Document and Entity Information	9 Months Ended
Document and Entity Information	Sep. 30, 2010	Oct. 29, 2010
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2010
Document Fiscal Year Focus	2010
Document Fiscal Period Focus	Q3
Trading Symbol	ALGN
Entity Registrant Name	ALIGN TECHNOLOGY INC
Entity Central Index Key	0001097149
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		76,311,295

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data, unless otherwise specified

3 Months Ended

9 Months Ended

Sep. 30, 2010

Sep. 30, 2009

Sep. 30, 2010

Sep. 30, 2009

Net revenues:

Invisalign

$ 91,170

^[1]

$ 75,092

^[1]

$ 279,413

^[1]

$ 212,748

^[1]

Non-case

4,777

4,177

14,820

12,969

Total net revenues

95,947

79,269

294,233

225,717

Cost of revenues

Invisalign

19,090

18,491

55,978

50,278

Non-case

1,924

1,777

6,594

5,753

Total cost of revenues

21,014

20,268

62,572

56,031

Gross profit

74,933

59,001

231,661

169,686

Operating expenses:

Sales and marketing

26,905

27,687

83,790

84,649

General and administrative

16,203

16,224

46,159

46,231

Research and development

6,592

5,611

19,104

16,471

Restructurings

1,319

Litigation settlement

3,310

69,673

3,310

69,673

Insurance settlement

(8,666)

Total operating expenses

53,010

119,195

143,697

218,343

Profit (loss) from operations

21,923

(60,194)

87,964

(48,657)

Interest and other income (expense), net

(83)

(271)

(480)

434

Net profit (loss) before provision for income taxes

21,840

(60,465)

87,484

(48,223)

Provision for (benefit from) income taxes

5,025

(10,523)

23,136

(5,462)

Net profit (loss)

$ 16,815

$ (49,942)

$ 64,348

$ (42,761)

Net profit (loss) per share:

Basic

$ 0.22

$ (0.72)

$ 0.85

$ (0.64)

Diluted

$ 0.22

$ (0.72)

$ 0.83

$ (0.64)

Shares used in computing net profit (loss) per share:

Basic

76,081

69,528

75,653

67,278

Diluted

78,109

69,528

77,852

67,278

[1]	The nine months ended September 30, 2010 includes a $14.3 million release of previously deferred revenue for Invisalign Teen replacement aligners.

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2010	Dec. 31, 2009
Current assets:
Cash and cash equivalents	$ 264,924	$ 166,487
Marketable securities, short-term	7,396	19,978
Accounts receivable, net of allowance for doubtful accounts of $655 and $1,033, respectively	63,811	54,537
Inventories	2,382	2,046
Prepaid expenses and other current assets	19,429	18,251
Total current assets	357,942	261,299
Marketable securities, long term	7,829
Property and equipment, net	28,102	24,971
Goodwill	478	478
Intangible assets, net	2,888	4,988
Deferred tax asset, net	43,778	61,535
Other assets	4,218	1,969
Total assets	445,235	355,240
Current liabilities:
Accounts payable	5,826	6,122
Accrued liabilities	44,074	42,822
Deferred revenues	30,136	32,299
Total current liabilities	80,036	81,243
Other long-term liabilities	5,797	961
Total liabilities	85,833	82,204
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; 76,255 and 74,568 shares issued and outstanding, respectively)	8	7
Additional paid-in capital	547,228	525,073
Accumulated other comprehensive income, net	317	455
Accumulated deficit	(188,151)	(252,499)
Total stockholders' equity	359,402	273,036
Total liabilities and stockholders' equity	$ 445,235	$ 355,240

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Sep. 30, 2010	Dec. 31, 2009
Accounts receivable, allowance for doubtful accounts	$ 655	$ 1,033
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	5,000	5,000
Preferred stock, issued	0	0
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	200,000	200,000
Common stock, shares issued	76,255	74,568
Common stock, shares outstanding	76,255	74,568

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2010	Sep. 30, 2009
Cash Flows from Operating Activities:
Net profit (loss)	$ 64,348	$ (42,761)
Adjustments to reconcile net profit (loss) to net cash provided by operating activities:
Deferred income taxes	17,631	740
Depreciation and amortization	8,694	7,582
Amortization of intangibles	2,100	2,100
Stock-based compensation	12,138	12,011
Litigation settlement costs paid in stock		56,524
Amortization of prepaid royalties	827	1,906
(Benefit from) provision for doubtful accounts	(10)	958
Loss on retirement and disposal of fixed assets	60	20
Changes in assets and liabilities:
Accounts receivable	(9,962)	(3,167)
Inventories	(343)	74
Prepaid expenses and other assets	(3,086)	(7,036)
Accounts payable	13	816
Accrued and other long-term liabilities	6,260	(912)
Deferred revenues	(1,666)	11,051
Net cash provided by operating activities	97,004	39,906
Cash Flows from Investing Activities:
Purchase of property and equipment	(11,932)	(4,084)
Purchases of marketable securities	(12,742)	(33,940)
Maturities of marketable securities	17,474	40,910
Other assets	(1,356)	35
Net cash (used in) provided by investing activities	(8,556)	2,921
Cash Flows from Financing Activities:
Proceeds from issuance of common stock	10,907	6,376
Payments on short-term obligations		(136)
Employees' taxes paid upon the vesting of restricted stock units	(889)	(264)
Net cash provided by financing activities	10,018	5,976
Effect of foreign exchange rate changes on cash and cash equivalents	(29)	58
Net increase in cash and cash equivalents	98,437	48,861
Cash and cash equivalents at beginning of period	166,487	87,100
Cash and cash equivalents at end of period	$ 264,924	$ 135,961

Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2010

Summary of Significant Accounting Policies

Note 1. Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Align Technology, Inc. (“we”, “our”, 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 our financial position as of September 30, 2010, our results of operations for the three and nine months ended September 30, 2010 and 2009, and our cash flows for the nine months ended September 30, 2010 and 2009. The Condensed Consolidated Balance Sheet as of December 31, 2009 was derived from the December 31, 2009 audited financial statements. Revenues and cost of revenues in prior period amounts have been reclassified to conform with the current period presentation. These reclassifications had no impact on previously reported gross profit or financial position.

The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or any other future period, and we make 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 our Annual Report on Form 10-K for the year ended December 31, 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 our Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates.

Revenue recognition

Invisalign Teen is delivered in a single shipment except for six replacement aligners that are included in the price of the product and may be ordered at any time throughout treatment. We use vendor specific objective evidence of fair value to allocate revenue to the replacement aligners and recognize the residual revenue upon initial shipment. Through the second quarter of 2010, we deferred 100 percent of the fair value for the six replacement aligners. This deferred revenue was subsequently recognized as the replacement aligners were shipped or when the case was completed. Management evaluated the actual usage of replacement aligners since the launch of Invisalign Teen nearly two years ago, and believes that there is sufficient historical evidence to establish an estimated usage rate. As a result, in June 2010, we reduced deferred revenue for Invisalign Teen replacement aligners by $14.3 million to reflect the estimated usage for in-process cases and starting in July 2010, we began recognizing the fair value of the replacement aligners when they are shipped. We believe that this estimated usage is reasonable and appropriate because of the relative stability of the Invisalign Teen replacement utilization since it was first offered. Although we are not expecting any material changes, we will continue to analyze the usage of replacement aligners and may adjust the estimated usage rate as necessary.

Recent Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (FASB) amended the Accounting Standards Codification (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. We are planning to adopt the update effective January 1, 2011 and are assessing the potential impact to our consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (ASC 820): Improving Disclosures about Fair Value Measurements.” This update will require (1) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (2) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This guidance clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and require disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosure are effective for fiscal years beginning after December 15, 2009, except for the disclosure requirements related to the purchases, sales, issuances and settlements in the rollforward activity of Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years ending after December 31, 2010. We are still assessing the impact of this guidance and do not believe the adoption of this guidance will have a material impact to our consolidated financial statements.

On February 24, 2010, FASB issued ASU 2010-09, “Subsequent Events (ASC 855): Amendments to Certain Recognition and Disclosure Requirements.” The amendments in the ASU remove the requirement for a Securities and Exchange Commission (SEC) filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. We adopted this guidance in the first quarter of 2010.

Marketable Securities and Fair Value Measurements

9 Months Ended

Sep. 30, 2010

Marketable Securities and Fair Value Measurements

Note 2. Marketable Securities and Fair Value Measurements

Our short-term and long-term marketable securities as of September 30, 2010 and December 31, 2009 are as follows (in thousands):

Short-term


September 30, 2010	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value


U.S. government notes and bonds	$	2,999	$	1	$	—		$	3,000
Corporate bonds and certificate of deposit		2,294		—		(1	)		2,293
Foreign bonds		706		—		—			706
Commercial paper		1,398		—		(1	)		1,397

Total	$	7,397	$	1	$	(2	)	$	7,396

Long-term


September 30, 2010	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value


Corporate bonds	$	4,464	$	—	$	(11	)	$	4,453
Foreign bonds		1,321		1		(2	)		1,320
Agency bonds		2,055		1		—			2,056

Total	$	7,840	$	2	$	(13	)	$	7,829

Short-term


December 31, 2009	Amortized Cost		Gross Unrealized Gains		Fair Value


U.S. government notes and bonds	$	18,972	$	6	$	18,978
Corporate bonds		1,000		—		1,000

Total	$	19,972	$	6	$	19,978

For the nine months ended September 30, 2010 and 2009, no significant gains or losses were realized on the sale of marketable securities.

Fair Value Measurements

We measure the fair value of our 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. We use 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.

Our Level 1 assets consist of U.S. government debt securities and money market funds. We did not hold any Level 1 liabilities as of September 30, 2010.

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.

Our Level 2 assets consist of corporate bonds, certificates of deposits, foreign bonds, agency bonds, and commercial paper. We did not hold any Level 2 liabilities as of September 30, 2010.

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.

We did not hold any Level 3 assets or liabilities as of September 30, 2010.

The following table summarizes our financial assets measured at fair value on a recurring basis as of September 30, 2010 (in thousands):


Description	Balance as of September 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash equivalents:
Money market funds	$	183,633	$	183,633	$	—

Short-term investments:
U.S. government debt securities		3,000		3,000		—
Corporate bonds and certificate of deposit		2,293		—		2,293
Foreign bonds		706		—		706
Commercial paper		1,397		—		1,397

Long-term investments:
Corporate bonds		4,453		—		4,453
Foreign bonds		1,320		—		1,320
Agency bonds		2,057		—		2,057

	$	198,859	$	186,633	$	12,226

- Definition

This element represents the disclosure related to the fair value measurement of assets and liabilities which includes [financial] instruments measured at fair value that are classified in stockholders' equity. Such assets and liabilities may be measured on a recurring or nonrecurring basis. The disclosures which may be required or desired include: (1) for assets and liabilities measured on a recurring basis, disclosure may include: (a) the fair value measurements at the reporting date; (b) the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3); (c) for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (ii) purchases, sales, issuances, and settlements (net); (iii) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs); (d) the amount of the total gains or losses for the period in subparagraph (c) (i) above included in earnings (or changes in net assets) that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date and a description of where those unrealized gains or losses are reported in the statement of income (or activities); (e) the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period and (2) for assets and liabilities that are measured at fair value on a nonrecurring basis (for example, impaired assets) disclosure may include, in addition to (a) above: (a) the reasons for the fair value measurements recorded; (b) the same as (b) above; (c) for fair value measurements using significant unobservable inputs (Level 3), a description of the inputs and the information used to develop the inputs; and (d) the valuation technique(s) used to measure fair value and a discussion of changes, if any, in the valuation technique(s) used to measure similar assets and/or liabilities in prior periods.

+ References+ Details

Balance Sheet Components

9 Months Ended

Sep. 30, 2010

Balance Sheet Components

Note 3. Balance Sheet Components

Inventories are comprised of (in thousands):


	September 30, 2010		December 31, 2009
Raw materials	$	1,557	$	1,079
Work in process		667		746
Finished goods		158		221

	$	2,382	$	2,046

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

Accrued liabilities consist of the following (in thousands):


	September 30, 2010		December 31, 2009
Accrued payroll and benefits	$	20,519	$	25,847
Accrued litigation settlement		3,310		—
Accrued income taxes		2,714		2,920
Accrued sales rebate		2,984		2,610
Accrued sales tax and value added tax		2,788		2,392
Accrued warranty		2,658		2,376
Accrued sales and marketing expenses		2,794		1,954
Other		6,307		4,723

	$	44,074	$	42,822

Intangible Assets

9 Months Ended

Sep. 30, 2010

Intangible Assets

Note 4. Intangible Assets

The intangible assets represent non-compete agreements received in conjunction with the October 2006 OrthoClear Agreement at gross value of $14.0 million. These assets are amortized on a straight-line basis over the expected useful life of five years. As of September 30, 2010 and December 31, 2009, the net carrying value of these non-compete agreements was $2.9 million (net of $11.1 million of accumulated amortization) and $5.0 million (net of $9.0 million of accumulated amortization), respectively.

We perform 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 our 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, 2010 is as follows (in thousands):


Fiscal Year
2010 (for the remaining 3 months)	$	700
2011		2,188

Total	$	2,888

Legal Proceedings

9 Months Ended

Sep. 30, 2010

Legal Proceedings

Note 5. Legal Proceedings

Weber

On May 18, 2007, Debra A. Weber filed a consumer class action lawsuit against us, 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 us for breach of contract. The cause of action against us titled “Breach of Third Party Benefit Contract” references our agreement to make Invisalign treatment available to OrthoClear patients, alleging that we failed “to provide the promised treatment to Plaintiff or any of the class members.” On June 2, 2010, the Court granted our motion for summary judgment and dismissed us from the action.

On June 29, 2010, Weber requested that the Court enter final judgment as to Align pursuant to Federal Rule of Civil Procedure 54(b) in order to certify Align’s dismissal for immediate appeal. We filed an opposition to Weber’s request on July 19, 2010, on the grounds that Weber failed to show that exceptional circumstances warranted the entry of a final judgment where fewer than all claims or parties had been dismissed. On August 20, 2010, the Court denied Weber’s motion. On October 29, 2010, the Court dismissed the action against OrthoClear and OrthoClear Holdings Inc. with prejudice at the request of the remaining parties pursuant to a settlement. The Stipulation and Order of Dismissal with Prejudice entered by the Court provides that the settlement and dismissal does not affect any rights Weber may have to appeal dismissal of the action as against us. We believe there is no evidence to indicate that a reasonable possibility exists that a loss had been incurred as of September 30, 2010.

Securities Litigation

In August 2009, Plaintiff Charles Wozniak filed a lawsuit against us and our 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 our common stock 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, we failed to disclose that we had shifted the focus of our sales force to clearing backlog, causing a significant decrease in the number of new case starts. On November 13, 2009, the Court appointed Plumbers and Pipefitters National Pension Fund as lead plaintiff. The lead plaintiff filed an amended complaint on January 29, 2010. The amended complaint alleges that we and Mr. Prescott issued a number of purportedly false and misleading statements throughout the class period concerning the Patients First program, our production capacity, a purported backlog, and the focus of our sales force. On March 26, 2010, we and Mr. Prescott filed a motion to dismiss the amended complaint. The motion was heard by the Court on July 9, 2010, and the Court has not yet released a ruling on the motion. We believe the lawsuit to be without merit and intend to vigorously defend ourselves. We believe there is not sufficient evidence to conclude that a reasonable possibility exists that a loss had been incurred as of September 30, 2010.

Legal Settlements

9 Months Ended

Sep. 30, 2010

Legal Settlements

Note 6. Legal Settlements

Ormco

On August 16, 2009, we 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 litigations between the parties, and we 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. The settlement value was allocated between past infringement and future use of the patent based on total case shipments during the period of infringement. We attributed $69.7 million to past infringement claims, based on case shipments from September 9, 2003 through August 16, 2009. This was recorded as litigation settlement costs and included in operating expenses during the period ended September 30, 2009. Additional royalty costs based on case shipments between August 17, 2009 through January 19, 2010 totaling $7.0 million were recorded as prepaid royalties as of the settlement date. We amortized $6.2 million of the prepaid royalties to cost of sales for the year ended December 31, 2009 and the remaining $0.8 million was amortized during first quarter of 2010.

OrthoClear

In June 2010, we received an $8.7 million insurance settlement over a disputed coverage under our general liability umbrella that was not previously reimbursed by our insurer related to the OrthoClear litigation.

Leiszler

On May 10, 2010, Christopher J. Leiszler filed a complaint against us in the United States District Court for the Northern District of California. The complaint alleges that we implemented unfair and fraudulent requirements for the prescription of Invisalign through the Invisalign Proficiency Requirements. In January 2010 Dr. Leiszler’s Invisalign provider status was suspended for failing to meet the Proficiency Requirements. Dr. Leiszler sued on behalf of himself and all others similarly situated. The complaint seeks a refund of the price paid to us for Invisalign training. On October 19, 2010, we entered into a memorandum of understanding to resolve this litigation. Under terms of the proposed settlement, class members can obtain reinstatement to prescribe Invisalign treatment under certain circumstances (the “Reinstatement Benefit”). Certain class members will have the option to elect a cash remedy instead of the Reinstatement Benefit. The proposed settlement remains subject to the execution of a formal settlement agreement and approval by the Court. We anticipate that a formal settlement agreement will be presented to the Court in December 2010. Under the proposed settlement, we will deposit approximately $7.5 million into an escrow account which will be used to pay eligible class members who elect the cash remedy, as well as legal fees and other costs. We recorded a litigation settlement charge of $3.3 million in the third quarter of 2010 for our estimated liability related to this settlement. We will continue to assess and evaluate the matter with our legal counsel and update the estimated settlement charge as appropriate as new information becomes available.

Credit Facilities

9 Months Ended

Sep. 30, 2010

Credit Facilities

Note 7. Credit Facilities

On December 5, 2008, we renegotiated and amended our existing credit facility with Comerica Bank. Under this revolving line of credit, we have $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 us 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 we maintain at Comerica Bank above the $10.0 million minimum.

As of September 30, 2010, we had no outstanding borrowings under this credit facility and are in compliance with the financial covenants.

Commitments and Contingencies

9 Months Ended

Sep. 30, 2010

Commitments and Contingencies

Note 8. Commitments and Contingencies

Leases

As of September 30, 2010, minimum future lease payments for non-cancelable leases are as follow (in thousands):


Fiscal Year
2010 (for the remaining 3 months)	$	1,535
2011		5,074
2012		4,010
2013		3,339
2014 and thereafter		9,900

Total	$	23,858

On January 26, 2010, we entered into an agreement to lease new corporate headquarters of approximately 129,024 square feet in San Jose, California. The lease agreement commenced on June 28, 2010 and will continue for an initial term of seven years and two months. The agreement for our previous corporate headquarters in Santa Clara, California, expired on June 30, 2010.

Warranty

We warrant our products against material defects until the Invisalign case is complete. We accrue 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. We regularly review the accrued balances and update 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 our warranty accrual during the nine months ended September 30, 2010 and 2009, respectively (in thousands):


	Nine Months Ended September 30,
	2010			2009
Balance at beginning of period	$	2,376		$	2,031
Charged to cost of revenues		2,212			2,046
Actual warranty expenses		(1,930	)		(1,962	)

Balance at end of period	$	2,658		$	2,115

Stock-based Compensation

9 Months Ended

Sep. 30, 2010

Stock-based Compensation

Note 9. Stock-based Compensation

Summary of stock-based compensation expense

On May 20, 2010 our stockholders voted to approve an amendment to the 2005 Incentive Plan. The amendment increased the plan by 3,300,000 shares for a total reserved for issuance of 13,283,379 shares, plus up to an aggregate of 5,000,000 shares that would have been returned to our 2001 Stock Incentive Plan as a result of termination of options or repurchase of shares on or after March 28, 2005.

The following table summarizes stock-based compensation expense related to all of our stock-based options and employee stock purchases for the three and nine months ended September 30, 2010 and 2009 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Cost of revenues	$	399	$	359	$	1,237	$	1,150
Sales and marketing		1,280		1,243		3,387		3,559
General and administrative		2,141		1,885		5,960		5,839
Research and development		594		500		1,554		1,463

Total stock-based compensation expense	$	4,414	$	3,987	$	12,138	$	12,011

Options

The fair value of stock options granted was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Stock Options:
Expected term (in years)		4.4			4.4			4.4			4.4
Expected volatility		63.4	%		64.0	%		63.3	%		61.6	%
Risk-free interest rate		1.5	%		2.1	%		1.9	%		1.6	%
Expected dividend		—			—			—			—
Weighted average fair value per share at grant date	$	7.28		$	5.42		$	9.06		$	4.15

Stock option activity for the nine months ended September 30, 2010 under the stock incentive plans is set forth below:


	Total Shares Underlying Stock Options
	Number of Shares Underlying Stock Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2009		7,488		$	11.49
Granted		1,458			17.61
Cancelled or expired		(243	)		14.61
Exercised		(806	)		7.77

Outstanding as of September 30, 2010		7,897		$	12.90		5.98	$	53,180

Vested and expected to vest at September 30, 2010		7,638		$	12.83		5.94	$	51,983

Exercisable at September 30, 2010		5,080		$	11.97		5.33	$	39,086

As of September 30, 2010, we expect to recognize $16.1 million of total unamortized compensation cost, net of estimated forfeitures, related to stock options over a weighted average period of 2.4 years.

Restricted Stock Units

In the amended 2005 Incentive Plan any shares subject to an award of restricted stock, restricted stock units, performance shares or performance units will be counted against the authorized share reserve as one and one-half (1¹/2) shares for every one share subject to the award, and any shares cancelled will be returned to the Plan at the same ratio.

A summary of the nonvested shares for the nine months ended September 30, 2010 is as follows:


	Number of Shares Underlying RSUs (in thousands)			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (in thousands)
Nonvested as of December 31, 2009		876
Granted		420
Vested and released		(288	)
Forfeited		(64	)

Nonvested as of September 30, 2010		944			1.35	$	18,486

As of September 30, 2010 the total unamortized compensation cost related to restricted stock units, net of estimated forfeitures, was $9.0 million, which we expect to recognize over a weighted average period of 2.3 years.

Employee Stock Purchase Plan

Our 2005 Employee Stock Purchase Plan consists of overlapping twenty-four month offering periods with four six-month purchase periods in each offering period and will expire on January 31, 2011. In May 2010, our shareholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”). The 2010 Purchase Plan consists of overlapping twenty-four month offering periods with four six-month purchase periods in each offering period. The 2010 Purchase Plan will continue until terminated by either the Board or its administrator. Employees purchase shares at 85% of the fair market value of the common stock at either the beginning of the offering period or the end of the purchase period, whichever is lower. The maximum number of shares available under the 2010 Purchase Plan is 2,400,000 shares.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Employee Stock Purchase Plan:
Expected term (in years)		1.3			1.2			1.3			1.3
Expected volatility		53.4	%		72.8	%		55.9	%		74.6	%
Risk-free interest rate		0.4	%		0.7	%		0.4	%		0.6	%
Expected dividend		—			—			—			—
Weighted average fair value at grant date	$	6.87		$	5.10		$	7.22		$	3.78

As of September 30, 2010, we expect to recognize $0.6 million of the total unamortized compensation cost related to employee purchases over a weighted average period of 0.1 years.

Accounting for Income Taxes

9 Months Ended

Sep. 30, 2010

Accounting for Income Taxes

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 fifty percent likely of being realized upon ultimate settlement.

During the third quarter of fiscal 2010, the amount of unrecognized tax benefits was increased by approximately $2.7

million. The total amount of unrecognized tax benefits was $10.4 million as of September 30, 2010, which would impact our effective tax rate if recognized. We recognize interest and penalties related to unrecognized tax benefits as a component of income taxes. Interest and penalties are not significant and are included in the unrecognized tax benefits. We are subject to taxation in the U.S. and various states and foreign jurisdictions. All of our tax years will be open to examination by the U.S. federal and most state tax authorities due to our net operating loss and overall credit carryforward position. With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2005.

- Definition

The disclosure required for tax positions taken in the tax returns filed or to be filed for which it is more likely than not that the tax position will not be sustained upon examination by taxing authorities (i.e., uncertain tax positions) and other types of income tax contingencies, including: (1) the policy on classification of interest and penalties; (2) a tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period; the total amount(s) of: (3) unrecognized tax benefits that, if recognized, would affect the effective tax rate, and (4) interest and penalties recognized in each of the income statement and balance sheet; (5) for positions for which it is reasonably possible that the total amounts unrecognized will significantly change within 12 months of the reporting date the: (i) nature of the uncertainty, (ii) nature of the event that could occur that would cause the change, and (iii) an estimate of the range of the reasonably possible change or a statement that an estimate of the range cannot be made; and (6) a description of tax years that remain subject to examination by major tax jurisdictions.

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Net Profit (Loss) Per Share

9 Months Ended

Sep. 30, 2010

Net Profit (Loss) Per Share

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):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010		2009
Net profit (loss)	$	16,815	$	(49,942	)	$	64,348	$	(42,761	)


Weighted-average common shares outstanding, basic		76,081		69,528			75,653		67,278

Effect of potential dilutive common shares		2,028		—			2,199		—

Total shares, diluted		78,109		69,528			77,852		67,278


Basic net profit (loss) per share	$	0.22	$	(0.72	)	$	0.85	$	(0.64	)

Diluted net profit (loss) per share	$	0.22	$	(0.72	)	$	0.83	$	(0.64	)

For the three and nine months ended September 30, 2010, stock options and restricted stock units totaling 3.3 million and 3.0 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, 2009, stock options and restricted stock units totaling 4.0 million and 5.1 million, respectively, were excluded from diluted net loss per share because of their anti-dilutive effect.

Comprehensive Income (Loss)

9 Months Ended

Sep. 30, 2010

Comprehensive Income (Loss)

Note 12. Comprehensive Income (Loss)

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net profit (loss)	$	16,815		$	(49,942	)	$	64,348		$	(42,761	)
Foreign currency translation adjustments		585			214			(120	)		242
Change in unrealized gains (losses) on available-for-sale securities		(18	)		—			(18	)		20

Comprehensive income (loss)	$	17,382		$	(49,728	)	$	64,210		$	(42,499	)

- Definition

This label may include the following: 1) the amount of income tax expense or benefit allocated to each component of other comprehensive income, including reclassification adjustments, 2) the reclassification adjustments for each classification of other comprehensive income and 3) the ending accumulated balances for each component of comprehensive income. Components of comprehensive income include: (1) foreign currency translation adjustments; (2) gains and losses on foreign currency transactions that are designated as, and are effective as, economic hedges of a net investment in a foreign entity; (3) gains and losses on intercompany foreign currency transactions that are of a long-term-investment nature, when the entities to the transaction are consolidated, combined, or accounted for by the equity method in the reporting enterprise's financial statements; (4) change in the market value of a futures contract that qualifies as a hedge of an asset reported at fair value; (5) unrealized holding gains and losses on available-for-sale securities and that resulting from transfers of debt securities from the held-to-maturity category to the available-for-sale category; (6) a net loss recognized as an additional pension liability not yet recognized as net periodic pension cost; and (7) the net gain or loss and net prior service cost or credit for pension plans and other postretirement benefit plans.

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Segments and Geographical Information

9 Months Ended

Sep. 30, 2010

Segments and Geographical Information

Note 13. Segments and Geographical Information

Segment

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

Geographical Information

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Net revenues:
North America	$	72,555	$	60,054	$	223,141	$	172,577
Europe		22,280		18,206		68,085		50,986
Other international		1,112		1,009		3,007		2,154

Total net revenues	$	95,947	$	79,269	$	294,233	$	225,717



	As of September 30, 2010		As of December 31, 2009
Long-lived assets:
North America	$	84,573	$	91,548
Europe		872		1,018
Other international		1,848		1,375

Total long-lived assets	$	87,293	$	93,941

Restructuring

9 Months Ended

Sep. 30, 2010

Restructuring

Note 14. Restructuring

In July and October 2008, we 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 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 was completed during the second quarter of 2009.

In 2009, we incurred approximately $1.3 million of costs related to severance and termination benefits. There were no costs incurred relating to the restructuring plans during 2010.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2010
Release of previously deferred revenue for Invisalign Teen replacement aligners	$ 14.3