litigation settlement:

Three Months Ended

Nine Months Ended

September 30,

(In millions)

2009