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

                                    FORM 10-K

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

For the fiscal year ended June 29, 2002      Commission file number 000-14742

                               CANDELA CORPORATION
             (Exact name of registrant as specified in its charter)

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<S>                                                         <C>
                 DELAWARE                                      04-2477008
      (State or other jurisdiction of                       (I.R.S. Employer
       incorporation or organization)                       Identification No.)

530 BOSTON POST ROAD, WAYLAND, MASSACHUSETTS                      01778
  (Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code             508-358-7400
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:

                          Common Stock, $.01 par value
                         Common Stock Purchase Warrants
                                (Title of Class)

     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 proceeding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X No ___

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

     The aggregate market value of the registrant's voting stock, held by
non-affiliates of the registrant as of September 24, 2002, based upon the
closing price of such stock on the NASDAQ Stock Market on that date, was
$40,565,444. As of September 24, 2002, 9,658,439 shares of the registrant's
common stock, $.01 par value, were issued and outstanding.

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                                     PART I

ITEM 1.  BUSINESS.

     Candela Corporation is a pioneer in the development and commercialization
of advanced aesthetic laser systems that allow physicians and personal care
practitioners to treat a wide variety of cosmetic and medical conditions
including:

     o vascular lesion treatment of rosacea, facial spider veins, leg veins,
       scars, stretch marks, warts, port wine stains and hemangiomas

     o hair removal

     o removal of benign pigmented lesions such as age spots, freckles and
       tattoos

     o non-ablative dermal remodeling of wrinkles

     o psoriasis

     o other skin treatments

     Since our founding 32 years ago, we have continuously developed and
enhanced applications of laser technology. In the mid-1980's we began developing
laser technology for medical applications, and since that time have shipped
approximately 5,000 lasers to 55 countries. Since the early 1990's we have
focused our organizational resources on developing laser technology for use
solely in the aesthetic and cosmetic laser industry. Our introduction of new
dermatology/plastic surgery laser systems during the mid-1990's allowed us to
expand rapidly in this area. Candela's current product line offers comprehensive
and technologically sophisticated aesthetic and medical laser systems used by
dermatologists, plastic surgeons and various other medical and personal care
practitioners. Candela's product line includes the following innovative
products:

     o GentleLASE(R) family of high energy long pulse hair removal lasers with
       the cool comfort of Candela's patented Dynamic Cooling Device(TM) (DCD)
       including the GentleLASEPlus(TM), our fastest laser for permanent hair
       reduction, the GentleYAG(TM), a high energy long pulse Nd:YAG laser,
       designed for the removal of unwanted hair for darker and tanned skin, and
       our most affordable laser for hair removal, the GentleLASE(TM) Limited
       Edition

     o Vbeam(R) pulsed dye laser, capable of treating a wide variety of vascular
       lesions without purpura

     o ALEXLAZR(TM), for treating pigmented lesions and tattoos

     o Smoothbeam(TM) diode laser, for non-ablative dermal remodeling of
       periorbital wrinkles

     o C-beam(TM) pulsed dye laser, for effective treatment of psoriasis and
       surgical scars

     The discretionary income of aging baby boomers continues to rise which
creates new opportunities for Candela. This market segment places a premium on
good health and personal appearance, and has demonstrated a willingness to pay
for health and cosmetic products and services. The growing popularity of laser
treatments among the general population is also spurring demand for Candela's
products. Last year, Americans spent an estimated $10 billion on cosmetic
procedures. Increasingly, lasers are proving an attractive alternative for
eliminating unwanted hair. Still in the early stages of development, the laser
hair removal market is expected to experience significant growth over the next
five years.

     The Company is dedicated to developing safe and effective products. Our
aesthetic laser systems are further distinguished by being among the fastest,
smallest and most affordable in their respective markets. We believe that we
have increasingly captured significant market share because of these product
attributes and we are committed to continual innovation to meet the needs of our
markets.

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INDUSTRY OVERVIEW

     Medical lasers use the unique characteristics of laser light to achieve
precise and efficacious therapeutic effects, often in a non-invasive manner. The
precise color, concentration, and controllability of different types of laser
light provide for the delivery of a wide range of specialized treatments. First
introduced in the 1960's, the use of lasers for medical applications grew
rapidly in the 1990's as technical advances made medical lasers more effective
and reliable. Medical lasers today are used for numerous types of procedures
falling into four broad categories: ophthalmic surgery, aesthetic and cosmetic
procedures, general surgery, and dental procedures. Candela competes solely
within the growing market for lasers performing aesthetic and cosmetic
procedures including:

     o removal of unwanted hair from the face, legs, back, and other body areas

     o treatment of rosacea, facial veins and leg veins, red birthmarks, scars,
       stretch marks, and warts

     o reduction in the appearance of periorbital wrinkles

     o removal of pigmented lesions such as age spots, freckles and tattoos

     o psoriasis

     o other skin treatments

     Lasers produce intense bursts of highly focused light to treat skin
tissues. A laser's wavelength (color), energy level, spot size and pulse width
(exposure time) are optimized for the specific treatment. Hair removal and the
treatment of various leg vein malformations require the deepest laser
penetration for successful treatment while scars and red birthmarks (port wine
stains and hemangiomas) require less laser penetration. Pigmented lesions such
as sunspots, liver spots and tattoos are typically surface conditions that
require the least amount of penetration. Different conditions may require the
use of different types of lasers, and an active aesthetic and cosmetic practice
addressing a broad range of laser procedures has need of multiple lasers.

     In the pioneering years of the cosmetic and aesthetic laser industry from
the late 1980's to the mid 1990's, the market for laser procedures was focused
on vascular conditions such as port wine stains and hemangiomas and the
development of treatments for pigmented lesions, such as tattoos. Equipment
available in this period tended to be expensive, slow, and bulky. In addition,
laser applications addressed the needs of relatively small patient populations,
served by a narrow group of specialists.

     The aesthetic and cosmetic laser industry appears to be entering an era of
broader based growth. The major factors converging to drive this growth are:

     o the economics of practitioners in a tough medical reimbursement
       environment

     o the rising discretionary income of aging baby boomers

     o the development of technology that allows for new, effective and
       economical procedures for conditions with large patient populations

     Aesthetic and cosmetic laser vendors, who are able to deliver lasers that
are efficacious, cost effective, reliable, and easy to use, will be well
positioned to take advantage of such broader-based industry growth.

     Managed care and reimbursement restrictions in the U.S. and similar
constraints, such as socialized medicine, outside the U.S., are motivating
practitioners to emphasize aesthetic and cosmetic procedures that are delivered
on a private, fee-for-service basis. While cosmetic procedures were once the
domain of plastic surgeons and dermatologists, reimbursement reductions coupled
with the reliable revenue stream from private-pay procedures have piqued the
interest of other specialties, including general practice physicians and
obstetricians and gynecologists.

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     Key technical developments required for the broader cosmetic laser markets
relate to ease-of-use, speed, lower costs, safety, and effective elimination of
undesirable side effects. These factors are critical for broader segments of
practitioners who wish to build aesthetic and cosmetic laser practices. These
factors are also important for minimizing the disruption of a patient's normal
routine and for building demand for procedures addressing very large patient
populations.

BUSINESS STRATEGY

     Candela continues to believe that a convergence of price, performance and
technology is occurring in the aesthetic and cosmetic laser industry, driving
market expansion. We believe we have the necessary infrastructure in place to
capitalize on this expansion. Candela's objective is to establish itself as the
leading provider of aesthetic and cosmetic lasers by using its proprietary
technology and expertise in light and tissue interaction, as well as by
developing market-oriented products that utilize related technologies. Our
business strategy is focused on the following goals:

     o reduce product costs

     o increase penetration of our traditional customer base

     o expand our direct distribution channels domestically

     o expand our international distribution channels

     o continue investing in research and development to develop new
       applications that are efficacious, cost-effective, reliable and easy to
       use

     o broaden additional applications for our Dynamic Cooling Device

     REDUCE PRODUCT COSTS. We apply bottom-up engineering, focusing on each
component to improve the performance of each device while reducing its size,
complexity, and cost. We believe our approach leads to lasers with fewer parts
and greater manufacturing efficiency, resulting in lower production costs which
enables us to offer more reliable products at more affordable prices.

     INCREASE PENETRATION OF OUR TRADITIONAL CUSTOMER BASE. Our traditional
customer base consists of dermatologists and plastic and cosmetic surgeons. We
believe that the affordability of our products will enable us to penetrate
further into the dermatologist, plastic and cosmetic surgeon markets. We believe
that affordability has been a major obstacle preventing the remaining
practitioners from purchasing a laser. As competition for patients among
practitioners increases, those practitioners with aesthetic and cosmetic lasers
will be able to differentiate themselves.

     EXPAND OUR DOMESTIC SALES DISTRIBUTION CHANNELS. North America presently
represents almost 47% of our sales and is the largest single geographic market
for our products. We have increased the size of our U.S. direct sales force to
better address the needs of our traditional core markets.

     EXPAND OUR INTERNATIONAL DISTRIBUTION CHANNELS. Outside of the U.S. we
continue to strengthen our long-standing positions in Europe and Japan and are
seeking to expand our markets in Asia and Latin and South America. We currently
have direct sales offices in Madrid, Frankfurt, Paris, Bangkok, Osaka, Nagoya
and Tokyo. Over the past year we increased the number and improved the quality
of our international independent distributor channel. We currently utilize 49
independent distributors in 55 countries.

     CONTINUE INVESTING IN R&D. We believe that investment in research and
development is necessary to remain a leader in the aesthetic and cosmetic laser
market. Our research and development approach is to develop high-quality,
reliable, and affordable products that continue to address existing markets and
allow us to enter and expand into larger markets, such as acne therapy. Our
research and development staff works closely with our marketing and operations
groups to ensure our goals are met. Our strategy has been to drive technology
that is market applicable and addresses voids in the marketplace. To that end,
Candela will continue to apply technologies to reduce the size and complexity of
its technology and products, increase the speed and ease with which therapeutic
applications can be delivered, improve its ability to build and deliver lasers
at affordable prices, and address expanding therapeutic applications and

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markets. Candela has numerous research and development arrangements with leading
hospitals and medical laboratories in the U.S. and Europe.

     BROADEN ADDITIONAL APPLICATIONS FOR OUR DYNAMIC COOLING DEVICE ("DCD").
Recently, the aesthetic and cosmetic laser market has begun to recognize the
importance of effective cooling delivery systems for laser treatment, especially
in such large market segments as hair removal and treatment of leg veins,
vascular lesions, wrinkles and psoriasis. We intend to broaden the incorporation
of DCD into all of our lasers and believe by doing so we can address major new
market opportunities.

THE MARKET FOR AESTHETIC AND COSMETIC LASERS

     Our traditional customer base for aesthetic and cosmetic lasers consists of
dermatologists and plastic and cosmetic surgeons. In addition, other
practitioner groups are emerging as potential customers, including general
practitioners, obstetricians, gynecologists, and general and vascular surgeons.
In the U.S., according to the American Medical Association and various
societies, there are approximately 10,000 dermatologists, and 7,000 plastic and
cosmetic surgeons. Practitioners in other specialties that are beginning to buy
aesthetic and cosmetic lasers include 70,000 general and family practitioners,
35,000 obstetricians and gynecologists, and 28,000 general and vascular
surgeons. In addition, the aesthetic and cosmetic laser market includes
non-medical practitioners, notably electrologists, of which there are an
estimated 6,000 in the U.S.

     The end markets for cosmetic laser procedures encompass broad and growing
patient groups, including aging "baby boomers" as well as younger age groups.
According to the U.S. Census Bureau, at the end of 1998 the number of "baby
boomers" in the 35 to 54 age range was approximately 80 million, representing
more than 29% of the total U.S. population. This large population group has
exhibited a strong demand for aesthetic and cosmetic procedures. We believe that
as the cost of treatments decreases and the popularity of laser cosmetic
procedures such as hair removal increases, the target market for these
procedures will expand beyond the baby boomers to include a broad range of women
and men aged 17 to 65. Demographic factors similar to the U.S. underlie the
growth of the aesthetic and cosmetic laser market outside of the U.S. as well.

     HAIR REMOVAL. We believe that the great majority of the 108 million women
over the age of 16 in the U.S. employ one or more techniques for temporary hair
removal from various parts of the body. Also, a growing number of men are
removing hair by means other than their daily shaving routine. A number of
techniques are used to pull hair from the follicle including waxing,
depilatories, and tweezing. In the waxing process, a lotion, generally
beeswax-based, is spread on the area to be treated and is then rapidly peeled
off, pulling out the entrapped hairs. Depilatories employ rotating spring coils
or slotted rubber rolls to trap and pull out the hairs. Tweezing involves
removing individual hairs with a pair of tweezers. Pulling hair from the
follicle produces temporary results, but is often painful and may cause skin
irritation. Depilatory creams, which contain chemicals to dissolve hair,
frequently leave a temporary unpleasant odor and may also cause skin irritation.
Shaving is the most widely used method of hair removal, especially for legs and
underarms, but produces the shortest-term results. Hair bleaches do not remove
hair, but instead lighten the color of hair so that it is less visible. A
principal drawback of all of these methods is that they require frequent
treatment.

     Before the advent of laser hair removal, electrolysis was the only method
available for the long-term removal of body hair. Electrolysis is a process in
which an electrologist inserts a needle directly into a hair follicle and
activates an electric current in the needle, which disables the hair follicle.
The tiny blood vessels in each hair follicle are heated and coagulated,
presumably cutting off the blood supply to the hair matrix, or are destroyed by
chemical action depending upon modality used. The success rate for electrolysis
is variable depending upon the skill of the electrologist and always requires a
series of treatments. Electrolysis is time-consuming, expensive and sometimes
painful. There is also some risk of skin blemishes and a rising concern relating
to needle infection. Because electrolysis requires that each hair follicle be
treated separately and can only treat visible hair follicles, the treatment of
an area as small as an upper lip may require numerous visits at an aggregate
cost of up to $1,000. The American Electrology Association estimates that
approximately one million people per year undergo electrology procedures.
Although we believe the large majority of all electrolysis treatments are for
facial hair, the neck, breasts and bikini line are also treated. Because hair
follicles are disabled one at a time, electrolysis is rarely used to remove hair
from large areas such as the back, chest, abdomen, and legs. We believe lasers
enable the practitioner to address a potentially larger market than electrolysis
by treating a larger area of the body more quickly and with better results.

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     We believe the market for laser-based hair removal will grow as the
customer compares laser treatments to other hair removal methods that are
currently available. The benefits of laser treatment include:

     o significant longer term cosmetic improvement

     o treatment of larger areas in each treatment session

     o less discomfort during and immediately after procedures

     o reduced procedure time and number of treatments

     o reduced risk of scarring and infection

     o non-invasive procedures

     o no risk of cross-contamination

     VASCULAR LESIONS. Benign vascular lesions are abnormal, generally enlarged
and sometimes proliferating blood vessels that appear on the surface of the skin
as splotches, dots, bulges, and spider shapes in a variety of colors ranging
from red to purple. Different types of benign vascular lesions include the
following:

     o rosacea, which is the dilation of capillaries in the cheeks, nose,
       forehead and chin

     o telangiectasias, more commonly referred to as spider veins, appearing on
       the face and other parts of the body

     o varicose veins, which are large veins greater than 1mm in diameter and
       often bulge above the skin surface

     o leg telangiectasias, which are smaller spider veins up to 1mm in diameter
       appearing as single strands

     o port wine stains, which are vascular birthmarks characterized by a red or
       purple discoloration of the skin

     o hemangiomas, which are protuberances that consist of dilated vessels,
       which often appear on newborns within one month of birth

     o stretch marks and scars

     Varicose leg veins typically result when damaged valves cause blood to
stagnate rather than be pumped back to the heart, causing the vein walls to
stretch and bulge. Varicose veins affect a significant portion of the U.S. adult
population and increase in prevalence with age. To date, treatment for varicose
veins has been predominantly performed on women. Other benign vascular lesions
include port wine stains, hemangiomas, and facial and truncal telangiectasias or
spider veins. It is estimated that in 1997 there were approximately 661,000
procedures performed in the U.S. to remove vascular lesions and the number of
procedures is expected to increase to an estimated 2.6 million in 2002. While
procedural data is less available internationally, it is estimated that
worldwide procedures will grow to 5 million in 2002.

     PIGMENTED LESIONS/TATTOOS: Benign pigmented lesions can be both epidermal,
on the outer layer of skin, and dermal, on the inner-most layer of skin, natural
or man-made (tattoos), and can constitute a significant cosmetic problem to
those who have them. Laser treatment of pigmented lesions is primarily performed
in international markets, especially in Asia.

     SKIN REJUVENATION: Skin rejuvenation is one of the fastest growing segments
of the aesthetic laser market, with sales projected to increase from $140
million in 2001 to over $650 million in 2003. A significant percentage of the
population suffers from fine lines and wrinkles or older looking skin as a
result of the normal aging process. This is the primary group of candidates for
non-ablative laser treatment. While the market for skin rejuvenation is greatest
in the U.S., significant opportunities abound

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in international markets where there is an aging demographic, such as Japan, or
a high prevalence of photodamaged skin, such as Australia and Latin/South
America.

     PSORIASIS: The National Psoriasis Foundation estimates that psoriasis
afflicts more than 7 million Americans and that between 150,000 and 260,000 new
cases are diagnosed each year. Candela received FDA clearance in 2001 to market
a pulsed dye laser for the treatment of psoriasis. The new laser specifically
treats recalcitrant psoriatic plaque safely and effectively and began shipping
during fiscal year 2002.

     Internationally, Candela is positioned for significant growth, with
investments in product development aimed specifically toward global markets.
Other internationally focused investments include an expansion of our
distribution channels, both in affiliate offices and in an expansion in Japan
and some parts of Asia. In fact, more than half of Candela sales are from
markets outside the U.S.


CANDELA'S PRODUCTS

     We research, develop, manufacture, market, sell and service lasers used to
perform procedures addressing patients' aesthetic, medical and cosmetic
concerns. We offer a comprehensive range of products based on proprietary
technologies. Our products focus on the major aesthetic and cosmetic laser
applications including:

     o hair removal

     o non-invasive treatment of facial and leg veins and other benign vascular
       lesions

     o rosacea

     o removal of benign pigmented lesions such as age spots and tattoos

     o treatment of scars and stretch marks

     o wrinkle reduction

     o psoriasis

     o other skin treatments

     Laser technology forms the basis for most of our products. Our patented
technology uses thermal energy generated by an intense pulsed laser light source
to selectively eliminate unwanted skin blemishes without damaging the
surrounding healthy tissue, and to remove facial or other unwanted hair
throughout the body. Candela's objective is to establish itself as the leading
provider of aesthetic and cosmetic lasers by continually striving to develop
smaller, faster, and less expensive devices. Candela has been a pioneer in the
laser industry. From the start, our mission has been to lead the way in the
development of innovative laser products. Significant innovations include:

     DYNAMIC COOLING DEVICE(TM). The Dynamic Cooling Device ("DCD") selectively
cools only the top layer of the skin, while leaving the targeted underlying hair
follicle, vein or other structure at normal temperature. As a result, higher
levels of laser energy can be delivered during treatment, while minimizing
thermal injury, pain, and the inconvenience associated with anesthetics. The
design of the hand-held DCD enables the practitioner to clearly see the area
being treated, and the combined efficiency of the lasers and DCD reduces the
risks of over treatment. The DCD delivers just the right amount of cooling
quickly and consistently. Currently, DCD is available as an option on several
Candela laser systems.

     GENTLELASE(R) FAMILY. The GentleLASEPlus(TM) is a high-energy, long-pulse
solid-state laser that generates laser light in the near infrared wavelength
range. It is used for both hair removal and the treatment of large (1mm or
larger) leg veins. The technology incorporated in the GentleLASEPlus(TM) uses
intense pulsed light energy directed through an Alexandrite rod, which achieves
selective heating while keeping the temperature of the skin below its damage
threshold. The longer Alexandrite laser wavelength enables GentleLASEPlus(TM) to
penetrate skin surfaces deeper than traditional Ruby lasers, and the large spot
size (18mm) is the industry's largest.

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     Hair removal typically requires three to five treatments to achieve
efficacious results due to the growth cycle of hair follicles. A typical
treatment can range from approximately $200 for an upper lip and chin procedure
to as much as $1,000 per treatment for the back or chest.

     The other systems of the GentleLASE(R) family are the GentleLASE Limited
Edition(TM), our most affordable hair removal laser, and the GentleYAG(TM), a
high energy long pulse Nd:YAG laser, designed for the removal of unwanted hair
and leg veins for darker and tanned skin.

     VBEAM(R). The Vbeam(R) delivers the safety and efficacy of the clinically
proven pulsed dye laser (PDL) while minimizing the problematic side effects of
postoperative bruising, commonly referred to as purpura. It features Candela's
patented Dynamic Cooling Device(TM) (DCD) to protect the epidermis. The system
comes in a choice of four colors, an industry first, and is priced very
competitively. Vbeam(R) provides treatment of facial spider veins, port wine
stains, leg telangiectasias, hemangiomas, poikiloderma, rosacea, scars, warts,
stretch marks, vulvodynia, and other vascular abnormalities in adults, children
and infants. The Vbeam(R)'s user-adjustable laser pulse duration (0.45-40msec)
features Candela's ultra-long pulse duration, the longest offered in a dye
laser. Most treatments of vascular lesions cost between $300 and $800, depending
on the length and the type of procedure. The combination of Vbeam(R) and
GentleLASE(R) offers the capability to treat a majority of leg veins in patients
seeking treatment. A predecessor product to Vbeam(R), the SPTL-1b, is currently
marketed in Japan, pending Ministry of Health approval of Vbeam(R). The Vbeam(R)
was initially cleared by the FDA for marketing in the U.S. in January 2000, and
has since received additional clearance for the treatment for facial wrinkles.

     ALEXLAZR(TM). A short-pulsed solid-state laser, which emits near-infrared
light for the non-invasive removal of tattoo pigments and pigmented lesions such
as freckles and Nevus of Ota, a bluish colored, non-vascular, pigmented lesion,
generally found among persons of Asian descent. The ALEXlazr(TM) was cleared by
the FDA for marketing for these uses in the U.S. in 1994. The ALEXlazr(TM) has a
fiber optic delivery system that produces an even beam distribution without hot
spots. Its wavelength maximizes beam penetration, providing positive results
with deeper pigments and is effective in the removal of most tattoo pigments.

     SMOOTHBEAM(TM). Introduced in March 2001, the Smoothbeam(TM) diode laser
heats collagen in the upper dermis, stimulating new collagen deposition for the
improvement of periorbital wrinkles. The system is small, easily portable and
available in four unique colors to ideally complement the practice environment.
Candela has since filed a separate application with the FDA for marketing
Smoothbeam(TM) for the treatment of back acne.

     C-BEAM(TM). Introduced in February 2002, the C-beam(TM) is a pulsed dye
laser used for the treatment of psoriasis, wrinkles and surgical scars. The
system has a very low risk profile; moreover, it is small in size, affordable,
and offers few treatment sessions for effective results.

SALES AND DISTRIBUTION

     We market and sell our products in more than 55 countries. Separate
regional executives in North America, Latin and South America, Japan, Asia,
Europe and the Middle East manage our marketing, selling and service activities
through a combination of direct personnel and a network of independent
distributors.

     The mix of direct sales and distributors varies by region. Generally, our
distributors enter into a 2-3 year exclusive agreement during which they
typically agree not to sell our competitors' products. Our sales strategy is to
choose the most productive and practicable distribution channel within each of
our geographic markets.

     We sell products in the U.S. primarily through our direct sales force to
our traditional customer base of dermatologists and cosmetic surgeons. Outside
the U.S. we sell our products in Western Europe, Japan, Latin and South America,
the Middle East, and the Pacific Rim through direct sales offices and
distribution relationships. We have a total of 61 employees in our direct sales
offices in Madrid, Frankfurt, Bangkok, Paris, Tokyo, Nagoya and Osaka. We have
established distribution relationships throughout Europe, Japan, Africa, Latin
and South America, and the Middle East. Outside the U.S. we currently utilize 49
distributors in 55 countries.

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     The following chart shows data relating to Candela's international
activities during each of the last three fiscal years by geographic region.
Revenue generated from regions other than the U.S. includes sales from Candela's
German, Spanish, French, and Japanese subsidiaries, as well as sales shipped
directly to international locations from the U.S.

<TABLE>
<CAPTION>
                                                 JUNE 29,        JUNE 30,        JULY 1,
REVENUES:                                          2002            2001           2000
                                                   ----            ----           ----
<S>                                              <C>              <C>           <C>
(000)
United States and Canada                         $ 28,801         $28,694       $ 36,353
Japan and the Far East                             20,157          20,935         24,005
Europe                                             11,693          14,451         14,608
United States shipments to other regions              896             692            424
                                                 --------        --------       --------
Total revenue                                    $ 61,547        $ 64,772       $ 75,390
                                                 ========        ========       ========
</TABLE>

SERVICE AND SUPPORT

     We believe that quick and effective delivery of service is important to our
customers. We strive to respond to service calls within 24 hours and to complete
the call within 48 hours to minimize practitioner disruption. Our principal
service center and parts depot is located at our Wayland, Massachusetts
headquarters. Parts depots are also located at our sales offices in Japan,
Thailand, Spain, Germany and France. Independent distributors also maintain
parts depots.

     We also believe a highly trained and qualified service staff is key to
product reliability. Distributors and subsidiaries have the primary
responsibility of servicing systems within their territories. Their service
personnel are required to attend formal training to become certified. In
addition, we have service and technical support staff in each of our markets
worldwide.

     Product maintenance and repair following the warranty period provides an
additional recurring source of revenue. Customers may elect to purchase a
service contract or purchase service on a time-and-materials basis. Our service
contracts vary by the type of systems and the level of services desired by the
customer and typically last for a 12 to 24 month period after the initial
warranty period expires. Initial warranties on most laser products cover parts
and service for twelve months. One of our products, the Vbeam(R) laser system,
comes with a standard 3-year warranty that includes maintenance and a specified
level of consumables.

     Candela emphasizes education and support of its customers. Our recommended
preventive maintenance, coupled with continuing technical education for service
representatives, helps to ensure product reliability. After a sale, a
Candela-qualified service engineer installs the system at the customer site by
performing validation tests to ensure the system is operating properly. Before
or after installation, a nurse clinician is available to provide the
practitioner with training and clinical support.

MANUFACTURING

     We design, manufacture, assemble, and test our branded products at our
Wayland, Massachusetts facility. Ensuring adequate and flexible production
capacity, continuous cost reduction, and superior product quality are top
priorities of our manufacturing organization. We achieve our goals by:

     o working closely with the research and development organization, including
       significant early involvement in product design,

     o continually improving our just-in-time manufacturing and inventory
       processes, and

     o effectively managing a limited number of the most qualified suppliers.

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     Our facility has ISO 9001 certification and EN 46001 registration. ISO 9001
certification provides guidelines for the quality of company systems associated
with the design, manufacture, installation, and service of company products. EN
46001 standards are European quality requirements specifically relating to the
design of medical devices.

     Our products are manufactured with standard components and subassemblies
supplied by subcontractors to our specifications. We purchase certain components
and subassemblies from a limited number of suppliers.

     If our suppliers are unable to meet our requirements on a timely basis, our
production could be interrupted until we obtain an alternative source of supply.
To date, we have not experienced significant delays in obtaining dyes, optical
and electro-optical components, electronic components, and raw materials for our
products.

RESEARCH AND DEVELOPMENT

     We believe that our advanced research and engineering activities are
crucial to maintaining and enhancing our business, and we are currently
conducting research on a number of applications. We believe that our in-house
research and development staff has demonstrated its ability to develop
innovative new products that meet evolving market needs. Our core competencies
include:

     o applied laser physics and technology

     o new imaging methods

     o tissue optics

     o photochemistry

     o laser-tissue interaction

     o clinical research

     o engineering and design of medical laser devices

     As we discover new technologies or applications with commercial potential,
we assemble a team to develop the new product or application in cooperation with
leading physicians and medical and research institutions. In the U.S. in
particular, we must receive FDA clearance before marketing new products or
applications.

     Our research and development team works with our operations group to design
our products for ease of manufacturing and assembly and with our marketing group
to respond to market opportunities. We believe this interaction between
functional groups facilitates the introduction of new products with the right
balance of features, performance, quality, and cost. To date our research and
development effort has relied primarily on internal development building on our
core technologies rather than through acquisition.

     In addition, Candela conducts joint research with physicians affiliated
with various medical and research institutions. One example of technology
developed through joint research is our DCD that was developed in conjunction
with the Beckman Laser Institute at the University of California, Irvine. We
anticipate continuing joint research and licensing arrangements with medical
research institutions.

CUSTOMERS

     We currently sell our products primarily to physicians. The majority of our
customers choose to finance their purchases through independent leasing
companies. Our sales are not dependent on any single customer or distributor,
and Candela continues to expand its distribution channel in the U.S. through a
direct sales force. Our customers are located in more than 55 countries. We
continue to target the estimated 6,000 electrologists in the U.S. as potential
customers for GentleLASEPlus(TM) for hair removal, positioning
GentleLASEPlus(TM) as an adjunct to traditional electrolysis methods.

                                       10
<PAGE>

COMPETITION

     Competition in the aesthetic and cosmetic laser industry is intense and
technological developments are expected to continue at a rapid pace. Although
there are several manufacturers of aesthetic and cosmetic lasers, we believe
Candela is one of only a few companies that offer a broad range of products able
to address multiple applications. Unlike Candela, few of our competitors focus
exclusively on the cosmetic and aesthetic laser market. We compete on the basis
of proprietary technology, product features, performance, service, price, and
reputation. Some of our competitors have greater financial, marketing, and
technical resources than we do; moreover, some competitors have developed, and
others may attempt to develop, products with applications similar to ours.

     We believe that many factors will affect our competitive position in the
future, including our ability to:

     o develop and manufacture new products that meet the needs of our markets

     o respond to competitive developments and technological changes

     o manufacture our products at lower cost

     o retain a highly qualified research and engineering staff

     o provide sales and service to a worldwide customer base

     o improve product reliability

PROPRIETARY RIGHTS

     We own several U.S. and foreign patents and have one foreign and four U.S.
patent applications pending to protect our rights in certain technical aspects
of our hair removal, benign vascular lesion, pigmented lesion, and other laser
systems. The expiration dates for our issued U.S. patents range from December 8,
2006 to December 6, 2019.

     In addition to our portfolio of patents issued and pending, we license
patented technology from third parties. We use DCD under a license agreement to
patent rights owned by the Regents of the University of California. In August
2000 we entered into an agreement to amend the license agreement whereby in
exchange for an exclusivity fee of approximately $1.7 million, which was prepaid
in full, Candela obtained exclusive license rights to the DCD (subject to
certain limited license rights of Cool Touch, Inc ("Cool Touch")) in the
following fields of use: procedures that involve skin resurfacing and
rejuvenation, vascular skin lesions, and laser hair removal. Cool Touch, Inc., a
subsidiary of New Star Technology, Inc., obtained a license to the DCD on a
co-exclusive basis with Candela, in certain narrower fields of use. Cool Touch
is restricted in its ability to assign its license rights to certain existing
competitors of Candela. Candela is entitled to one-half of all royalty income
payable to the Regents from Cool Touch. Under the amended agreement, Candela no
longer is required by the Regents to negotiate sublicenses to third parties.
However, Candela is entitled to one-half of all royalties due from any other
entity that licenses the DCD technology from the Regents in other fields of use.

     We rely primarily on a combination of patent, copyright, and trademark laws
to establish and protect our proprietary rights. We also rely on trade secret
laws, confidentiality procedures, and licensing arrangements to establish and
protect our technology rights. In addition, we seek to protect our proprietary
rights by using confidentiality agreements with employees, consultants,
advisors, and others. We cannot be certain that these agreements will adequately
protect our proprietary rights in the event of any unauthorized use or
disclosure, that our employees, consultants, advisors, or others will maintain
the confidentiality of such proprietary information, or that our competitors
will not otherwise learn about or independently develop such proprietary
information.

     Despite our efforts to protect our intellectual property, unauthorized
third parties may attempt to copy aspects of our products, to violate our
patents, or to obtain and use our proprietary information. In addition, the laws
of some foreign countries do not protect our intellectual property to the same
extent, as do the laws of the U.S. The loss of any material trademark, trade
name, trade secret, or copyright could hurt our business, results of operations,
and financial condition.

                                       11
<PAGE>

     We believe that our products do not infringe the rights of third parties.
However, we cannot be certain that third parties will not assert infringement
claims against us in the future or that any such assertion will not result in
costly litigation or require us to obtain a license to third party intellectual
property. In addition, we cannot be certain that such licenses will be available
on reasonable terms or at all, which could hurt our business, results of
operations, and financial condition.

GOVERNMENT REGULATION

     FDA'S PREMARKET CLEARANCE AND APPROVAL ("PMA") REQUIREMENTS. Unless an
exemption applies, each medical device that we wish to market in the U.S. must
receive either "510(k) clearance" or PMA in advance from the U.S. Food and Drug
Administration pursuant to the Federal Food, Drug, and Cosmetic Act. The FDA's
510(k) clearance process usually takes from four to twelve months, but it can
last longer. The process of obtaining PMA approval is much more costly, lengthy,
and uncertain and generally takes from one to three years or even longer. We
cannot be sure that 510(k) clearance or PMA approval will ever be obtained for
any product we propose to market.

     The FDA decides whether a device must undergo either the 510(k) clearance
or PMA approval process based upon statutory criteria. These criteria include
the level of risk that the agency perceives is associated with the device and a
determination whether the product is a type of device that is similar to devices
that are already legally marketed. Devices deemed to pose relatively less risk
are placed in either class I or II, which requires the manufacturer to submit a
pre-market notification requesting 510(k) clearance, unless an exemption
applies. The pre-market notification must demonstrate that the proposed device
is "substantially equivalent" in intended use and in safety and effectiveness to
a legally marketed "predicate device" that is either in class I, class II, or is
a "pre-amendment" class III device (i.e., one that was in commercial
distribution before May 28, 1976) for which the FDA has not yet decided to
require PMA approval.

     After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance. The FDA
requires each manufacturer to make this determination in the first instance, but
the FDA can review any such decision. If the FDA disagrees with a manufacturer's
decision not to seek a new 510(k) clearance, the agency may retroactively
require the manufacturer to submit a pre-market notification requiring 510(k)
clearance. The FDA also can require the manufacturer to cease marketing and/or
recall the modified device until 510(k) clearance is obtained. We have modified
some of our 510(k) cleared devices, but have determined that, in our view, new
510(k) clearances are not required. We cannot be certain that the FDA would
agree with any of our decisions not to seek 510(k) clearance. If the FDA
requires us to seek 510(k) clearance for any modification, we also may be
required to cease marketing and/or recall the modified device until we obtain a
new 510(k) clearance.

     Devices deemed by the FDA to pose the greatest risk such as
life-sustaining, life-supporting, or implantable devices, or deemed not
substantially equivalent to a legally marketed predicate device, are placed in
class III. Such devices are required to undergo the PMA approval process in
which the manufacturer must prove the safety and effectiveness of the device to
the FDA's satisfaction. A PMA application must provide extensive pre-clinical
and clinical trial data and also information about the device and its components
regarding, among other things, manufacturing, labeling, and promotion. After
approval of a PMA, a new PMA or PMA supplement is required in the event of a
modification to the device, its labeling, or its manufacturing process.

     A clinical trial may be required in support of a 510(k) submission or PMA
application. Such trials generally require an Investigational Device Exemption
("IDE") application approved in advance by the FDA for a limited number of
patients, unless the product is deemed a nonsignificant risk device eligible for
more abbreviated IDE requirements. The IDE application must be supported by
appropriate data, such as animal and laboratory testing results. Clinical trials
may begin once the IDE application is approved by the FDA and the appropriate
institutional review boards are at the clinical trial sites.

     To date, the FDA has deemed our products to be class II devices eligible
for the 510(k) clearance process. We believe that most of our products in
development will receive similar treatment. However, we cannot be certain that
the FDA will not deem one or more of our future products to be a class III
device and impose the more burdensome PMA approval process.

     PERVASIVE AND CONTINUING FDA REGULATION. A host of regulatory requirements
apply to marketed devices such as our laser products, including labeling
regulations, the Quality System Regulation (which

                                       12
<PAGE>

requires manufacturers to follow elaborate design, testing, control,
documentation, and other quality assurance procedures), the Medical Device
Reporting regulation (which requires that manufacturers report to the FDA
certain types of adverse events involving their products), and the FDA's general
prohibition against promoting products for unapproved or "off label" uses. Class
II devices such as ours also can have special controls such as performance
standards, post-market surveillance, patient registries, and FDA guidelines that
do not apply to class I devices. Unanticipated changes in existing regulatory
requirements or adoption of new requirements could hurt our business, financial
condition, and results of operations.

     We are subject to inspection and market surveillance by the FDA for
compliance with regulatory requirements. If the FDA finds that we have failed to
comply with applicable requirements, the agency can institute a wide variety of
enforcement actions. The FDA sometimes issues a public warning letter, but also
may pursue more drastic remedies, such as refusing our requests for 510(k)
clearance or PMA approval of new products, withdrawing product approvals already
granted to us, requiring us to recall products, or asking a court to require us
to pay civil penalties or criminal fines, adhere to operating restrictions, or
close down our operations. Ultimately, criminal prosecution is available to the
FDA as punishment for egregious offenses. Any FDA enforcement action against us
could hurt our business, financial condition, and results of operation.

     OTHER U.S. REGULATION. We also must comply with numerous federal, state,
and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control, and
hazardous substance disposal. We cannot be sure that we will not be required to
incur significant costs to comply with such laws and regulations in the future
or that such laws or regulations will not hurt our business, financial
condition, and results of operations.

     FOREIGN REGULATION. International sales are subject to foreign government
regulation, the requirements of which vary substantially from country to
country. The time required to obtain approval by a foreign country may be longer
or shorter than that required for FDA approval, and the requirements may differ.
Companies are now required to obtain the CE Mark prior to sale of certain
medical devices within the European Union ("EU"). During this process, the
sponsor must demonstrate compliance with ISO manufacturing and quality
requirements.

     Candela and its products may also be subject to other federal, state,
local, or foreign regulations relating to health and safety, environmental
matters, quality assurance, and the like. Candela's compliance with laws that
regulate the discharge of materials into the environment or otherwise relate to
the protection of the environment does not have a material effect on its ongoing
operations. Candela has not made any material expenditures for environmental
control facilities.

PRODUCT LIABILITY AND WARRANTIES

     Our products are generally covered by a one-year warranty, with an option
to purchase extended service contracts after the time of sale, except for our
Vbeam(R) product which is covered by a standard three-year warranty. We set
aside a reserve based on anticipated warranty claims. We believe such reserves
to be adequate, but in the event of a major product problem or recall, such
reserves may be inadequate to cover all costs, and such an event could have a
material adverse effect on our business, financial condition, and results of
operations.

     Our business involves the inherent risk of product liability claims. We
maintain appropriate product liability insurance with respect to our products
with a coverage limit of $13 million in the aggregate. We cannot be certain that
with respect to our current or future products, such insurance coverage will
continue to be available on terms acceptable to us or that such coverage will be
adequate for liabilities that may actually be incurred.

THE SKIN CARE CENTERS

     In June 1996, we began an effort to own and operate skin care centers
offering cosmetic laser treatments utilizing our equipment along with other
cosmetic services traditionally offered by high-end spas. We pursued this
strategy by purchasing an operating spa in Boston in 1996. In March 1997, we
opened a new facility in Scottsdale, Arizona, with no pre-existing customer
base. We subsequently decided to reduce our focus on our skin care center
efforts. We closed our Scottsdale, Arizona facility in

                                       13
<PAGE>

the quarter ended December 27, 1997, and in January of 1999 ceased to offer
aesthetic laser procedures at our Boston skin care center, although we continue
to offer health and beauty services from this location. We have subleased the
Scottsdale facility as of the third quarter of fiscal 2002 and we are actively
seeking buyers to assume the lease and purchase the assets of the Boston
facility in order to concentrate on our core business of manufacturing and
servicing advanced aesthetic laser systems.

EMPLOYEES

     As of July 31, 2002, we employed 310 people in the following areas of our
organization:

     o 29 in research, development, and engineering

     o 45 in manufacturing and quality assurance

     o 30 in service positions

     o 39 in sales and marketing

     o 27 in finance and administrative positions and all others

     o 79 in our clinic and health spa subsidiary, including both full and
       part-time employees

     o 61 in our international sales and service subsidiaries

NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations". SFAS No. 141 revises the standards of business
combinations by eliminating the use of the pooling-of-interests method and
requiring that all business combinations be accounted for using the purchase
method of accounting. SFAS No. 141 also changes the criteria to recognize
intangible assets apart from goodwill. The provisions of SFAS No. 141 are
effective for all business combinations initiated after June 30, 2001. The
adoption of this statement had no impact on the Company's financial position and
results of operations.

     In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 revises the standards of accounting for goodwill and
indefinite lived intangible assets by replacing the regular amortization of
these assets with the requirement that they are reviewed annually or more
frequently if impairment indicators arise, for impairment. Separable intangible
assets that have finite lives will continue to be amortized over their useful
lives. The accounting standards of SFAS No. 142 are effective for fiscal years
beginning after December 15, 2001 (fiscal 2003). The Company does not believe
the adoption of this statement will have any impact on the earnings or financial
position of the Company.

     In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets". SFAS No. 143 addresses
financial accounting and reporting for the retirement obligation of an asset.
SFAS No. 143 states that companies should recognize the asset retirement cost,
at its fair value, as part of the cost of the asset and classify the accrued
amount as a liability in the condensed consolidated balance sheet. The asset
retirement liability is then accreted to the ultimate payout as interest
expense. The initial measurement of the liability would be subsequently updated
for revised estimates of the discounted cash outflows. SFAS No. 143 will be
effective for fiscal years beginning after June 15, 2002 (fiscal 2003). The
Company does not believe the adoption of SFAS No. 143 will have an impact on its
financial position, results of operations, or cash flows.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No.
121 by requiring one accounting model to be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 will be effective for fiscal years beginning after
December 15, 2001 (fiscal 2003). The Company does not believe the adoption of
SFAS No. 144 will have an impact on its financial position, results of
operations, or cash flows.

                                       14
<PAGE>

ITEM 2. PROPERTIES.

     We lease a facility totaling approximately 35,000 square feet for our
operations in Wayland, Massachusetts, which is located approximately 20 miles
west of Boston. The lease on this facility was amended in April 2002 to extend
the expiration date to March 2006. Candela's management believes that its
current facilities are suitable and adequate for our near-term needs.

     Candela's subsidiaries currently lease the following facilities:

     o Candela Skin Care Center of Scottsdale, Inc., 7,555 square feet located
       in Scottsdale, AZ. The lease on this facility is for a period of ten
       years, expiring on June 30, 2006, with a provision for two five-year
       extensions. On November 1, 2001, the Scottsdale facility was subleased,
       although sublease payments were not scheduled to begin until April 2002.
       As part of the sub-lease agreement, Candela will pay one month of rent in
       each of fiscal years 2003, 2004 and 2005. These future rent payments have
       been accounted for in our restructuring reserve.

     o Candela Skin Care Center of Boston, Inc., 20,728 square feet located in
       Boston, MA. The lease on this facility is for a period of 15 years, and
       commenced on June 1, 1994.

     o Candela KK. - Tokyo office. The lease on this 400 square meter facility
       is for a period of 3 years, expiring on May 23, 2005.

     o Candela KK - Osaka office. The lease on this 91 square meter facility is
       for a period of 2 years, expiring on May 31, 2003.

     o Candela KK - Nagoya office. The lease on this 49 square meter facility is
       for a period of 2 years, expiring on November 14, 2002.

     o Candela Iberica, S.A., 191.25 square meters located in Madrid, Spain. The
       lease contract is automatically extended each month until written notice
       is given.

     o Candela Deutschland GmbH. The office is located in Neu Isenberg, Germany.
       The lease is for a period of 5 years and expires on October 31, 2006.

     o Candela France SARL. The office is located in Gometz le Chatel, France.
       The lease is for a period of 9 years, expiring on May 1, 2011.

     o Bangkok, Thailand. The Manager of Pacific Rim operations resides and
       operates out of a leased residence in Bangkok, Thailand.

ITEM 3. LEGAL PROCEEDINGS.

     During Candela's second fiscal quarter ended December 29, 2001, Candela
notified Physicians Sales and Service, Inc. ("PSS"), a division of PSS World
Medical, Inc., that Candela was terminating its exclusive Distribution Agreement
between Candela and PSS due to PSS's failure to pay outstanding invoices
totaling approximately $2.3 million. These invoices arose in connection with
Candela's shipment of various units of equipment to PSS pursuant to firm
purchase orders received by Candela from PSS. These invoices arose as of June
30, 2001, and were due and payable in full on or before September 30, 2001.
After receiving the Notice of Termination from Candela, PSS filed a lawsuit
against Candela in Middlesex County Superior Court in Massachusetts as well as a
demand for arbitration pursuant to the mandatory arbitration clause in the
distribution agreement. Both of PSS's complaints allege breach of contract, a
violation of the Massachusetts Unfair Trade Practices Act, breach of the
covenant of good faith and fair dealing, promissory estoppel and intentional
interference with contractual relations resulting from Candela's termination of
its distribution agreement with PSS. PSS's motion for injunctive relief was
denied, and Candela's motion to stay the lawsuit pending the outcome of
arbitration was allowed. Candela has filed counterclaims in the arbitration for
breach of contract and unfair competition, among other claims, and seeking
payment on all outstanding invoices. The arbitration proceeding is in discovery
at this time. Candela believes that PSS's claims are without merit and intends
to vigorously prosecute its claim for payment of outstanding amounts and to
defend against all of PSS's claims in the arbitration proceeding.

                                       15
<PAGE>

Candela is carrying a reserve of $300,000 included in its reserve for bad debts
as of the end of fiscal year 2002 to safeguard against the risk of some
nonpayment by PSS. Since PSS has challenged its obligation to pay any of the
$2.3 million of invoices at issue in the arbitration, if Candela were to lose
the arbitration proceeding, such loss would have a material adverse effect on
Candela.

     From time to time, Candela is a party to various legal proceedings
incidental to its business. Apart from any possible adverse outcome in the PSS
arbitration, Candela believes that none of the legal proceedings which are
presently pending will have a material adverse effect upon our financial
position, results of operations or liquidity.

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

    No matter was submitted to a vote of our security holders during the fourth
quarter of the fiscal year covered by this report.













                                       16
<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
        MATTERS.

     Candela's common stock trades on The NASDAQ Stock Market under the symbol
     "CLZR."

     At September 24, 2002, there were approximately 372 holders of record of
the Company's common stock and the closing sale price of the Company's common
stock was $4.20.

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

<TABLE>
<CAPTION>
                              HIGH       LOW
<S>                           <C>        <C>
FISCAL 2002
      First Quarter           $ 7.35     $5.00
      Second Quarter            5.14      3.45
      Third Quarter             5.45      3.55
      Fourth Quarter            6.10      4.37

FISCAL 2001
      First Quarter           $13.44     $9.25
      Second Quarter           10.69      5.25
      Third Quarter             9.13      5.38
      Fourth Quarter            7.98      6.50
</TABLE>

DIVIDEND POLICY

     The Company has never paid a cash dividend and has no present intention to
pay cash dividends in the foreseeable future. The Board of Directors currently
intends to retain any future earnings for use in the Company's business.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

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

                                       17
<PAGE>

<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)                                    FOR THE YEAR ENDED
                                                                         ------------------
                                               JUNE 29,         JUNE 30,        JULY 1,         JULY 3,        JUNE 27,
CONSOLIDATED STATEMENT OF OPERATIONS DATA:       2002             2001           2000            1999            1998
                                                 ----             ----           ----            ----            ----
<S>                                           <C>             <C>            <C>             <C>            <C>
REVENUE:
Lasers and other products                     $   45,957      $   48,376     $   60,340      $   46,708     $    25,917
Product related service                           12,731          12,498         11,320           8,801           8,405
Skin care centers                                  2,859           3,899          3,730           3,079           2,703
                                              -----------    ------------    -----------    ------------   -------------
Total revenue                                     61,547          64,772         75,390          58,588          37,025

COST OF SALES:
Lasers and other products                         20,396          21,208         22,703          18,623          11,272
Product related service                           11,205           7,676          6,802           5,715           6,954
Skin care centers                                  2,318           2,412          2,377           2,125           2,481
                                              -----------    ------------    -----------    ------------   -------------
Total cost of sales                               33,919          31,296         31,882          26,463          20,707

GROSS PROFIT:
Lasers and other products                         25,561          27,167         37,637          28,085          14,645
Product related service                            1,526           4,822          4,518           3,086           1,451
Skin care centers                                    541           1,487          1,353             954             222
                                              -----------    ------------    -----------    ------------   -------------
Total gross profit                                27,628          33,476         43,508          32,125          16,318

OPERATING EXPENSES:
Research and development                           4,644           5,575          4,822           3,998           2,399
Selling, general & administrative                 27,031          24,076         21,669          17,891          15,271
Restructuring charge (credit) (note)                (693)          1,113              0               0           2,609
                                              -----------    ------------    -----------    ------------   -------------
Total operating expenses                          30,982          30,764         26,491          21,889          20,279
                                              -----------    ------------    -----------    ------------   -------------

Income (loss) from operations                     (3,354)          2,712         17,017          10,236          (3,961)

OTHER INCOME (EXPENSE):
Interest income                                      547           1,652          1,427             115              42
Interest expense                                    (476)           (437)          (482)           (492)           (235)
Other income (expense)                               487              33            242              (3)           (123)
                                              -----------    ------------    -----------    ------------   -------------
Total other income (expense)                         558           1,248          1,187            (380)           (316)
                                              -----------    ------------    -----------    ------------   -------------
INCOME (LOSS) BEFORE INCOME TAXES                 (2,796)          3,960         18,204           9,856          (4,277)

Provision for (benefit from) income taxes           (642)          1,433          3,641           2,365             175
                                              -----------    ------------    -----------    ------------   -------------
NET INCOME (LOSS)                              $  (2,154)     $    2,547     $   14,563     $     7,491     $    (4,452)
                                              ===========    ============    ===========    ============   =============
Basic earnings (loss) per share                $   (0.21)     $     0.23     $     1.33     $      0.91     $     (0.54)
Diluted earnings (loss) per share              $   (0.21)     $     0.22     $     1.19     $      0.82     $     (0.54)
Weighted average shares outstanding               10,053          10,928         10,932           8,250           8,219

Adjusted weighted average shares
  outstanding                                     10,053          11,521         12,190           9,179           8,219
</TABLE>

<TABLE>
<CAPTION>
                                                                         FOR THE YEAR ENDED
                                                                         ------------------
CONSOLIDATED BALANCE SHEET DATA:               JUNE 29,       JUNE 30,        JULY 1,         JULY 3,        JUNE 27,
                                                2002            2001           2000            1999           1998
                                                -----           -----          -----           -----          ----
<S>                                             <C>             <C>            <C>             <C>            <C>
Cash and cash equivalents                       $ 19,628        $ 32,318       $ 34,863        $ 10,055         $ 1,615
Working capital                                   35,134          42,310         44,255          13,186           2,639
Total assets                                      67,891          74,018         73,164          36,451          22,604
Long-term debt                                     2,115           2,815          3,034           3,181             887
Total stockholders' equity                        40,853          46,975         48,563          14,023           5,395
Total liabilities and stockholders' equity        67,891          74,018         73,164          36,451          22,604
</TABLE>

                                       18
<PAGE>

Note: The following events are related to the restructuring reserve:

During the quarter ended December 27, 1997, a restructuring charge was recorded
and a reserve established in the amount of $2.6 million resulting from the
closure of the skin care center located in Scottsdale, Arizona.

During the quarter ended June 30, 2001, an additional restructuring charge of
$1.1 million was recorded resulting from the change in estimate of future
sublease payments regarding the skin care center located in Scottsdale, Arizona
and an asset impairment charge of $640,000 was recorded for the long-lived
assets, principally, leasehold improvements, located at the skin care center
located in Boston, Massachusetts.

During the quarter ended March 30, 2002, the restructuring charge for the skin
care center in Scottsdale, Arizona was reduced by $693,000 to reflect the
reduction in future lease payments due to the sub-lease of that property.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

     ALL STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION CONTAINED IN THE
FOLLOWING DISCUSSION RELATIVE TO MARKETS FOR OUR PRODUCTS AND TRENDS IN REVENUE,
GROSS MARGINS AND ANTICIPATED EXPENSE LEVELS, AS WELL AS OTHER STATEMENTS
INCLUDING WORDS SUCH AS "ANTICIPATE", "BELIEVE", "PLAN", "ESTIMATE", "EXPECT",
AND "INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND
ECONOMIC RISKS AND UNCERTAINTIES, AND OUR ACTUAL RESULTS OF OPERATIONS MAY
DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO THOSE DISCUSSED IN "CAUTIONARY STATEMENTS" AS WELL AS OTHER RISKS AND
UNCERTAINTIES REFERENCED IN THIS ANNUAL REPORT ON FORM 10-K.

OVERVIEW

     We research, develop, manufacture, market, sell and service lasers used to
perform aesthetic and cosmetic procedures. We sell our lasers principally to
medical practitioners. Candela markets its products directly and through a
network of distributors to end users. Our traditional customer base includes
plastic and cosmetic surgeons and dermatologists. More recently, we have
expanded our sales to a broader group of practitioners consisting of general
practitioners and certain specialists including obstetricians, gynecologists,
and general and vascular surgeons. We derive our revenue from: the sale of
lasers and other products; the provision of product related services; and the
operations of our skin care center.

     Domestic and international product sales are generated principally through
our direct sales force based in the U.S. and seven international offices. Prior
to fiscal 1999, a relatively small portion of our sales came through our network
of independent distributors. In December 1998, we entered into an exclusive
distributorship arrangement with Physician Sales and Service (PSS). Sales to
distributors for the years ended June 30, 2001 and July 1, 2000, increased as a
result of this arrangement. In fiscal year 2002, we announced our decision to
terminate our relationship with PSS and use a direct sales force to service the
sales channels previously serviced by that distributor.

     We typically assemble products in our Wayland, Massachusetts, facility in
the quarter in which they are shipped, and backlog has not been significant. We
experience some seasonal reduction of our product sales in the quarter ending in
September due to the summer holiday schedule of physicians and their patients.

     All product shipments include a standard 12-month parts and service
warranty except for Vbeam products which include a standard 3-year warranty. The
anticipated cost associated with the warranty coverage is accrued at the time of
shipment as a cost of sales charged to product related service costs. Any costs
associated with product installation are also recognized as costs of product
related service. Both such anticipated and actual costs have no associated
revenue and therefore reduce the gross profit from product related service
revenue.

     Product related service revenue consists of revenue from maintenance and
repair services and the sale of spare parts and consumables. We derive revenue
from extended service contracts, which are typically for a 12 or 24 month
period, and the revenue is initially deferred and recognized over the life of
the service contract. In addition, we provide on-site service worldwide on a
time-and-materials basis directly or through our distributors.

                                       19
<PAGE>

     In June 1996, we began an effort to own and operate skin care centers
offering cosmetic laser treatments utilizing our equipment, along with providing
other cosmetic services traditionally offered by high-end spas. We pursued this
strategy by purchasing an existing spa in Boston in 1996 and by opening a new
skin care center in Scottsdale, Arizona in March 1997. We subsequently decided
to reduce our focus on our skin care center efforts and to renew our commitment
to our core aesthetic and cosmetic laser business. During fiscal 1998, we closed
the Scottsdale facility because it had failed to generate any material revenue,
recorded a restructuring charge, and established a reserve in the amount of $2.6
million representing the anticipated cost associated with this closure, less
assumed future sublease payments. During fiscal 2001, we recorded an additional
restructuring charge of $1,113,000 as no sub-lessee had been located for the
facility. During fiscal 2002, the Scottsdale property was subleased and the
restructuring charge was reversed by $693,000. In January 1999, we ceased to
offer aesthetic laser procedures at our Boston skin care center, but we continue
to provide personal care and health and beauty services from this location. We
are actively seeking buyers to assume the lease and purchase the assets of the
Boston facility. During the quarter ended June 30, 2001, the Company determined
that impairment indicators existed relating to its skin care/health spa
services. In accordance with Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
Be Disposed Of," the Company evaluated the recoverability of its spa-related
long-lived assets, and determined that the estimated future undiscounted cash
flows were below the carrying value of the spa-related long-lived assets at June
30, 2001. Accordingly, the Company charged off all remaining undepreciated
long-lived spa-related assets of approximately $640,000.

     International revenue, consisting of sales from our subsidiaries in
Germany, France, Spain, and Japan, and sales shipped directly to international
locations from the U.S., during the fiscal years ended June 29, 2002, June 30,
2001, and July 1, 2000 represented 53%, 55% and 52% of total sales,
respectively.

     Our fiscal year consists of the 52 or 53-week period ending on the Saturday
closest to June 30 of each year. The years ended June 29, 2002, June 30, 2001
and July 1, 2000 each contained 52 weeks.

SIGNIFICANT ACCOUNTING POLICIES

     The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to revenue recognition, bad debts, inventories, warranty obligations,
and income taxes. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
and the related judgments and estimates affect the preparation of our
consolidated financial statements.

     REVENUE RECOGNITION. Our policy is to recognize revenue upon shipment of
our products to our customers and the fulfillment of all contractual terms and
conditions, pursuant to the guidance provided by Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements (SAB 101), issued by the
Securities and Exchange Commission. Judgments are required in evaluating the
credit worthiness of our customers. Credit is not extended to customers and
revenue is not recognized until collectibility is reasonably assured.

     ALLOWANCE FOR DOUBTFUL ACCOUNTS. Our policy is to maintain allowances for
estimated losses resulting from the inability of our customers to make required
payments. Credit limits are established through a process of reviewing the
financial history and stability of each customer. Where appropriate, we obtain
credit rating reports and financial statements of customers when determining or
modifying their credit limits. We regularly evaluate the collectibility of our
trade receivable balances based on a combination of factors. When a customer's
account balance becomes past due, we initiate dialogue with the customer to
determine the cause. If it is determined that the customer will be unable to
meet its financial obligation to us, such as in the case of a bankruptcy filing,
deterioration in the customer's operating results or financial position or other
material events impacting their business, we record a specific allowance to
reduce the related receivable to the amount we expect to recover given all
information presently available.

                                       20
<PAGE>

     As of June 29, 2002, our accounts receivable balance of $23,827,000 is
reported net of allowances for doubtful accounts of $981,000. We believe our
reported allowances at June 29, 2002, are adequate. If the financial conditions
of those customers were to deteriorate, however, resulting in their inability to
make payments, we may need to record additional allowances, which would result
in additional selling, general and administrative expenses being recorded for
the period in which such determination was made.

     INVENTORY RESERVES. As a designer and manufacturer of high technology
equipment, we are exposed to a number of economic and industry factors that
could result in portions of our inventory becoming either obsolete or in excess
of anticipated usage. These factors include, but are not limited to,
technological changes in our markets, our ability to meet changing customer
requirements, competitive pressures in products and prices, and the availability
of key components from our suppliers. Our policy is to establish inventory
reserves when conditions exist that suggest that our inventory may be in excess
of anticipated demand or is obsolete based upon our assumptions about future
demand for our products and market conditions. We regularly evaluate the ability
to realize the value of our inventory based on a combination of factors
including the following: historical usage rates, forecasted sales or usage,
product end of life dates, estimated current and future market values and new
product introductions. Purchasing requirements and alternative usage avenues are
explored within these processes to mitigate inventory exposure. When recorded,
our reserves are intended to reduce the carrying value of our inventory to its
net realizable value. As of June 29, 2002, our inventory of $12,118,000 is
stated net of inventory reserves of $1,804,000. If actual demand for our
products deteriorates, or market conditions are less favorable than those that
we project, additional inventory reserves may be required.

     PRODUCT WARRANTIES. Our products are sold with warranty provisions that
require us to remedy deficiencies in quality or performance of our products over
a specified period of time at no cost to our customers. Our policy is to
establish warranty reserves at levels that represent our estimate of the costs
that will be incurred to fulfill those warranty requirements at the time that
revenue is recognized. We believe that our recorded liability at June 29, 2002,
is adequate to cover our future cost of materials, labor and overhead for the
servicing of our products sold through that date. If actual product failures or
material or service delivery costs differ from our estimates, our warranty
liability would need to be revised accordingly.

     CONTINGENCIES. The Company is subject to proceedings, lawsuits and other
claims. The Company assesses the likelihood of any adverse judgments or outcomes
to these matters as well as potential ranges of probable losses. A determination
of the amount of reserves required, if any, for these contingencies is made
after careful analysis of each individual issue. The required reserves may
change in the future due to new developments in each matter or changes in
approach such as a change in settlement strategy in dealing with these matters.
The Company records charges for the costs it anticipates incurring in connection
with litigation and claims against the Company when management can reasonably
estimate these costs.

     RESTRUCTURING. The Company records restructuring charges incurred in
connection with consolidation or relocation of operations, exited business
lines, or shutdowns of specific sites. These restructuring charges, which
reflect management's commitment to a termination or exit plan that will begin
within twelve months, are based on estimates of the expected costs associated
with site closure, legal matters, contract terminations, or other costs directly
related to the restructuring. If the actual cost incurred exceeds the estimated
cost, an additional charge to earnings will result. If the actual cost is less
than the estimated cost, a credit to earnings will be recognized.

                                       21
<PAGE>

RESULTS OF OPERATIONS

     The following tables set forth selected financial data for the periods
indicated, expressed as percentages.

<TABLE>
<CAPTION>
                                                                   FOR THE YEAR ENDED
                                                                  --------------------
                                                       JUNE 29,           JUNE 30,          JULY 1,
CONSOLIDATED STATEMENT OF OPERATIONS DATA:               2002               2001             2000
                                                         ----               ----             ----
<S>                                              <C>                <C>               <C>
REVENUE MIX:
Lasers and other products                                74.7%              74.7%           80.0%
Product related service                                  20.7%              19.3%           15.0%
Skin care centers                                         4.6%               6.0%            4.9%
                                                 --------------    ---------------    ------------
Total revenue                                           100.0%             100.0%          100.0%

OPERATING RATIOS:
GROSS PROFIT:
Lasers and other products                                55.6%              56.2%           62.4%
Product related service                                  12.0%              38.6%           39.9%
Skin care centers                                        18.9%              38.1%           36.3%
                                                 --------------    ---------------    ------------
Total gross profit                                       44.9%              51.7%           57.7%

OPERATING EXPENSES:
Research and development                                  7.5%               8.6%            6.4%
Selling, general & administrative                        43.9%              37.2%           28.7%
Restructuring charge                                     (1.1%)              1.7%            0.0%
                                                 --------------    ---------------    ------------
Total operating expenses                                 50.3%              47.5%           35.1%

Income from operations                                   (5.4%)              4.2%           22.6%
Total other income (expense)                              0.9%               1.9%            1.5%
                                                 --------------    ---------------    ------------
INCOME (LOSS) BEFORE INCOME TAXES                        (4.5%)              6.1%           24.1%

Provision for (benefit from) income taxes                (1.0%)              2.2%            4.8%
                                                 --------------    ---------------    ------------
NET INCOME (LOSS)                                        (3.5%)              3.9%           19.3%
                                                 ==============    ===============    ============
</TABLE>

FISCAL YEAR ENDED JUNE 29, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001

    REVENUE. Total revenue declined 5% to $61.5 million in fiscal 2002 from
$64.8 million in fiscal 2001. International revenue, consisting of sales from
our subsidiaries in Germany, Spain, France and Japan, and sales shipped directly
to international locations from the U.S., was 53% of total revenue for fiscal
2002 in comparison to 55% for fiscal 2001. Laser and product revenue decreased
5% to $45.9 million in fiscal 2002 from $48.4 million in fiscal 2001. Lower unit
sales of the GentleLASE(R) and AlexLAZR(TM) products contributed approximately
$6.3 million to the decrease in product sales from fiscal 2001 to 2002 but were
offset by an increase in Vbeam(R) unit sales of approximately $3.4 million and
an increase in Smoothbeam(TM) sales of $1.2 million. Product-related service
revenue remained relatively constant at $12.5 million in fiscal 2001 and $12.7
million in fiscal 2002. Skin care center revenue decreased 28.2% to $2.8 million
in fiscal 2002 compared to $3.9 million in 2001, due primarily to decreases in
customer traffic. We expect that increases in unit sales of Vbeam(R),
Smoothbeam(TM) and C-beam(TM) products will outpace continued declines in
average selling prices and unit volumes of the GentleLASE(R) and AlexLAZR(TM)
products during fiscal 2003.

     GROSS PROFIT. Gross profit decreased to $27.6 million or 44.9% of
revenue in fiscal 2002 from $33.5 million or 51.7% of revenue in fiscal 2001
mainly as a result of increased warranty costs associated with the Vbeam
products and the decline in margins at the skin care center. Gross profit on
lasers and other products decreased slightly from $27.2 million or 56% in
fiscal 2001 to $25.6 million or 56% in fiscal 2002. Gross profit for product
related service revenue in fiscal 2002 decreased to $1.5 million or 12% of
revenue

                                       22
<PAGE>

compared to $4.8 million or 39% of revenue for fiscal 2001. The decrease in
product related service gross profit is due primarily to increased warranty
costs associated with the Vbeam products. The increase in Vbeam warranty costs
was largely due to the one-time replacement of a component of the system and
these costs are not expected to reoccur in fiscal 2003. Skin care center gross
profit for fiscal year 2002 decreased to $0.5 million or 19% of revenue in
comparison to $1.5 million or 38% of revenue for fiscal year 2001 resulting from
a combination of a decrease in the number of services performed and the sale of
retail inventory at reduced margins.

     RESEARCH AND DEVELOPMENT EXPENSE. Research and development spending for
fiscal 2002 decreased 17% to $4.6 million, from $5.6 million for fiscal 2001.
The decrease in research and development expense reflects reductions in
personnel and other cost cutting initiatives.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 12.0% to $27.0 million in fiscal 2002, from
$24.1 million in fiscal 2001. An aggressive commission plan to rebuild our
domestic sales force contributed approximately $2 million to the increase in
selling expenses in fiscal 2002 over fiscal 2001. An increase of $300,000 for
bad debt expense related to the PSS dispute, and a $300,000 increase in market
studies also contributed to higher general and administrative costs in fiscal
2002 over fiscal 2001. Selling, general and administrative expenses were 44% of
revenue in fiscal 2002 compared to 37% for fiscal 2001.

     IMPAIRMENT CHARGE. During the quarter ended June 30, 2001, the Company
determined that impairment indicators existed relating to its skin care/health
spa services. In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of," the Company
evaluated the recoverability of its spa-related long-lived assets. The Company
determined that the estimated future undiscounted cash flows were below the
carrying value of the spa-related long-lived assets at June 30, 2001.
Accordingly, the Company wrote off as selling, general and administrative
expense all remaining spa-related long-lived assets, principally leasehold
improvements, of $640,000.

     RESTRUCTURING CHARGE. During the quarter ended December 27, 1997, a
restructuring charge was recorded and a reserve established in the amount of
$2.6 million, which assumed a sublease of the premises, resulting from the
closure of the skin care center located in Scottsdale, Arizona. During fiscal
2001, we incurred an additional charge of $1.1 million because we had been
unable to sublease the property. During fiscal 2002, we secured a sublease for
the property and reversed the restructuring reserve by $693,000 which represents
the future sublease payments to be received from the sublessee.

     OTHER INCOME/EXPENSE. For the fiscal year ended June 29, 2002, total other
income declined to $0.6 million from $1.2 million for the fiscal year ended June
30, 2001. Interest income decreased approximately $1.1 million in fiscal 2002 as
compared to fiscal 2001 due to lower levels of cash invested at lower interest
rates. This decrease was partially offset by a $400,000 gain arising from the
effects of currency fluctuations.

     INCOME TAXES. The provision for income taxes results from a combination of
activities of both the domestic and foreign subsidiaries of the Company. The
Company recorded a 23% effective tax rate for the year ended June 29, 2002,
compared to the year ended June 30, 2001, in which the Company recorded a 36%
tax rate. The benefit from income taxes for the year ended June 29, 2002,
includes a tax benefit for taxable losses in the U.S. offset by a tax provision
calculated for taxable income generated in Japan and Spain at rates in excess of
the U.S. statutory tax rate.

FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JULY 1, 2000

    REVENUE. Total revenue declined 14% to $64.8 million in fiscal 2001 from
$75.4 million in fiscal 2000. International revenue, consisting of sales from
our subsidiaries in Germany, Spain, France and Japan, and sales shipped directly
to international locations from the U.S., was 55% of total revenue for fiscal
2001 in comparison to 52% for fiscal 2000. Laser and product revenue decreased
19.8% to $48.4 million in fiscal 2001 from $60.3 million in fiscal 2000. This
decrease was due to a shortfall in the second quarter of fiscal 2001, caused by
a lack of orders from a major US distributor, combined with a decline in the
average selling price of the GentleLASE(TM), our highest volume selling laser.
Product-related service revenue increased 10.6% to $12.5 million in fiscal 2001
from $11.3 million in fiscal 2000. This increase was attributable to increased
shipments of consumables used with our Vbeam(R), GentleLASE(R), and
Smoothbeam(TM) products as well as an increase in the sale of extended service
contracts. Skin care

                                       23
<PAGE>

center revenue increased 5.4% to $3.9 million in fiscal 2001 compared to $3.7
million in 2000, due to increased marketing and promotional activities for our
Boston Spa.

     GROSS PROFIT. Gross profit decreased to $33.5 million or 51.7% of
revenue in fiscal 2001 from $43.5 million or 57.7% of revenue in fiscal 2000
mainly as a result of an increase in sales discounts, effects of a
fluctuating foreign currency market, and sales of lower margin systems, in
comparison to sales of higher margin GentleLASE(R) and Vbeam(R) systems
during fiscal 2000. Gross profit on lasers and other products decreased to
$27.2 million or 56% in fiscal 2001 compared to $37.6 million or 62% in
fiscal 2000. Gross profit for product related service revenue in fiscal 2001
slightly increased to $4.8 million or 39% of revenue compared to $4.5 million
or 40% of revenue for fiscal 2000. Skin care center gross profit for fiscal
year 2001 increased to $1.5 million or 38% of revenue in comparison to $1.4
million or 36% of revenue for fiscal year 2000 resulting from a combination
of an increased number of services and emphasis placed on cost control within
the center.

     RESEARCH AND DEVELOPMENT EXPENSE. Research and development spending for
fiscal 2001 increased 16% to $5.6 million, from $4.8 million for fiscal 2000.
The increase in research and development expense reflects efforts to develop new
products such as the Smoothbeam(TM) and the C-beam(TM).

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 11.0% to $24.1 million in fiscal 2001, from
$21.7 million in fiscal 2000. This increase reflects substantial marketing
expenditures incurred to support the launches of new lasers, combined with legal
expenses due to litigation settlements throughout the first half of the year.
Selling costs increased due to sponsoring preceptorships for future clientele.
Selling, general and administrative expenses were 37% of revenue in fiscal 2001
compared to 29% for fiscal 2000.

     IMPAIRMENT CHARGE. During the quarter ended June 30, 2001, the Company
determined that impairment indicators existed relating to its skin care/health
spa services. In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of," the Company
evaluated the recoverability of its spa-related long-lived assets. The Company
determined that the estimated future undiscounted cash flows were below the
carrying value of the spa-related long-lived assets at June 30, 2001.
Accordingly, the Company wrote off as selling, general and administrative
expense all remaining spa-related long-lived assets, principally leasehold
improvements, of $640,000.

     RESTRUCTURING CHARGE. During the quarter ended December 27, 1997, a
restructuring charge was recorded and a reserve established in the amount of
$2.6 million, which assumed a sublease of the premises, resulting from the
closure of the skin care center located in Scottsdale, Arizona. During fiscal
2001, we incurred an additional charge of $1.1 million due to a change in future
sublease payments.

     OTHER INCOME/EXPENSE. For the fiscal years ended June 30, 2001 and July 1,
2000, total other income remained constant at $1.2 million. Interest income
increased due to high levels of cash invested and was offset by losses arising
from the effects of currency fluctuations, in particular, the Japanese yen.

     INCOME TAXES. The provision for income taxes results from a combination of
activities of both the domestic and foreign subsidiaries of the Company. The
Company recorded a 36% effective tax rate for the year ended June 30, 2001,
compared to the year ended July 1, 2000, in which the Company recorded a 20% tax
rate due to reductions in the valuation allowance against the deferred tax
asset.

     LIQUIDITY AND CAPITAL RESOURCES

     Cash used by operating activities amounted to $7.3 million for fiscal 2002
compared to cash generated by operations of $3.0 million for fiscal 2001. Cash
used in operating activities reflects the effects of a net loss for fiscal 2002
combined with an increase in accounts receivable balances and decreases in
accounts payable balances as compared to fiscal 2001. Cash used in investing
activities totaled $1.1 million for fiscal 2002 compared to $1.6 million for
fiscal 2001 resulting from a decrease in capital expenditures made to support
our implementation of Oracle ERP software. Cash used in financing activities
amounted to $5.1 million in 2002 in comparison to $3.2 million for 2001. This
use of cash is due to an increase in the number of shares repurchased on the
open market during the two fiscal years. The Company also made principal
payments on its long-term debt in the amount of $370,000 during fiscal 2002.

                                       24
<PAGE>

     On October 15, 1998, we issued eight-year, 9.75% subordinated term notes to
three investors in the aggregate amount of $3.7 million, secured by the
Company's assets. In addition, we issued warrants to purchase 555,000 shares of
common stock to the note holders that have an exercise price of $4.00 per
warrant, which yield 1.5 shares of common stock. The relative fair value
ascribed to the warrants was $836,000 and was recorded as a component of
Additional Paid-In Capital in Stockholders Equity. The relative fair value of
the debt was recorded as $2,864,000. The debt is being accreted to face value
using the interest method over eight years, which will result in interest
expense of $836,000 over the eight-year period in addition to the 9.75% stated
interest rate. As of June 29, 2002, a total of $361,100 has been accreted to the
notes, resulting in a long-term liability balance of $2.1 million and a
short-term balance of $740,000; furthermore, a total of $374,200 of interest
expense has been recorded in fiscal year 2002 in connection with these notes.

     The notes, which become due in October 2006, require quarterly interest
payments and permit early repayment with a decreasing penalty percentage
through October 31, 2004. Given the lower current interest rates and the rate
on the loan, the Company is giving consideration to repaying the entire debt
as of November 1, 2002. If the Company were to take advantage of the early
repayment option on November 1, 2002, we would be required to accrete the
remaining debt balance at that time, resulting in a non-cash interest expense
of $440,502. We would also be required to pay a cash penalty of $236,800 and
the outstanding principal balance of $2.96 million. Such a repayment would
result in cash interest expense savings of $352,423 over the remaining term
of debt net of the cash penalty.

     The note agreement contains restrictive covenants establishing maximum
leverage, certain minimum ratios, and minimum levels of net income. As of June
29, 2002, the Company is in violation of minimum net worth levels, for which a
waiver has been received for the fourth quarter of fiscal 2002.

     Outstanding contractual obligations of the Company are reflected in the
following table:

<TABLE>
<CAPTION>
(in thousands)
                                                    Less than                                      After
                                       Total          1 year       1-3 years      4-5 years       5 years
<S>                                    <C>          <C>            <C>            <C>             <C>
Long-term debt                          $  3,330        $   740       $  2,220        $   370        $     0
Operating leases                           6,258          1,287          3,237          1,099            635
                                        --------       --------       --------       --------        -------
Total contractual cash obligations      $  9,588       $  2,027       $  5,457       $  1,469        $   635
</TABLE>

     The Company also maintains a renewable $5,000,000 revolving credit
agreement with a major bank with interest at the bank's base rate. Any
borrowings outstanding under the line of credit are due on demand or according
to a payment schedule established at the time funds are borrowed. The line of
credit is unsecured. The agreement contains restrictive covenants limiting the
establishment of new liens, and the purchase of margin stock. No amounts were
outstanding under the line of credit as of June 29, 2002.

     We believe that cash balances will be sufficient to meet anticipated cash
requirements. However, we cannot be sure that we will not require additional
capital beyond the amounts currently forecasted by us, nor that any such
required additional capital will be available on reasonable terms, if at all, as
it becomes required.

CAUTIONARY STATEMENTS

     This Annual Report on Form 10-K contains forward-looking statements
including, without limitation, statements concerning the future of the
industry, product development, business strategy (including the possibility
of future acquisitions), anticipated operational and capital expenditure
levels, continued acceptance and growth of our products, and dependence on
significant customers and suppliers. This Annual Report on Form 10-K contains
forward-looking statements that we have made based on our current
expectations, estimates and projections about our industry, operations, and
prospects, not historical facts. We have made these forward-looking
statements pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995. These statements can be identified by the use of
forward-looking terminology such as "may," "will," "believe," "expect,"
"anticipate," "estimate," "continue" or other similar words. These statements
discuss future expectations, and may contain projections of results of
operations or of financial condition or state other forward-looking
information. When considering forward-looking statements, you should keep in
mind the cautionary statements in this Annual Report on Form 10-K. The
cautionary statements noted below and other factors noted throughout this
Annual Report on

                                       25
<PAGE>

Form 10-K could cause our actual results to differ significantly from those
contained in any forward-looking statement. We may not update or publicly
release the results of these forward-looking statements to reflect events or
circumstances after the date hereof.

     BECAUSE WE DERIVE MORE THAN HALF OF OUR REVENUE FROM INTERNATIONAL SALES,
INCLUDING APPROXIMATELY ONE-THIRD OF OUR REVENUE FROM JAPAN AND THE ASIA-PACIFIC
MARKETPLACE IN FISCAL 2002, WE ARE SUSCEPTIBLE TO CURRENCY FLUCTUATIONS,
NEGATIVE ECONOMIC CHANGES TAKING PLACE IN JAPAN AND THE ASIA-PACIFIC
MARKETPLACE, AND OTHER RISKS ASSOCIATED WITH CONDUCTING BUSINESS OVERSEAS.

     We sell more than half of our products and services outside the U.S. and
Canada. International sales, consisting of sales from our subsidiaries in
Germany, Spain, France and Japan, and sales shipped directly to international
locations from the U.S., accounted for 53% of our revenue for fiscal year 2002,
and we expect that they will continue to be significant. As a result, a major
part of our revenues and operating results could be adversely affected by risks
associated with international sales. In particular, significant fluctuations in
the exchange rates between the U.S. dollar and foreign currencies could cause us
to lower our prices and thus reduce our profitability, or could cause
prospective customers to push out orders to later dates because of the increased
relative cost of our products in the aftermath of a currency devaluation or
currency fluctuation. Other risks associated with international sales that we
currently face or have faced in the past include:

     o longer payment cycles common in foreign markets

     o failure to obtain or significant delays in obtaining necessary import or
       foreign regulatory approvals for our products

     o difficulties in staffing and managing our foreign operations.

     THE FAILURE TO OBTAIN ALEXANDRITE RODS FOR THE GENTLELASE(R) FROM OUR SOLE
SUPPLIER WOULD IMPAIR OUR ABILITY TO MANUFACTURE And SELL GENTLELASE(R).

     We use Alexandrite rods to manufacture the GentleLASE(R), which accounts
for a significant portion of our total revenues. We depend exclusively on
Litton Airtron Synoptics to supply these rods, for which no alternative
supplier meeting our quality standards exists. We cannot be certain that
Litton will be able to meet our future requirements at current prices or at
all. To date, we have been able to obtain adequate supplies of Alexandrite
rods in a timely manner, but any extended interruption in our supplies could
hurt our results.

     DISAPPOINTING QUARTERLY REVENUE OR OPERATING RESULTS COULD CAUSE THE PRICE
OF OUR COMMON STOCK TO FALL.

     Our quarterly revenue and operating results are difficult to predict and
may swing sharply from quarter to quarter. Historically, our first fiscal
quarter has typically had the least amount of revenue in any quarter of our
fiscal year. The results of the first quarter are directly impacted by the
seasonality of the purchasing cycle.

     If our quarterly revenue or operating results fall below the expectations
of investors or public market analysts, the price of our common stock could fall
substantially. Our quarterly revenue is difficult to forecast for many reasons,
some of which are outside of our control, including the following:

     MARKET SUPPLY AND DEMAND

     o potential increases in the level and intensity of price competition
       between our competitors and us

     o potential decrease in demand for our products

     o possible delays in market acceptance of our new products.

     CUSTOMER BEHAVIOR

     o changes in or extensions of our customers' budgeting and purchasing
       cycles

                                       26
<PAGE>

     o changes in the timing of product sales in anticipation of new product
       introductions or enhancements by us or our competitors.

     COMPANY OPERATIONS

     o absence of significant product backlogs

     o our effectiveness in our manufacturing process

     o unsatisfactory performance of our distribution channels, service
       providers, or customer support organizations

     o timing of any acquisitions and related costs.

     THE COST OF CLOSING OUR REMAINING SKIN CARE CENTER MAY BE HIGHER THAN
MANAGEMENT HAS ESTIMATED TO DATE, AND HIGHER ACTUAL COSTS WOULD NEGATIVELY
IMPACT OUR OPERATING RESULTS.

     We have renewed our commitment to expand and diversify our core cosmetic
and surgical laser equipment business. As part of this refocus, we decided to
reduce our focus on our efforts to own and operate centers which would offer
cosmetic laser treatments utilizing our equipment, along with providing other
cosmetic services traditionally offered by high-end spas. Although we are
actively seeking a buyer for our skin care center in Boston, Massachusetts, we
cannot be certain that a sale or sublease of the facility will be completed on
favorable terms or at all. We have established a reserve to accrue for the
anticipated costs of terminating the Skin Care Center in Scottsdale, Arizona.
During fiscal 2002, we were able to secure a sub-lease of this facility and
consequently reversed a portion of the reserve to account for future lease
payments being made by the sub-lessee.

     OUR FAILURE TO RESPOND TO RAPID CHANGES IN TECHNOLOGY AND INTENSE
COMPETITION IN THE LASER INDUSTRY COULD MAKE OUR LASERS OBSOLETE.

     The aesthetic and cosmetic laser equipment industry is subject to rapid and
substantial technological development and product innovations. To be successful,
we must be responsive to new developments in laser technology and new
applications of existing technology. Our financial condition and operating
results could be hurt if our products fail to compete favorably in response to
such technological developments, or we are not agile in responding to
competitors' new product introductions or product price reductions. In addition,
we compete against numerous companies offering products similar to ours, some of
which have greater financial, marketing, and technical resources than we do. We
cannot be sure that we will be able to compete successfully with these companies
and our failure to do so could hurt our business, financial condition, and
results of operations.

     LIKE OTHER COMPANIES IN OUR INDUSTRY, WE ARE SUBJECT TO A REGULATORY REVIEW
PROCESS AND OUR FAILURE TO RECEIVE NECESSARY GOVERNMENT CLEARANCES OR APPROVALS
COULD AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND REMAIN COMPETITIVE.

     The types of medical devices that we seek to market in the U.S. generally
must receive either "510(k) clearance" or "PMA approval" in advance from the
U.S. Food and Drug Administration (FDA) pursuant to the Federal Food, Drug, and
Cosmetic Act. The FDA's 510(k) clearance process usually takes from four to
twelve months, but it can last longer. The process of obtaining PMA approval is
much more costly and uncertain and generally takes from one to three years or
even longer. To date, the FDA has deemed our products eligible for the 510(k)
clearance process. We believe that most of our products in development will
receive similar treatment. However, we cannot be sure that the FDA will not
impose the more burdensome PMA approval process upon one or more of our future
products, nor can we be sure that 510(k) clearance or PMA approval will ever be
obtained for any product we propose to market.

     Many foreign countries in which we market or may market our products have
regulatory bodies and restrictions similar to those of the FDA. Particularly,
for example, we are awaiting Ministry of Health approval in Japan for the sale
of the Vbeam(R). We cannot be certain that we will be able to obtain (or
continue to obtain) any such government approvals or successfully comply with
any such foreign regulations in a timely and cost-effective manner, if at all,
and our failure to do so could adversely affect our ability to sell our
products.

                                       27
<PAGE>

     WE HAVE MODIFIED SOME OF OUR PRODUCTS WITHOUT FDA CLEARANCE. THE FDA COULD
RETROACTIVELY DECIDE THE MODIFICATIONS WERE IMPROPER AND REQUIRE US TO CEASE
MARKETING AND/OR RECALL THE MODIFIED PRODUCTS.

     Any modification to one of our 510(k) cleared devices that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance. The FDA
requires every manufacturer to make this determination in the first instance,
but the FDA can review any such decision. We have modified some of our marketed
devices, but we believe that new 510(k) clearances are not required. We cannot
be certain that the FDA would agree with any of our decisions not to seek 510(k)
clearance. If the FDA requires us to seek 510(k) clearance for any modification,
we also may be required to cease marketing and/or recall the modified device
until we obtain a new 510(k) clearance.

     ACHIEVING COMPLETE COMPLIANCE WITH FDA REGULATIONS IS DIFFICULT, AND IF WE
FAIL TO COMPLY, WE COULD BE SUBJECT TO FDA ENFORCEMENT ACTION.

     We are subject to inspection and market surveillance by the FDA to
determine compliance with regulatory requirements. The FDA's regulatory scheme
is complex, especially the Quality System Regulation ("QSR"), which requires
manufacturers to follow elaborate design, testing, control, documentation, and
other quality assurance procedures. This complexity makes complete compliance
difficult to achieve. Also, the determination as to whether a QSR violation has
occurred is often subjective. If the FDA finds that we have failed to comply
with the QSR or other applicable requirements, the agency can institute a wide
variety of enforcement actions, including a public warning letter or other
stronger remedies, such as:

     o fines, injunctions, and civil penalties against us

     o recall or seizure of our products

     o operating restrictions, partial suspension, or total shutdown of our
       production

     o refusing our requests for 510(k) clearance or PMA approval of new
       products

     o withdrawing product approvals already granted

     o criminal prosecution

     CLAIMS BY OTHERS THAT OUR PRODUCTS INFRINGE THEIR PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHTS COULD PREVENT US FROM MANUFACTURING AND SELLING
SOME OF OUR PRODUCTS OR REQUIRE US TO INCUR SUBSTANTIAL COSTS FROM LITIGATION OR
DEVELOPMENT OF NON-INFRINGING TECHNOLOGY.

     Our industry has been characterized by frequent litigation regarding patent
and other intellectual property rights. Patent applications are maintained in
secrecy in the U.S. until such patents are issued and are maintained in secrecy
for a period of time outside the U.S. Accordingly, we can conduct only limited
searches to determine whether our technology infringes any patents or patent
applications of others. Any claims of patent infringement would be
time-consuming and could:

     o result in costly litigation

     o divert our technical and management personnel

     o cause product shipment delays

     o require us to develop non-infringing technology

     o require us to enter into royalty or licensing agreements.

                                       28
<PAGE>

     Although patent and intellectual property disputes in the laser industry
have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and often require the
payment of ongoing royalties, which could hurt our gross margins. In addition,
we cannot be sure that the necessary licenses would be available to us on
satisfactory terms, or that we could redesign our products or processes to avoid
infringement, if necessary. Accordingly, an adverse determination in a judicial
or administrative proceeding, or the failure to obtain necessary licenses, could
prevent us from manufacturing and selling some of our products, which could hurt
our business, results of operations, and financial condition. On the other hand,
we may have to start costly and time consuming litigation in order to enforce
our patents, to protect trade secrets, and know-how owned by us or to determine
the enforceability, scope, and validity of the proprietary rights of others.

     WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF PRODUCT LIABILITY CLAIMS.

     There are various risks of physical injury to the patient when using our
lasers for aesthetic and cosmetic treatments. Injuries often result in product
liability or other claims being brought against the practitioner utilizing the
device and us. The costs and management time we would have to spend in defending
or settling any such claims, or the payment of any award in connection with such
claims, could hurt our business, results of operations, and financial condition.
Although we maintain product liability insurance, we cannot be certain that our
policy will provide sufficient coverage for any claim or claims that may arise,
or that we will be able to maintain such insurance coverage on favorable
economic terms.

     WE MAY BE UNABLE TO ATTRACT AND RETAIN MANAGEMENT AND OTHER PERSONNEL WE
NEED TO SUCCEED.

     The loss of any of our senior management or other key research,
development, sales, and marketing personnel, particularly if lost to
competitors, could hurt our future operating results. Our future success will
depend in large part upon our ability to attract, retain, and motivate highly
skilled employees. We cannot be certain that we will attract, retain, and
motivate sufficient numbers of such personnel.

     OUR FAILURE TO MANAGE FUTURE ACQUISITIONS AND JOINT VENTURES EFFECTIVELY
MAY DIVERT MANAGEMENT ATTENTION FROM OUR CORE BUSINESS AND CAUSE US TO INCUR
ADDITIONAL DEBT, LIABILITIES OR COSTS.

     We may acquire businesses, products, and technologies that complement or
expand our business. We may also consider joint ventures and other collaborative
projects. We may not be able to:

     o identify appropriate acquisition or joint venture candidates

     o successfully negotiate, finance, or integrate any businesses, products,
       or technologies that we acquire

     o successfully manage any joint ventures or collaborations.

     Furthermore, the integration of any acquisition or joint venture may divert
management time and resources. If we fail to manage these acquisitions or joint
ventures effectively, we may incur debts or other liabilities or costs which
could harm our operating results or financial condition. While we from time to
time evaluate potential acquisitions of businesses, products, and technologies,
consider joint ventures and other collaborative projects, and anticipate
continuing to make these evaluations, we have no present understandings,
commitments, or agreements with respect to any acquisitions or joint ventures.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     As of June 29, 2002, the Company's cash and certain debt are exposed to
interest rate risk. We are exposed to foreign currency risk due to accounts
receivable from our foreign subsidiaries.

     We have cash equivalents that primarily consist of commercial paper,
overnight repurchase agreements and money market accounts. We believe that any
near term changes in interest rates will be immaterial to any potential losses
in future earnings, cash flow and fair values.

                                       29
<PAGE>

     We currently have long-term debt with a face value of $2.1 million with the
interest rate fixed at the time of issuance. The long-term debt becomes due in
October 2006. We believe that any near term changes in interest rates will be
immaterial to any potential losses in future earnings, cash flow and fair
values.

     The Company has foreign subsidiaries in Japan, Spain, France and Germany
and is exposed to movements in the exchange rate between the Euro, Japanese Yen
and the U.S. Dollar. On June 29, 2002, the Euro closed at 1.008 Euro to 1.00
U.S. Dollar. The same rate was 1.178 Euro to U.S. Dollar on June 30, 2001. The
Japanese Yen closed at 119.49 to 1.00 U.S. Dollar on June 29, 2002 compared to
124.77 Yen to 1.00 U.S. Dollar on June 30, 2001. Net exchange gains resulting
from foreign currency translations amounted to $661,000 for fiscal 2002.

     As of June 29, 2002, the Company held foreign currency forward contracts
with notional values totaling approximately $1.9 million for the delivery of
1,089,534 Euro and 98,539,000 Yen which have maturities prior to September 27,
2002. The aggregate fair value of our forward foreign exchange contracts
outstanding was $80,948 as of June 29, 2002. The net fair value is computed by
subtracting the value of the contracts using the year-end forward rates (the
notional value) from the value of the forward contracts computed at the
contracted exchange rates. We believe that any near term changes in currency
rates will be immaterial to any potential losses in future earnings, cash flow
and fair values because any adjustments to fair value are largely offset by the
change in the fair value of the foreign currency intercompany receivables.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     Financial statements and supplementary data are included herein and are
indexed under Item 15 (a) (1)-(2).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.








                                       30
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.

    The current directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME                               AGE      POSITION
----                               ---      --------
<S>                                <C>      <C>
Gerard E. Puorro                    55      President, Chief Executive Officer and Director

Kenneth D. Roberts                  69      Chairman of the Board of Directors

Douglas W. Scott                    56      Director

Nancy Nager, RN, BSN, MSN           51      Director

F. Paul Broyer                      53      Senior Vice President,  Finance and  Administration
                                              and Chief Financial Officer

David A. Davis                      47      Vice  President,   Global  Marketing  and  Business Development

Dennis S. Herman                    52      Vice President, North American Sales

William H. McGrail                  41      Vice President, Development and Operations

Toshio Mori                         50      Vice President, President of Candela KK

Robert J. Wilber                    44      Vice President, European Operations

Dr. Kathleen McMillan               46      Vice President, Research

Darrell W. Simino                   60      Treasurer and Corporate Controller
</TABLE>

     Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors are duly elected and qualified,
subject to earlier removal by the Board of Directors. There are no family
relationships among any of the executive officers or directors of the Company.

     Mr. Puorro was appointed a Director of the Company in September 1991. Mr.
Puorro has been President and Chief Executive Officer of the Company since April
1993. From April 1989 until April 1993, he was Senior Vice President and Chief
Financial Officer of the Company. He was elected Chief Operating Officer in
December 1992. Prior to joining the Company, he was Vice President and
Controller at Massachusetts Computer Corporation.

     Mr. Roberts has been a Director of the Company since August 1989 and
Chairman of the Board of Directors since November 1991. From November 1992 to
June 1995, Mr. Roberts was employed on a part-time basis as Vice President and
Chief Financial Officer of Foster Miller, Inc., an engineering services company.
Since December 1988, he has been an independent management consultant. From July
1986 to December 1988, Mr. Roberts was Vice President, Treasurer and Chief
Financial Officer of Massachusetts Computer Corporation, a manufacturer of
micro-supercomputers. Prior to that time and for many years, he was Senior Vice
President and Treasurer of Dynatech Corporation (now named Acterna Corporation),
a provider of diversified high technology products and services.

     Mr. Scott has been a Director of the Company since September 1991. Since
1985, Mr. Scott has been a partner with Phildius, Kenyon & Scott, a health care
consulting and investment firm. Mr. Scott is

                                       31
<PAGE>

currently President, Chief Operating Officer, and a Director of Avitar, Inc., a
publicly held health care company. Mr. Scott also served as Chief Executive
Officer of Avitar from December 1989 through April 1991.

     Ms. Nager was appointed a Director of the Company in February 1999. From
1990 until the present, Ms. Nager has been the Principal and CEO of Specialized
Health Management, Inc., a privately held behavioral health care corporation.
Ms. Nager also founded and directs Specialized HomeCare, Inc., Specialized
Billing Services, Inc. and Seniorlink, an information, referral and resource
corporation. Prior to that, Ms. Nager was the Chief Operating Officer of Charles
River Hospital, a private psychiatric facility in Wellesley, Massachusetts,
where she previously held a number of positions in nursing and administration
from 1976 through 1990. Ms. Nager also provided corporate consulting to the
hospital's parent company Community Care Systems, Inc. from 1990 through 1992.

     Mr. Broyer was appointed Senior Vice President, Finance and Administration,
Chief Financial Officer, and Treasurer in July 1998. Mr. Broyer joined the
Company in October 1996 as Vice President and Chief Financial Officer. Prior to
joining the Company, Mr. Broyer held the position of Vice President Finance at
Integrated Genetics from 1994 to 1996. From 1987 until 1994, Mr. Broyer was
Corporate Controller for Laserdata, Inc. and held earlier positions with Avatar
Technologies and Data General Corporation.

     Mr. Davis joined the Company as Vice President, Global Marketing and
Business Development in September 2001. Prior to joining the Company, Mr. Davis
was Vice-President, Marketing for Hologix, Inc., a manufacturer and developer of
digital radiographic and bone densitometry products. From 1996 to 1997, Mr.
Davis was Vice President, Sales and Marketing for Vital Images, Inc. a software
company. From 1984 to 1995, Mr. Davis held Sales and Marketing management
positions at ATL Ultrasound.

     Mr. Herman was appointed Vice President, North American Sales in October
2001. Mr. Herman joined the Company in February 1999 as Eastern Regional Sales
Manager. Prior to joining the Company, Mr. Herman held the position of Vice
President of Sales at Palomar Medical Technologies, a medical device company,
from 1997 to 1998. From 1991 until 1997, Mr. Herman was National Sales Manager
of Spectrum Medical Technologies was later acquired by Palomar Medical
Technologies.

     Mr. McGrail was named Vice President, Development and Operations in May
2000. Previously, Mr. McGrail served in the position of Vice President of
Development Engineering since July 1998. Mr. McGrail also served in the position
of Director of Engineering since August 1994. From 1987 to 1992, he held the
positions of Senior Software Engineer and Software Design Engineer. Prior to
joining Candela, Mr. McGrail was employed with Raytheon Corporation.

     Mr. Mori was named Vice President, President of Candela KK in July 1998,
after serving as President and Representative Director of Candela KK since
September 1996. Previously, Mr. Mori held the positions of Director of Candela
KK from September 1992 to September 1996, and General Manager from September
1989 to September 1992. From 1976 to 1989, he was employed by Sansui Electric
Co. Ltd. in Tokyo.

     Mr. Wilber was appointed Vice President, European Operations in February
1999, after serving as Vice President, Worldwide Service since August 1997.
Previously, Mr. Wilber held the position of Director of Worldwide Service from
October 1993 to August 1997. He has been with the Company since September of
1989 and was previously a Finance Group Director. From 1989 to 1992 Mr. Wilber
held the positions of International Accounting Manager, Customer Service
Manager, and Director of Financial Planning and Analysis. Prior to joining the
Company, Mr. Wilber held positions at Sony Corporation of America, Massachusetts
Computer Corporation, and National Semiconductor/Data Terminal Systems.

     Dr. McMillan was appointed Vice President, Research in February 2001, after
serving for seven years as Director of Bioscience for Candela's Research
Department. Dr. McMillan's experience includes three years as Director of the
Otolaryngology Research Center at New England Medical Center, and a position as
Assistant Professor of Otolaryngology at Tufts University School of Medicine in
Boston, Massachusetts.

     Mr. Simino was appointed Treasurer in September 2000, and has held the
position of Corporate Controller, since November 1999. Mr. Simino joined the
Company in July 1996 as Manager, Financial Reporting. Prior to joining the
Company, Mr. Simino held the position of Controller of The Lance Corporation
from 1979 to 1996. From 1973 to 1979, Mr. Simino was a Division Controller for
Helix Technology Corporation.

                                       32
<PAGE>

SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and officers, and persons
who own more than 10% of a registered class of the Company's equity
securities, to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission (the "SEC"). Such
persons ("Reporting Persons") are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. Based on its review
of the copies of such filings, if any, and written representations from
certain Reporting Persons received by it with respect to the fiscal year
ended June 29, 2002 the Company believes that all Reporting Persons complied
with all Section 16(a) filing requirements in the fiscal year ended June 29,
2002, except that Mr. David A. Davis failed to timely file an Initial
Statement of Beneficial Ownership of Securities on Form 3.

ITEM 11. EXECUTIVE COMPENSATION.

     The following table sets forth certain information with respect to the
compensation paid or accrued by the Company for services rendered to the
Company, in all capacities, for the fiscal year ended June 29, 2002 by its Chief
Executive Officer (the "CEO") and the four other most highly paid executive
officers of the Company (and a former executive officer), in each case whose
total salary and bonus exceeded $100,000 during the fiscal year ended June 29,
2002 (collectively, the "Named Executive Officers").

Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                              LONG-TERM
                                                              ANNUAL                        COMPENSATION
                                                          COMPENSATION(1)                      AWARDS(2)
                                                        ------------------                -----------------
                                                                                             UNDERLYING         ALL OTHER
              NAME AND PRINCIPAL                                                              OPTIONS/         COMPENSATION
                   POSITION                      YEAR     SALARY($)     BONUS ($)              SARS(#)              ($)
-------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>           <C>       <C>                 <C>                <C>
Gerard E. Puorro                                2002          292,193        --                   --            7,047(3)
  Chief Executive Officer,                      2001          280,077    38,941 (8)           80,000            5,705(3)
  President and Director                        2000          254,807   125,044 (8)           30,000            6,697(3)

Dennis S. Herman                                2002          275,868        --               20,000            1,937(4)
 Vice President,                                2001          165,298        --                   --            2,150(4)
  North American Sales                          2000          203,730        --                   --            2,325(4)

Toshio Mori                                     2002          228,062    29,413(8)                --               --
  Vice President,                               2001          229,630    47,390(8)            15,000               --
  President of Candela KK                       2000          220,436    37,221(8)                --               --

Robert J. Wilber                                2002          199,320        --                   --            4,103(5)
  Vice President of                             2001          141,653    19,743(8)            40,000            2,235(5)
   European Operations                          2000          139,560    63,243(8)            30,000            2,275(5)

William B. Kelley                               2002          196,753        --                   --               --
 (former)  Vice President, North                2001          172,746    24,018 (8)           40,000            4,447(6)
  American Sales and Service                    2000          167,130    77,125 (8)           15,000            3,566(6)

F. Paul Broyer                                  2002          166,061        --                   --            6,882(7)
  Chief Financial Officer, Senior Vice          2001          150,640    21,785(8)            40,000            6,155(7)
  President, Finance and Administration         2000          141,731    63,659(8)            30,000            3,788(7)
</TABLE>

                                       33
<PAGE>

     (1) Excludes perquisites and other personal benefits, the aggregate annual
amount of which for each officer was less than the lesser of $50,000 or 10% of
the total salary and bonus reported for the named executive officer.
     (2) The Company did not grant any restricted stock awards or stock
appreciation rights ("SARs") or make any long-term incentive plan pay-outs
during the fiscal years ended June 29, 2002, June 30, 2001, or July 1, 2000.
     (3) For fiscal 2002, includes $3,771 in matching contributions by the
Company pursuant to the Company's 401(k) Plan, $1,570 in life insurance premiums
paid by the Company for the benefit of Mr. Puorro, and $1,706 for a Company
provided automobile. For fiscal 2001, includes $3,776 in matching contributions
by the Company pursuant to the Company's 401(k) Plan, $1,369 in life insurance
premiums paid by the Company for the benefit of Mr. Puorro, and $560 for a
Company provided automobile. For fiscal 2000, includes $3,591 in matching
contributions by the Company pursuant to the Company's 401(k) Plan, $1,373 in
life insurance premiums paid by the Company for the benefit of Mr. Puorro, and
$1,733 for a Company provided automobile.
     (4) For fiscal 2002, includes $1,550 in matching contributions by the
Company pursuant to the Company's 401(k) Plan and $387 for a Company provided
automobile. For fiscal 2001, includes $1,850 in matching contributions by the
Company pursuant to the Company's 401(k) Plan and $300 for a Company provided
automobile. For fiscal 2000, includes $2,325 in matching contributions by the
Company pursuant to the Company's 401(k) Plan and $200 for a Company provided
automobile.
     (5) For fiscal 2002, includes $1,509 in matching contributions by the
Company pursuant to the Company's 401(k) Plan, $156 in life insurance premiums
paid by the Company for the benefit of Mr. Wilber, and $2,438 for a Company
provided automobile. For fiscal 2001, includes $1,504 in matching contributions
by the Company pursuant to the Company's 401(k) Plan, $219 in life insurance
premiums paid by the Company for the benefit of Mr. Wilber and $512 for a
Company provided automobile. For fiscal 2000, includes $2,052 in matching
contributions by the Company pursuant to the Company's 401(k) Plan and $223 in
life insurance premiums paid by the Company for the benefit of Mr. Wilber.
     (6) For fiscal 2001, includes $3,746 in matching contributions by the
Company pursuant to the Company's 401(k) Plan, $284 in life insurance premiums
paid by the Company for the benefit of Mr. Kelley, and $416 for a Company
provided automobile. For fiscal 2000, includes $3,310 in matching contributions
by the Company pursuant to the Company's 401(k) Plan and $256 in life insurance
premiums paid by the Company for the benefit of Mr. Kelley.
     (7) For fiscal 2002, includes $3,564 in matching contributions by the
Company pursuant to the Company's 401(k) Plan and $312 in life insurance
premiums paid by the Company for the benefit of Mr. Broyer and $3,006 for a
Company provided automobile. For fiscal 2001, includes $3,321 in matching
contributions by the Company pursuant to the Company's 401(k) Plan and $193 in
life insurance premiums paid by the Company for the benefit of Mr. Broyer and
$2,640 for a Company provided automobile. For fiscal 2000, includes $2,987 in
matching contributions by the Company pursuant to the Company's 401(k) Plan and
$252 in life insurance premiums paid by the Company for the benefit of Mr.
Broyer and $551 for a Company provided automobile.
      (8) Incentive bonus approved by the Board of Directors, based on Company
results for the fiscal year.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                                      Potential Realizable
                                                                                                    Value at Assumed Annual
                                                                                                     Rates of Stock Prices
                                                Individual Grants                                   Appreciation for Options
                             ----------------------------------------------------------------------------------------------------
                                         Percent of Total
                                          Options/Granted     Exercise of
                           Options         to Employees        Base Price      Expiration
        Name               Granted        in Fiscal Year       ($/Share)          Date               5%               10%
---------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>           <C>                  <C>              <C>                <C>             <C>
Dennis S. Herman           20,000              7.10%              4.99          10/3/11            $62,763         $159,055
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

     Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
Company's Common Stock, as the case may be, over the term of the options. These
numbers are calculated based on rules promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
growth. Actual gains, if any,

                                       34
<PAGE>

on stock option exercises and Common Stock holdings are dependent on the timing
of such exercise and the future performance of the Company's Common Stock. There
can be no assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the individuals.

OPTION EXERCISES AND FISCAL YEAR END VALUES

     The following table sets forth information with respect to options to
purchase the Company's Common Stock granted under the 1989 Stock Plan and 1998
Stock Plan including (i) the number of shares purchased upon exercise of options
in the most recent fiscal year, (ii) the net value realized upon such exercise,
(iii) the number of unexercised options outstanding at June 29, 2002, and (iv)
the value of such unexercised options at June 29, 2002:

<TABLE>
<CAPTION>
                      SHARES
                     ACQUIRED       VALUE     NUMBER OF UNEXERCISED OPTIONS    VALUE OF UNEXERCISED IN-THE-MONEY
                       UPON       REALIZED         AT JUNE 29, 2002(#)          OPTIONS AT JUNE 29, 2002($)(2)
NAME                EXERCISE(#)    ($)(1)     EXERCISABLE     UNEXERCISABLE      EXERCISABLE      UNEXERCISABLE
------------------------------------------------------------------------------------------------------------------
<S>                 <C>           <C>         <C>             <C>               <C>               <C>
Gerard E. Puorro          75,000   $117,750         113,292           42,999            $55,595            $6,250
Dennis S. Herman              --          0           7,138           21,875                 $0           $10,200
Toshio Mori                   --          0          16,125           15,000            $13,093            $3,125
Robert J. Wilber              --          0          58,125           28,750            $19,607            $3,125
F. Paul Broyer                --          0          65,625           28,750            $30,780            $3,125
</TABLE>

     (1) Named Executive Officers will receive cash only if and when they
sellthe securities issued upon exercise of the options and the amount of cash
received by such individuals is dependent on the value of such securities at the
time of such sale, if any.
     (2) Value is based on the difference between option grant price and the
fair market value at 2002 fiscal year end ($5.50 per share as quoted on the
NASDAQ Stock Market at the close of trading on June 28, 2002) multiplied by the
number of shares underlying the option.

DIRECTOR COMPENSATION

     Directors who are not employees of the Company receive an annual retainer
of $4,000 and a fee of $1,000 per regularly scheduled meeting of the Board of
Directors. Directors are also reimbursed for out-of-pocket expenses incurred in
connection with the performance of their duties as a director.

     On May 10, 1990, the Board of Directors of the Company adopted the 1990
Non-Employee Director Stock Option Plan, which was approved by the Company's
stockholders on November 13, 1990. The 1990 Non-Employee Director Stock Option
Plan provides for the issuance of options for the purchase of up to 90,000
shares of the Company's Common Stock. Under this plan, each member of the
Company's Board of Directors who is neither an employee nor officer of the
Company receives a one-time grant of an option to purchase 15,000 shares of
Common Stock at an exercise price equal to the fair market value on the date of
grant. The options generally become exercisable in equal amounts over a period
of four years from the date of grant, expire seven years after the date of grant
and are nontransferable. Options for the purchase of 99,750 shares have been
granted, including cancellations and re-grants, at a range of exercise prices
from $2.17 to $9.67 per share. Upon stockholder approval of the 1993
Non-Employee Director Stock Option Plan, the Board of Directors terminated the
granting of options under the 1990 Non-Employee Director Stock Option Plan.

     On June 2, 1993, the Board of Directors of the Company adopted the 1993
Non-Employee Director Stock Option Plan, which was approved by the Company's
stockholders on November 18, 1993. The 1993 Non-Employee Director Plan provides
for the issuance of options for the purchase of up to 120,000 shares of the
Company's Common Stock. Under this Plan, each member of the Company's Board of
Directors who is neither an employee nor an officer of the Company receives a
onetime grant of an option to purchase 15,000 shares of Common Stock at an
exercise price equal to the fair market value on the date of grant. The options
generally become exercisable in equal amounts over a period of two years from
the date of grant, expire ten years after the date of grant and are
nontransferable. To date,

                                       35
<PAGE>

options for the purchase of 90,000 shares have been granted at exercise prices
ranging from $1.083 to $5.375 per share.

     On December 24, 1996, Dr. Richard J. Cleveland (a former director) was
granted non-statutory options to purchase 20,000 shares of the common stock of
Candela Skin Care Centers, Inc., a subsidiary of the Company, at an exercise
price of $1.00. These non-statutory options were granted pursuant to the terms
of the Candela Skin Care Centers, Inc. 1996 Incentive and Non-Statutory Stock
Option Plan, have a term of 10 years from the date of grant and become
exercisable over a four-year period. On August 21, 1997, options granted under
the CSCC Plan were converted to options in Candela Corporation at the rate of
0.21053 Candela Corporation options for each CSCC option. Dr. Cleveland realized
options for 4,211 Candela Corporation as a result of this conversion.

     On August 14, 1997, Non-Qualified Options to purchase 15,000 shares of the
Company's Common Stock were granted to each of Theodore G. Johnson (a former
director), Kenneth D. Roberts, Dr. Richard J. Cleveland, Douglas W. Scott and
Robert E. Dornbush (a former director) at an exercise price of $3.125 per share,
such price being the market price of the Common Stock on the date of the grant.
These Non-Qualified Options were granted pursuant to the Company's 1989 Stock
Plan (the "Plan") and vest in equal 50% amounts on each of the first and second
anniversaries of the date of the grant, provided that each such optionee
continues to serve as a director of the Company on such anniversary date.

     On August 21, 1997, Non-Qualified Options to purchase 6,000 shares of
the Company's Common Stock were granted to Dr. Richard J. Cleveland at an
exercise price of $4.66 per share, such price being the market price of the
Common Stock on the date of the grant. These options are fully vested and
have a term of ten years.

     On September 30, 1998, Non-Qualified Options to purchase 7,500 shares of
our common stock were granted to each of Theodore G. Johnson, Kenneth D.
Roberts, Dr. Richard J. Cleveland, Douglas W. Scott and Robert E. Dornbush, at
an exercise price of $2.42 per share, such price being the market price of the
common stock on the date of the grant. These Non-Qualified Options were granted
outside of a plan and vest in equal 50% amounts on each of the first and second
anniversaries of the date of the grant, provided that each such optionee
continues to serve as a director of Candela on such anniversary date.

     On January 12, 1999, Non-Qualified Options to purchase 7,500 shares of our
common stock were granted to each of Theodore G. Johnson, Kenneth D. Roberts,
Dr. Richard J. Cleveland, Douglas W. Scott and Robert E. Dornbush, at an
exercise price of $4.66 per share, such price being the market price of the
common stock on the date of the grant. These Non-Qualified Options were granted
pursuant to our 1998 Stock Plan and are fully vested.

     On January 25, 2001, Non-Qualified Options to purchase 15,000 shares of our
common stock were granted to each of Kenneth D. Roberts, Dr. Richard J.
Cleveland, Douglas W. Scott and Nancy Nager, at an exercise price of $6.656 per
share, such price being the market price of the common stock on the date of the
grant. These Non-Qualified Options were granted pursuant to our 1998 Stock Plan
and vest in equal 50% amounts on each of the first and second anniversaries of
the date of the grant, provided that each such optionee continues to serve as a
director of Candela on such anniversary date.

EMPLOYMENT AGREEMENTS

Candela has entered into severance agreements with each of Messrs. Puorro,
Broyer, Wilber, McGrail and Davis. Under our agreements with Messrs. Broyer,
Wilber, McGrail and Davis, Candela has agreed to continue payment of their
respective base annual salaries over twelve months in the event that their
services for Candela are terminated for any reason except for cause or such
individuals' resignation. Under our agreement with Mr. Puorro, in the event that
his employment is terminated for any reason, at either his election or Candela's
election other than for just cause, he will be entitled to receive severance
payments equal to his base annual salary for twelve months and then 50% of his
base annual salary for an additional twelve months. Each of the above named
individuals is subject to nonsolicitation and noncompetition provisions for the
period during which he receives severance payments.

                                       36
<PAGE>

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

     The Company's executive compensation program is administered by the
Compensation Committee, which consisted of Mr. Scott, Mr. Roberts and Ms. Nager
at the end of fiscal 2002. All three members of the Compensation Committee are
non-employee directors. Pursuant to the authority delegated by the Board of
Directors, the Compensation Committee each year sets the compensation of the
Chief Executive Officer and reviews and approves the compensation of all other
senior officers, including approval of annual salaries and bonuses as well as
the grant of stock options to officers and employees.

     COMPENSATION PHILOSOPHY

     An important goal of the Company is to attract and retain qualified
executives in a competitive industry. To achieve this goal, the Compensation
Committee applies the philosophy that compensation of executive officers,
specifically including that of the Chief Executive Officer and President, should
be linked to revenue growth, operating results and earnings per share
performance.

     Under the supervision of the Compensation Committee, the Company has
developed and implemented compensation policies. The Compensation Committee's
executive compensation policies are designed to (i) enhance profitability of the
Company and stockholder value, (ii) integrate compensation with the Company's
annual and long-term performance goals, (iii) reward corporate performance, (iv)
recognize individual initiative, achievement and hard work, and (v) assist the
Company in attracting and retaining qualified executive officers. Currently,
compensation under the executive compensation program is comprised of cash
compensation in the form of annual base salary, bonus, and long-term incentive
compensation in the form of stock options.

     BASE SALARY

     In setting cash compensation for the Chief Executive Officer and reviewing
and approving the cash compensation for all other officers, the Compensation
Committee reviews salaries annually. The Compensation Committee's policy is to
fix base salaries at levels comparable to the amounts paid to senior executives
with comparable qualifications, experience and responsibilities at other
companies of similar size and engaged in a similar business to that of the
Company. In addition, the base salaries take into account the Company's relative
performance as compared to comparable companies.

     The salary compensation for the executive officers is based upon their
qualifications, experience and responsibilities, as well as the attainment of
planned objectives. The Chief Executive Officer and President makes
recommendations to the Compensation Committee regarding the planned objectives
and executive compensation levels. The overall plans and operating performance
levels, upon which management compensation is based, are approved by the
Compensation Committee on an annual basis. During fiscal 2002, the Chief
Executive Officer and President made recommendations for salary reductions for
the executive group effective in fiscal 2003, and the Compensation Committee
approved decreases ranging from 5% to 10% of the base salary for the executive
officers. These decreases reflect cost cutting initiatives implemented to
restore the company to profitability.

     BONUS COMPENSATION

     The Company has a Management Incentive Plan, adopted by the Board of
Directors, whereby senior executives recommended by the Chief Executive
Officer and approved for inclusion in the Plan by the Compensation Committee
receive bonus compensation based on a percentage of base salary. Bonuses were
not paid under this Plan to U.S. based executives for fiscal 2002.

     STOCK OPTIONS

     The Compensation Committee relies on incentive compensation in the form of
stock options to retain and motivate executive officers. Incentive compensation
in the form of stock options is designed to provide long-term incentives to
executive officers and other employees, to encourage the executive officers and
other employees to remain with the Company and to enable them to develop and
maintain a stock ownership position in the Company's Common Stock. The Company's
1989 Stock Plan and the 1998 Stock Option Plan, administered by the Compensation
Committee, have been used for the granting of stock options.

     Both the 1989 Stock Plan and the 1998 Stock Option Plan permit the
Compensation Committee to administer the granting of stock options to eligible
employees, including executive officers. Options generally become exercisable
based upon a vesting schedule tied to years of future service to the Company.
The value realizable from exercisable options is dependent upon the extent to
which the Company's performance is reflected in the market price of the
Company's Common Stock at any particular point in time. Equity compensation in
the form of stock options is designed to provide long-term

                                       37
<PAGE>

incentives to executive officers and other employees. The Compensation Committee
approves the granting of options in order to motivate these employees to
maximize stockholder value. Vesting for options granted under the plan is
determined by the compensation committee at the time of grant and expires after
a 10-year period (5 years for 10% or more stockholders), at not less than the
fair market value at the date of grant. As a result of this policy, executives
and other employees are rewarded economically only to the extent that the
stockholders also benefit through stock price appreciation in the market.

     Options granted to employees are based on such factors as individual
initiative, achievement and performance. In administering grants to executives,
the Compensation Committee evaluates each officer's total equity compensation
package. The Compensation Committee generally reviews the option holdings of
each of the executive officers, including vesting and exercise price and the
then current value of such unvested options. The Compensation Committee
considers equity compensation to be an integral part of a competitive executive
compensation package and an important mechanism to align the interests of
management with those of the Company's stockholders. In fiscal year 2002,
options to purchase shares of Common Stock were granted to Mr. Davis and Mr.
Herman.

     MR. PUORRO'S COMPENSATION

     The cash compensation program for the Chief Executive Officer and the
President of the Company is designed to reward performance that enhances
stockholder value. The compensation package is comprised of base pay and stock
options, which is affected by the Company's revenue growth, market share growth,
profitability, and growth in earnings per share. In fiscal year 2002, Mr.
Puorro's cash compensation was $300,000. The Compensation Committee believes
that Mr. Puorro's compensation has been, and is now, comparable to the salary of
other Chief Executive Officers in other medical equipment companies, considering
the size and rate of profitability of those companies.

     The Compensation Committee is satisfied that the executive officers of the
Company are dedicated to achieving significant improvements in the long-term
financial performance of the Company and that the compensation policies and
programs implemented and administered have contributed and will continue to
contribute toward achieving this goal.

     This report has been submitted by the members of the Compensation
Committee:

                                Douglas W. Scott
                                Kenneth D. Roberts
                                Nancy Nager, RN, BSN, MSN

STOCK PERFORMANCE GRAPH

         The following graph illustrates a five year comparison of cumulative
total stockholder return among the Company, the S&P 500 Market Index and the
Company's "Industry Index." The Company selected an index of companies in the
electro-medical equipment industry as its industry group. Accordingly, the
Industry Index reflects the performance of all companies that are included in
the electro-medical equipment industry with 3845 as their Primary Standard
Industrial Classification Code Number. The comparison assumes $100 was invested
on June 27, 1997 (the date of the beginning of the Company's fifth preceding
fiscal year) in the Company's Common Stock and in each of the foregoing indices
and assumes reinvestment of dividends, if any.

                                       38

<PAGE>

                 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
                 AMONG CANDELA CORPORATION, THE S & P 500 INDEX
                                AND A PEER GROUP


<TABLE>
<CAPTION>

                                         Cumulative Total Return

                       6/27/97   6/26/98    7/2/99     7/1/00     6/30/01    6/29/02
                       -------   -------    ------     ------     -------    -------
<S>                    <C>       <C>        <C>        <C>        <C>        <C>
Candela Corporation    100.00     45.00     276.00     218.99     157.19     131.99
S&P 500                100.00    130.16     159.78     171.36     145.95     119.70
Peer Group             100.00    135.12     178.75     207.19     187.45     170.40
</TABLE>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth a summary of the equity compensation plans
offered by the Company:

<TABLE>
<CAPTION>
                                                           EQUITY COMPENSATION PLAN INFORMATION
                                                                                             Number of securities
                                        Number of securities                                remaining available for
                                            to be issued            Weighted-average          future issue under
                                          upon exercise of          exercise price of      equity compensation plans
                                        outstanding options,      outstanding options,       (excluding securities
                                        warrants and rights        warrants and rights      reflected in column (a))
                                     ----------------------------------------------------------------------------------
                                                (a)                        (b)                        (c)
<S>                                  <C>                            <C>                            <C>
Equity compensation plans
  approved by security holders               1,158,609                    $6.41                           447,133

Equity compensation plans
  Not approved by security holders                  --                       --                                --
                                     -----------------                  -------                     -------------
Total                                        1,158,609                    $6.41                           447,133
                                     =================                  =======                     =============
</TABLE>

                                       39
<PAGE>

     The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 19, 2002 by
(i) each person known to the Company who beneficially owns 5% or more of the
outstanding shares of its Common Stock, (ii) each director or nominee to become
a director of the Company, (iii) each executive officer identified in the
Summary Compensation Table and (iv) all directors and executive officers of the
Company as a group:

                       AMOUNT OF BENEFICIAL OWNERSHIP (1)

<TABLE>
<CAPTION>
              NAME AND ADDRESS OF                   NUMBER OF SHARES       PERCENT OF SHARES
               BENEFICIALLY OWNED                  BENEFICIALLY OWNED     BENEFICIALLY OWNED
-----------------------------------------------------------------------------------------------
<S>                                                <C>                    <C>
Gerard E. Puorro(2)                                      224,529                 2.32%

Kenneth D. Roberts(3)                                    126,000                 1.30%

Douglas W. Scott(4)                                       71,250                   *

Nancy Nager, R.N., B.S.N., M.S.N(5)                       22,500                   *

Dennis S. Herman(6)                                       12,138                   *

Toshio Mori(7)                                            16,125                   *

Robert J. Wilber(8)                                       68,516                   *

F. Paul Broyer(9)                                         77,987                   *

William D. Witter(10)                                  2,783,718                28.82%
153 East 53rd Street
New York, NY 10022

William D. Witter, Inc. (11)                           2,783,718                28.82%
153 East 53rd Street
New York, NY 10022

All Directors and Executive                              727,217                 7.53%
Officers as a Group (13 Persons) (12)
</TABLE>

*    Represents less than 1% of the Company's outstanding Common Stock.

     (1) Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
beneficially owned by them. Except as otherwise indicated, the address for each
beneficial owner is 530 Boston Post Road, Wayland, MA 01778. Pursuant to the
rules of the Securities and Exchange Commission the number of shares of Common
Stock deemed outstanding includes, for each person or group referred to in the
table, shares issuable pursuant to options held by the respective person or
group which may be exercised within the 60 day period following September 19,
2002.
     (2) Includes 117,500 shares issuable pursuant to stock options exercisable
within the 60 day period following September 19, 2002. Includes 107,029 shares
privately owned.
     (3) Includes 90,000 shares issuable pursuant to stock options exercisable
within the 60 day period following September 19, 2002. Does not include 4,500
shares held by a trust for the benefit of one of Mr. Roberts' children as to
which Mr. Roberts disclaims beneficial ownership. Includes 36,000 shares
privately owned.
     (4) Includes 67,500 shares issuable pursuant to stock options exercisable
within the 60 day period following September 19, 2002. Includes 3,750 shares
privately owned.
     (5) Includes 22,500 shares issuable pursuant to stock options exercisable
within the 60 day period following September 19, 2002.
     (6) Includes 12,138 shares issuable pursuant to stock options exercisable
within the 60 day period following September 19, 2002.

                                       40
<PAGE>

     (7) Includes 16,125 shares issuable pursuant to stock options exercisable
within the 60 day period following September 19, 2002.
     (8) Includes 68,125 shares issuable pursuant to stock options exercisable
within the 60 day period following September 19, 2002. Includes 391 shares
privately owned.
     (9) Includes 75,625 shares issuable pursuant to stock options exercisable
within the 60 day period following September 19, 2002. Includes 2,362 shares
privately owned.
     (10) Includes 2,740,924 shares of common stock beneficially owned by
William D. Witter, Inc. Includes warrants to purchase 105,000 shares of Common
Stock. Mr. Witter is the President and primary owner of William D. Witter, Inc.
and has the sole power to dispose or to direct the disposition of all of the
shares of common stock which are beneficially owned respectively by William D.
Witter, Inc. and William D. Witter.
     (11) Information based on Amendment No. 8 to Schedule 13G dated September
9, 2002 filed with the Security and Exchange Commission. All such shares are
also beneficially owned by William D. Witter, individually, the President and
primary owner of William D. Witter, Inc.
     (12) Includes 575,044 shares subject to stock options exercisable within
the 60 day following September 19, 2002. Includes 152,173 shares individually
owned.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     None.

ITEM 14. CONTROLS AND PROCEDURES

There have not been any significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date of our Chief Executive Officer's and Chief Financial Officer's most recent
evaluation of our internal controls.



                                       41
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

     (a) The following items are filed as part of this report:

     (1)  CONSOLIDATED FINANCIAL STATEMENTS:

<TABLE>
   <S>                                                                                 <C>
      Report of Independent Auditors                                                    F-1
      Consolidated Balance Sheets - June 29, 2002 and June 30, 2001                     F-2
      Consolidated Statements of Operations and Comprehensive Income - Years
        ended June 29, 2002, June 30, 2001, and July 1, 2000                            F-3
      Consolidated Statements of Stockholders' Equity - Years Ended June 29,
      2002, June 30, 2001, and July 1, 2000                                             F-4
      Consolidated Statements of Cash Flows - Years Ended June 29, 2002,
        June 30, 2001, and July 1, 2000                                                 F-5
      Notes to Consolidated Financial Statements                                        F-6

    (2)  CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
         Schedule II - Valuation and Qualifying Accounts                                F-20
</TABLE>

     The report of the registrant's independent auditor with respect to the
     above-listed financial statements and financial statement schedule appears
     on page F-1 of this report.

     All other financial statements and schedules not listed have been omitted
     since the required information is included in the consolidated financial
     statements or the notes thereto, or is not applicable, material, or
     required.

    (3) EXHIBITS: Except as otherwise noted, the following documents are
         incorporated by reference from the Company's Registration Statement on
         Form S-1 (File Number 333-78339) or filed herewith:

<TABLE>
<S>              <C>         <C>
     3.1                     Certificate of Incorporation, as amended

     3.2         (FN9)       By-laws of the Company, as amended and restated
     4.1         (FN6)       Form of Rights Agreement dated as of
                             September 4, 1992, between the Company and The
                             First National Bank of Boston, as Rights Agent,
                             which includes as Exhibit A thereto the Form of
                             Rights Certificate.
     10.1        (FN1)       1985 Incentive Stock Option Plan
     10.2        (FN2)       1987 Stock Option Plan
     10.2.1      (FN2)       1989 Stock Plan
     10.2.2      (FN3)       1990 Employee Stock Purchase Plan
     10.2.3      (FN3)       1990 Non-Employee Director Stock Option Plan
     10.2.4      (FN7)       1993 Non-Employee Director Stock Option Plan
     10.2.5      (FN13)      1998 Stock Plan
     10.3        (FN7)       Lease for premises at 526 Boston Post Road, Wayland, Massachusetts.
     10.4        (FN7)       Lease for premises at 530 Boston Post Road, Wayland, Massachusetts.
     10.5        (FN7)       Patent License Agreement between the Company and Patlex Corporation
                             effective as of July 1, 1988.
     10.6        (FN4)       License Agreement among the Company, Technomed International, Inc.
                             and Technomed International S.A. dated as of December 20, 1990.
     10.7        (FN5)       License Agreement between the Company and Pillco Limited Partnership
                             effective as of October 1, 1991.
     10.8        (FN8)       Distribution Agreement between the Company
                             and Cryogenic Technology Limited, dated October 15,
                             1993.
     10.9        (FN10)      Asset Purchase Agreement between the Company and Derma-Laser, Limited and
                             Derma-Lase, Inc. dated June 23, 1994.
     10.10       (FN13)      Letter Agreement between the Company and Fleet Bank dated
                             February 13, 1997.
     10.10.1     (FN13)      Amendment to Letter Agreement between the Company and Fleet Bank dated
                             December 15, 1998.
     10.12*      (FN11)      Exclusive License Agreement dated as of
                             February 13,1995 and amended October 15, 1998, by
                             and among the Company and the Regents of the
                             University of California.
     10.12.1*    (FN15)      Settlement Agreement dated August 11, 2000 and among the Company, the
                             Regents of the University of California, and Cool Touch, Inc.
     10.13       (FN12)      Note and Warrant Purchase Agreement, dated as of October 15, 1998 by and among
                             the Company, Massachusetts Capital Resource Company, William D. Witter and
                             Michael D.Witter.
     10.13.1     (FN12)      Form of Note delivered to the Company in the aggregate principal amount
                             of $3,700,000 to Massachusetts Capital Resource Company, William D. Witter
                             and Michael D. Witter.
     10.13.2     (FN12)      Form of Common Stock Purchase Warrant to purchase an aggregate of 370,000
                             shares of the Company's Common Stock delivered to Massachusetts Capital
                             Resource Company, William D. Witter and Michael D. Witter.
     21.1                    Subsidiaries of the Company
     23.1                    Consent of Ernst & Young, LLP (Independent Auditors)

                                       42
<PAGE>

<S>              <C>         <C>

99.1                         Certification of Chief Executive Officer pursuant
                             to 18 U.S.C. Section 1350, as adopted pursuant to
                             Section 906 of the Sarbanes-Oxley Act of 2002.

99.2                         Certification of Chief Financial Officer pursuant
                             to 18 U.S.C. Section 1350, as adopted pursuant to
                             Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>

       * Confidential treatment as to certain portions has been requested
pursuant to Rule 24b-2.

<TABLE>
<S>              <C>         <C>

                  (FN1)      Previously filed as an exhibit to Registration Statement
                             No. 33-54448B and incorporated herein by reference.
                  (FN2)      Previously filed as an exhibit to the Company's
                             Amended and Restated Annual Report on Form 10-K for
                             the fiscal year ended June 30, 1988 (Commission
                             file number 000-14742), and incorporated herein by
                             reference.
                  (FN3)      Previously filed as an exhibit to the Company's
                             Annual Report on Form 10-K for the fiscal year
                             ended June 30, 1990 (Commission file number
                             000-14742), and incorporated herein by reference.
                  (FN4)      Previously filed as an exhibit to Form 10-Q for the
                             quarter ended December 29, 1990 (Commission file
                             number 000-14742), and incorporated herein by
                             reference.
                  (FN5)      Previously filed as an exhibit to Form 10-Q for the
                             quarter ended September 28, 1991 (Commission file
                             number 000-14742), and incorporated herein by
                             reference.
                  (FN6)      Previously filed as an exhibit to Form 8-K, dated
                             September 8, 1992 (Commission file number
                             000-14742), and incorporated herein by reference.
                  (FN7)      Previously filed as an exhibit to the Company's
                             Annual Report on Form 10-K for the fiscal year
                             ended July 3, 1993 (Commission file number
                             000-14742), and incorporated herein by reference.
                  (FN8)      Previously filed as an exhibit to Form 10-Q for the
                             quarter ended January 1, 1994 (Commission file
                             number 000-14742), and incorporated herein by
                             reference.
                  (FN9)      Previously filed as an exhibit to Form 10-Q for the
                             quarter ended April 2, 1994 (Commission file number
                             000-14742), and incorporated herein by reference.
                  (FN10)     Previously filed as an exhibit to the Company's
                             Annual Report on Form 10-K for the fiscal year
                             ended July 2, 1994 (Commission file number
                             000-14742), and incorporated herein by reference.
                  (FN11)     Previously filed as an exhibit to Form 10-Q for the
                             quarter ended March 27, 1999 (Commission file
                             number 000-14742), and incorporated herein for
                             reference.
                  (FN12)     Previously filed as an exhibit to the Company's
                             Amended and Restated Annual Report on Form 10-K for
                             the fiscal year ended June 27, 1998 (Commission
                             file number 000-14742), and incorporated herein by
                             reference.
                  (FN13)     Previously filed as an exhibit to Registration Statement
                             No. 333-78339 and incorporated herein by reference.
                  (FN14)     Previously filed as an exhibit to Form 10-Q for the
                             quarter ended March 31, 2001 (Commission file
                             number 000-14742), and incorporated herein by
                             reference.
                  (FN15)     Previously filed as an exhibit to Form 10-K for the
                             fiscal year ended July 1, 2000 (Commission filed number
                             000-14742), and incorporated by reference.

</TABLE>

              (b) Reports on Form 8-K. No reports on Form 8-K were filed by the
                  Company during the fourth quarter of the fiscal year ended
                  June 29, 2002.

              (c) The Company hereby files, as part of this Form 10-K, the
                  exhibits listed in Item 14(a)(3) above.

              (d) The Company hereby files, as part of this Form 10-K, the
                  consolidated financial Statement schedules listed in Item
                  15(a)(2) above.

                                       43
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on September 23, 2002.

                            CANDELA CORPORATION

                            By: /s/ Gerard E. Puorro
                                -----------------------------------------
                                Gerard E. Puorro, President,
                                Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                           TITLE                              DATE
<S>                                 <C>                                <C>
/s/ Gerard E. Puorro                President, Chief Executive         September 23, 2002
-------------------------             Officer, and Director
Gerard E. Puorro                      (Principal Executive Officer)

/s/ F. Paul Broyer                  Senior Vice President,             September 23, 2002
-------------------------             Finance and Administration,
F. Paul Broyer                        Chief Financial Officer

/s/ Kenneth D. Roberts              Chairman of the Board of           September 23, 2002
-------------------------             Directors
Kenneth D. Roberts

/s/ Nancy Nager                     Director                           September 23, 2002
-------------------------
Nancy Nager

/s/ Douglas W. Scott                Director                           September 23, 2002
-------------------------
Douglas W. Scott
</TABLE>

                                       44
<PAGE>

                                 CERTIFICATIONS

I, Gerard E. Puorro, certify that:

1. I have reviewed this annual report on Form 10-K of Candela Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
   statement of a material fact or omit to state a material fact necessary to
   make the statements made, in light of the circumstances under which such
   statements were made, not misleading with respect to the period covered by
   this annual report;

3. Based on my knowledge, the financial statements, and other financial
   information included in this annual report, fairly present in all material
   respects the financial condition, results of operations and cash flows of the
   registrant as of, and for, the periods presented in this annual report;

Date: September 23, 2002
                                                     /s/ Gerard E. Puorro
                                                     --------------------
                                                     Gerard E. Puorro
                                                     Chief Executive Officer


                                       45
<PAGE>

                                 CERTIFICATIONS

I, F. Paul Broyer, certify that:

1.   I have reviewed this annual report on Form 10-K of Candela Corporation;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

Date: September 23, 2002
                                                      /s/ F. Paul Broyer
                                                      -------------------------
                                                      F. Paul Broyer
                                                      Chief Financial Officer

                                       46
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

     The Board of Directors and Stockholders
     Candela Corporation

     We have audited the accompanying consolidated balance sheets of Candela
     Corporation and subsidiaries as of June 29, 2002 and June 30, 2001 and the
     related consolidated statements of operations and comprehensive income,
     stockholders' equity, and cash flows for each of the three years in the
     period ended June 29, 2002. Our audits also included the financial
     statement schedule listed in the Index at Item 14(a). These financial
     statements are the responsibility of the Company's management. Our
     responsibility is to express an opinion on these financial statements and
     schedule based on our audits.

     We conducted our audits in accordance with auditing standards generally
     accepted in the United States. Those standards require that we plan and
     perform the audit to obtain reasonable assurance as to whether the
     financial statements are free of material misstatement. An audit includes
     examining, on a test basis, evidence supporting the amounts and disclosures
     in the financial statements. An audit also includes assessing the
     accounting principles used and significant estimates made by management, as
     well as evaluating the overall financial statement presentation. We believe
     that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
     present fairly, in all material respects, the consolidated financial
     position of Candela Corporation and subsidiaries at June 29, 2002 and June
     30, 2001 and the consolidated results of their operations and their cash
     flows for each of the three years in the period ended June 29, 2002, in
     conformity with accounting principles generally accepted in the United
     States. Also, in our opinion, the related financial statement schedule,
     when considered in relation to the basic financial statements taken as a
     whole, presents fairly in all material respects the information set forth
     therein.

     /s/ERNST & YOUNG LLP

     Boston, Massachusetts
     August 13, 2002

<PAGE>

                      CANDELA CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                         JUNE 29, 2002 AND JUNE 30, 2001
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                              2002                 2001
                                                                              ----                 ----
<S>                                                                         <C>                   <C>
ASSETS:
Current assets:
Cash and cash equivalents                                                   $ 19,628              $ 32,318
Accounts receivable (net of allowance of $981 and $901
     in 2002 and 2001, respectively)                                          23,827                19,648
Notes receivable                                                               1,262                 1,205
Inventories, net                                                              12,118                10,071
Other current assets                                                             870                   980
                                                                            --------              --------
Total current assets                                                          57,705                64,222

Property and equipment, net                                                    3,156                 2,678
Deferred tax assets                                                            5,442                 5,327
Prepaid licenses                                                               1,405                 1,595
Other assets                                                                     183                   196
                                                                            --------              --------
Total assets                                                                $ 67,891              $ 74,018
                                                                            ========              ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable                                                            $  5,133              $  5,781
Accrued payroll and related expenses                                           3,003                 1,832
Accrued warranty costs                                                         4,452                 3,629
Income taxes payable                                                           1,604                 2,549
Restructuring reserve                                                            559                 1,689
Other accrued liabilities                                                      2,723                 1,909
Current portion of long-term debt                                                740                   318
Deferred income                                                                4,357                 4,205
                                                                            --------              --------
Total current liabilities                                                     22,571                21,912

Long-term deferred income                                                      2,352                 2,317
Long-term debt                                                                 2,115                 2,815
                                                                            --------              --------
Total long-term liabilities                                                    4,467                 5,132

Stockholders' equity:
Common stock, $.01 par value: 30,000,000 shares authorized
     11,884,023 and 11,783,736 shares issued and
     outstanding in 2002 and 2001, respectively                                  119                   118
Treasury stock, at cost: 2,250,000 shares and 1,000,000
     shares in 2002 and 2001, respectively                                   (12,997)               (7,782)
Additional paid-in capital                                                    43,869                43,475
Accumulated earnings                                                          11,090                13,244
Accumulated other comprehensive loss                                          (1,228)               (2,081)
                                                                            --------              --------
Total stockholders' equity                                                    40,853                46,974
                                                                            --------              --------
Total liabilities and stockholders' equity                                  $ 67,891              $ 74,018
                                                                            ========              ========
</TABLE>

The accompanying notes are an integral part of the financial statements.

                                      F-2

<PAGE>

                      CANDELA CORPORATION AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                 FOR THE YEARS ENDED JUNE 29, 2002, JUNE 30, 2001
                                AND JULY 1, 2000
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                     2002                 2001                 2000
                                                     ----                 ----                 ----
<S>                                               <C>                    <C>                 <C>
Revenue:
      Lasers and other products                    $ 45,957             $ 48,375             $ 60,340
      Product related service                        12,731               12,498               11,320
      Skin care centers                               2,859                3,899                3,730
                                                   --------             --------             --------
           Total revenue                             61,547               64,772               75,390

Cost of sales:
      Lasers and other products                      20,396               21,208               22,703
      Product related service                        11,205                7,676                6,802
      Skin care centers                               2,318                2,412                2,377
                                                   --------             --------             --------
           Total cost of sales                       33,919               31,296               31,882
                                                   --------             --------             --------

Gross profit                                         27,628               33,476               43,508

Operating expenses:
      Research and development                        4,644                5,575                4,822
      Selling, general & administrative              27,031               24,076               21,669
      Restructuring charge (credit)                    (693)               1,113                   --
                                                   --------             --------             --------
           Total operating expenses                  30,982               30,764               26,491
                                                   --------             --------             --------

Income (loss) from operations                        (3,354)               2,712               17,017

Other income (expense):
      Interest income                                   547                1,652                1,427
      Interest expense                                 (476)                (437)                (482)
      Other income (expense), net                       487                   33                  242
                                                   --------             --------             --------
           Total other income (expense)                 558                1,248                1,187
                                                   --------             --------             --------

Income (loss) before income taxes                    (2,796)               3,960               18,204

Provision for (benefit from) income taxes              (642)               1,433                3,641
                                                   --------             --------             --------
Net income (loss)                                  $ (2,154)            $  2,527             $ 14,563
                                                   ========             ========             ========
Basic earnings (loss) per share                    $  (0.21)            $   0.23             $   1.33
Diluted earnings (loss) per share                  $  (0.21)            $   0.22             $   1.19
                                                   ========             ========             ========
Weighted average shares outstanding                  10,053               10,928               10,932
Adjusted weighted average shares outstanding         10,053               11,521               12,190
                                                   ========             ========             ========

Net income (loss)                                  $ (2,154)            $  2,527             $ 14,563
Other comprehensive income (loss) net of tax:
      Foreign currency translation adjustment           661                 (598)                (318)
                                                   --------             --------             --------
Comprehensive income (loss)                        $ (1,493)            $  1,929             $ 14,245
                                                   ========             ========             ========
</TABLE>

The accompanying notes are an integral part of the financial statements.

                                      F-3
<PAGE>

                      CANDELA CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED JUNE 29, 2002, JUNE 30, 2001 AND
                                  JULY 1, 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                      COMMON STOCK        ADDITIONAL        TREASURY STOCK    ACCUMULATED    OTHER
                                  -------------------       PAID-IN        -----------------    EARNINGS   COMPREHENSIVE
                                   SHARES      AMOUNT       CAPITAL        SHARES    AMOUNT    (DEFICIT)      LOSS        TOTAL
                                  --------   ---------    ----------       -------  --------  -----------   -----------  ----------
<S>                               <C>         <C>         <C>             <C>     <C>         <C>         <C>            <C>
BALANCE JULY 3, 1999                 8,348    $     83    $ 18,535          --    $     --    $ (3,846)   $  (749)          $14,023

Sale of common stock
  under stock plans                    693           7       1,856                                                            1,863
Exercise of stock warrants             210           2         788                                                              790
Secondary offering                   2,250          23      19,101                                                           19,124
Treasury stock purchases                                                  (280)     (3,046)                                  (3,046)
Disqualifying dispositions
  of options                                                 1,644                                                            1,644
Net income                                                                                      14,563                       14,563
Currency translation
  adjustment                                                                                                 (398)             (398)
                                  --------    --------    --------    --------    --------    --------    -------           -------
BALANCE JULY 1, 2000                11,501         115      41,924        (280)     (3,046)     10,717     (1,147)           48,563

Sale of common stock
  under stock plans                    123           1         454                                                              455
Exercise of stock warrants             160           2       1,097                                                            1,099
Treasury stock purchases                                                  (720)     (4,736)                                  (4,736)
Net income                                                                                       2,527                        2,527
Currency translation
    adjustment                                                                                               (934)             (934)
                                  --------    --------    --------    --------    --------    --------    -------           -------
BALANCE JUNE 30, 2001               11,784         118      43,475      (1,000)     (7,782)     13,244     (2,081)           46,974

Sale of common stock
  under stock plans                    100           1         394                                                              395
Treasury stock purchases                                                (1,250)     (5,215)                                  (5,215)
Net loss                                                                                        (2,154)                      (2,154)
Currency translation
  adjustment                                                                                                  853               853
                                  --------    --------    --------    --------    --------    --------    -------           -------
BALANCE JUNE 29, 2002             $ 11,884    $    119    $ 43,869    $ (2,250)   $(12,997)   $ 11,090    $(1,228)          $40,853
                                  --------    --------    --------    --------    --------    --------    -------           -------
</TABLE>

The accompanying notes are an integral part of the financial statements.

                                      F-4
<PAGE>

                       CANDELA CORPORATION AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
           FOR THE YEARS ENDED JUNE 29, 2002, JUNE 30, 2001 AND JULY 1, 2000
                                  (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                    2002              2001               2000
                                                                    ----              ----               ----
<S>                                                               <C>                <C>                <C>
Cash flows from operating activities:
Net income (loss)                                                 $ (2,154)          $  2,527           $ 14,563
Adjustments to reconcile net income (loss) to net cash
   (used in) provided by operating activities:
       Depreciation and amortization                                   549                751                715
       Accretion of imputed interest on stock warrants                 102                 98                 96
       Provision for bad debts                                         116                 60                312
       Provision (credit) for restructuring charges                   (693)             1,113                 --
       Provision for impairment of long-lived assets                    --                640                 --
       Provision for deferred taxes                                   (115)              (683)            (3,542)
       Effect of exchange rate changes on foreign
          currency denominated assets and liabilities                 (305)              (110)              (190)
       Changes in assets and liabilities:
            Accounts receivable                                     (3,443)               713             (7,984)
            Notes receivable                                           (54)               414                629
            Inventories                                             (1,620)            (2,217)            (1,247)
            Other current assets                                       175                135                 91
            Other assets                                               305             (1,624)                --
            Accounts payable                                        (1,531)             1,034                443
            Accrued payroll and related expenses                     1,142               (630)            (1,278)
            Deferred income                                             87              1,095              3,499
            Accrued warranty costs                                     830                334                793
            Income tax payable                                      (1,005)              (774)             1,646
            Restructuring reserve                                     (437)              (467)              (476)
            Other accrued liabilities                                  669                625                265
                                                                  --------           --------           --------
       Net cash (used in) provided by operating
          activities                                                (7,382)             3,034              8,335

Cash flows from investing activities:
Purchase of property, plant and equipment                           (1,058)            (1,612)              (554)
                                                                  --------           --------           --------
       Net cash used in investing activities                        (1,058)            (1,612)              (554)

Cash flows from financing activities:
Proceeds from issuance of common stock                                 395              1,554             21,777
Repurchases of treasury stock                                       (5,215)            (4,736)            (3,046)
Principal payments of long-term debt                                  (370)                --                (78)
Net borrowings (repayments on) line of credit                           50                (14)              (574)
                                                                  --------           --------           --------
       Net cash provided by (used in) financing
          activities                                                (5,140)            (3,196)            18,079

Effect of exchange rate changes on cash and cash
   equivalents                                                         890               (771)            (1,052)
                                                                  --------           --------           --------
Net increase (decrease) in cash and cash equivalents               (12,690)            (2,545)            24,808

Cash and cash equivalents, beginning of period                      32,318             34,863             10,055
                                                                  --------           --------           --------
Cash and cash equivalents, end of period                          $ 19,628           $ 32,318           $ 34,863
                                                                  ========           ========           ========
Cash paid during the year for:
       Interest paid                                              $    347           $    361           $    387
       Income taxes paid (refunded)                               $    (68)          $  2,287           $  3,099

Non-Cash Activity
       Capital lease financing                                    $     --           $     --           $     42
</TABLE>

                                      F-5
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

The Company researches, develops, manufactures, markets, sells and services
lasers and other devices used to perform aesthetic and cosmetic procedures.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Candela
Corporation and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.

The Company's fiscal year ends on the Saturday nearest June 30. The years ended
June 29, 2002, June 30, 2001 and July 1, 2000 each contain 52 weeks.

USE OF ESTIMATES

The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. It is the belief
of the Company's management that all necessary adjustments have been made for an
accurate presentation of results. Actual results could differ from those
estimates and impact future results of operations and cash flows.

CASH AND CASH EQUIVALENTS

The Company classifies investments purchased with a maturity, at the date of
acquisition, of three months or less as cash equivalents. These are valued at
cash plus accrued interest, which approximates market value. At June 29, 2002
and June 30, 2001, substantially all cash equivalents were invested in overnight
Repurchase Agreements with a major bank. The Company had letters of credit
outstanding at June 29, 2002, amounting to $2.0 million with expiration dates
varying between June 30, 2002 and September 29, 2002.

ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE

The Company's trade accounts receivables and notes receivables are primarily
from sales to end users and distributors servicing the dermatology market, and
reflect a broad domestic and international customer base. The Company does not
require collateral and has not historically experienced significant credit
losses related to receivables from individual customers or groups of customers
in any particular industry or geographic area.

INVENTORIES

Inventory is stated at the lower of cost (first-in, first-out method) or market,
using a standard costing system.

PROPERTY AND EQUIPMENT

Purchased property and equipment is recorded at cost. Property and equipment
purchased under capital lease arrangements is recorded at the lesser of cost or
the present value of the minimum lease payments required during the lease
period. Laser systems used for testing are capitalized at cost. Repairs and
maintenance costs are expenses as incurred. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives as
follows:

<TABLE>
<CAPTION>
                                                                   NUMBER OF YEARS
    <S>                                                            <C>
     Leasehold improvements and assets under capital lease             2 to 13
     Office furniture, computer and other equipment                    3 to 5
</TABLE>

                                      F-6
<PAGE>

INCOME TAXES

The Company accounts for income taxes using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. In estimating future tax consequences, all expected
future events are considered other than enactments of changes in tax laws or
rates. Valuation allowances are established as necessary to reduce deferred tax
assets in the event that realization of the assets is considered unlikely.

ADVERTISING COSTS

Advertising costs are expensed as incurred. Advertising costs were $594,000,
$783,000 and $782,000 for the years ending June 29, 2002, June 30, 2001 and July
1, 2000 respectively.

FOREIGN CURRENCY TRANSLATION

The activity of the Company's foreign subsidiaries is translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards (SFAS)
No. 52, "Foreign Currency Translation". Assets and liabilities are translated
into U.S. dollars at current exchange rates, while income and expense items are
translated at average rates of exchange prevailing during the year. Exchange
gains and losses arising from translation of the Japanese, Spanish, German, and
French subsidiary balance sheets are accumulated as a separate component of
stockholders' equity. Net exchange gains resulting from foreign currency
transactions amounted to $661,000, $111,000 and $190,000 for fiscal 2002, 2001
and 2000, respectively, and are included in other income.

FINANCIAL INSTRUMENTS

The Company operates internationally, with sales offices, customers, and vendors
in several countries outside of the United States. The Company may reduce its
exposure to fluctuations in foreign exchange rates by creating offsetting
positions through the use of foreign currency forward contracts, a type of
derivative financial instrument. These foreign currency forward contracts may
involve elements of credit and market risk in excess of the amounts recognized
in the financial statements. The Company monitors its positions and the credit
quality of counter-parties, consisting primarily of major financial
institutions, and does not anticipate nonperformance by any counter-party. The
Company does not use derivative financial instruments for trading or speculative
purposes, nor is the Company a party to leveraged derivatives.

The Company accounts for its foreign currency forward contracts in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities measured at fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or in
other comprehensive income, depending on whether a derivative is designated as
part of a hedging relationship and, if it is, depending on the type of hedging
relationship. At June 29, 2002, the Company held foreign currency forward
contracts with notional values totaling approximately $1.9 million, which have
maturities prior to September 27, 2002. These foreign currency forward contracts
do not qualify for hedge accounting and therefore, are adjusted to fair value
through income as a component of other income and expense and offset the change
in fair value of the foreign currency intercompany receivables. The aggregate
fair value of our forward foreign exchange contracts outstanding was $80,948 as
of June 29, 2002. The net fair value is computed by subtracting the value of the
contracts using the year-end forward rates (the notional value) from the value
of the forward contracts computed at the contracted exchange rates.

The Company's financial instruments also include cash, cash equivalents,
accounts receivable, accounts payable, accrued liabilities and debt. Excluding
long-term debt, these financial instruments are carried at cost, which
approximates fair value due to their relative short term to maturity. The fair
value of the Company's long-term debt is estimated to be $3,774,422 using
discounted cash flow analysis based on the Company's incremental borrowing rates
for similar types of borrowing arrangements.

REVENUE RECOGNITION

PRODUCT SALES - The Company recognizes revenue upon shipment of product to
customers and the fulfillment of all contractual terms and conditions, pursuant
to the guidance provided by Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements. Credit is not extended to customers and
revenue is not recognized until collectibility is reasonably assured.

SERVICE - Revenue from the sale of service contracts is deferred and recognized
on a straight-line basis over the contract period. Revenue from service
administered by Candela that is not covered by a service contract is recognized
as the services are provided. Amounts received from the sale of gift
certificates by Candela Skin Care Centers ("CSCC") are deferred and recognized
as revenue when the services are provided.

                                      F-7
<PAGE>

MULTIPLE-ELEMENT ARRANGEMENTS - In certain instances, the Company sells products
together with maintenance contracts. The revenue recognized per element is
determined by allocating the total sales price to each element, based on the
relative fair values.

PRODUCT WARRANTY COSTS

The length of the Company's warranty on end user sales of medical devices is
generally one year on parts and labor except on the Vbeam(TM) system, which
carries a standard three-year warranty. An extended warranty is also available
for purchase on all of our systems. Distributor sales generally include a parts
warranty only. Estimated future costs for initial product warranties are
provided for at the time of sale.

TREASURY STOCK

The Board of Directors approved an open market stock repurchase program that
enables the Company to purchase up to 2,250,000 shares of its common stock. The
final stock repurchase was done on February 7, 2002. All such purchases were
transacted on the Nasdaq Stock Market at prevailing open market prices and were
paid for with general corporate funds. Such purchases were accounted for at cost
and held as treasury stock. As of June 29, 2002, the Company had repurchased
2,250,000 shares and the Board of Directors has not granted any further
authorization for repurchases of shares.

COMPREHENSIVE INCOME

Comprehensive income is comprised of two components, net income and other
comprehensive income. Other comprehensive income consists of translation
adjustments, which represent the effect of translating assets and liabilities of
the Company's foreign subsidiaries. Translation adjustments are shown net of tax
of $197,000, $336,000, and $80,000 for fiscal years 2002, 2001 and 2000,
respectively.

     EARNINGS (LOSS) PER SHARE

<TABLE>
<CAPTION>
(in thousands, except per share amounts)                      FOR THE YEARS ENDED:
                                                    JUNE 29,        JUNE 30,         JULY 1,
                                                      2002             2001           2000
                                                      ----             ----           ----
<S>                                                 <C>               <C>            <C>
NUMERATOR
Net income (loss)                                   $ (2,154)         $ 2,527        $14,563
                                                    ========          =======        =======
DENOMINATOR
BASIC EARNINGS (LOSS) PER SHARE

Weighted average shares outstanding                   10,053           10,928         10,932
                                                    --------          -------        -------
Earnings (loss) per share                           $  (0.21)         $  0.23        $  1.33
                                                    ========          =======        =======

DILUTED EARNINGS (LOSS) PER SHARE

Weighted average shares outstanding                   10,053           10,928         10,932

Effect of dilutive securities:

Stock options                                             --              331            702

Stock warrants                                            --              262            556
                                                    --------          -------        -------
Adjusted weighted average shares outstanding          10,053           11,521         12,190
                                                    --------          -------        -------
Earnings (loss) per share                           $  (0.21)         $  0.22        $  1.19
                                                    ========          =======        =======
</TABLE>

During the years ended June 29, 2002, June 30, 2001 and July 1, 2000, options
and warrants to purchase 814,858, 207,811 and 157,500 shares of common stock,
respectively, were not included in the computation of diluted earnings loss per
share because they would have had an anti-dilutive effect.

                                      F-8
<PAGE>

DIVIDENDS

The Company currently intends to retain future earnings for use in its business
and, therefore, does not expect to pay dividends in the foreseeable future.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company has elected the disclosure-only alternative permitted under SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has disclosed herein
pro forma net income and pro forma earnings per share using the fair value based
method for fiscal 2002, 2001, and 2000.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations". SFAS No. 141 revises the standards of business
combinations by eliminating the use of the pooling-of-interests method and
requiring that all business combinations be accounted for using the purchase
method of accounting. SFAS No. 141 also changes the criteria to recognize
intangible assets apart from goodwill. The provisions of SFAS No. 141 are
effective for all business combinations initiated after June 30, 2001. The
adoption of this statement had no impact on the Company's financial position and
results of operations.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 revises the standards of accounting for goodwill and
indefinite lived intangible assets by replacing the regular amortization of
these assets with the requirement that they are reviewed annually or more
frequently if impairment indicators arise, for impairment. Separable intangible
assets that have finite lives will continue to be amortized over their useful
lives. The accounting standards of SFAS No. 142 are effective for fiscal years
beginning after December 15, 2001 (fiscal 2003). The Company does not believe
the adoption of this statement will have any impact on the earnings or financial
position of the Company.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets". SFAS No. 143 addresses
financial accounting and reporting for the retirement obligation of an asset.
SFAS No. 143 states that companies should recognize the asset retirement cost,
at its fair value, as part of the cost of the asset and classify the accrued
amount as a liability in the condensed consolidated balance sheet. The asset
retirement liability is then accreted to the ultimate payout as interest
expense. The initial measurement of the liability would be subsequently updated
for revised estimates of the discounted cash outflows. SFAS No. 143 will be
effective for fiscal years beginning after June 15, 2002 (fiscal 2003). The
Company does not believe the adoption of SFAS No. 143 will have an impact on its
financial position, results of operations, or cash flows.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No. 121 by
requiring one accounting model to be used for long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 will be effective for fiscal years beginning after
December 15, 2001 (fiscal 2003). The Company does not believe the adoption of
SFAS No. 144 will have an impact on its financial position, results of
operations, or cash flows.

UNCERTAINTIES

The Company is subject to risks common to companies in the aesthetic laser
industry, including (i) the Company's ability to successfully complete
preclinical and clinical development and obtain timely regulatory approval and
adequate patent and other proprietary rights protection of its products and
services, (ii) the content and timing of decisions made by the Food & Drug
Administration and other agencies regarding the procedures for which the
Company's products may be approved, (iii) the ability of the Company to
manufacture adequate supplies of its products for development and
commercialization activities, (iv) the accuracy of the Company's estimates of
the size and characteristics of markets to be addressed by the Company's
products and services, (v) market acceptance of the Company's products and
services, (vi) the Company's ability to obtain reimbursement for its products
from third-party payers, where appropriate, and (vii) the accuracy of the
Company's information concerning the products and resources of competitors and
potential competitors.

The Company depends on a single vendor for Alexandrite rods used to manufacture
the GentleLASE(R). This product accounts for a significant portion of our total
revenues.

                                      F-9
<PAGE>

2. INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                          JUNE 29,           JUNE 30
                            2002              2001
                            -----             ----
<S>                      <C>              <C>
Raw materials            $     4,615      $      3,723
Work in process                1,037               951
Finished goods                 6,466             5,397
                         ------------     -------------
Total inventory          $    12,118      $     10,071
                         ============     =============
</TABLE>

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                             JUNE 29,            JUNE 30
                                              2002                2001
                                              -----               ----
<S>                                        <C>                <C>
Leasehold improvements                     $     2,459        $       3,653
Office furniture                                   944                  892
Computers, software and other equipment          7,022                4,803
                                           ------------       --------------
                                                10,425                9,348
Less accumulated depreciation                   (7,269)              (6,670)
                                           ------------       --------------
Property and equipment, net                $     3,156        $       2,678
                                           ============       ==============
</TABLE>

4. DEFERRED INCOME

Deferred income consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                 JUNE 29,               JUNE 30
                                                   2002                  2001
                                                   -----                 ----
<S>                                            <C>                     <C>
Service contract revenue                       $       5,383           $   5,051
Gift certificate revenue                               1,170               1,107
Customer deposits                                         85                 247
Other deferred sales revenue                              71                 117
                                               --------------     ---------------
Total deferred revenue                                 6,709               6,522
Less current portion                                   4,357               4,205
                                               --------------     ---------------
Long term portion of deferred income           $       2,352           $   2,317
                                               ==============     ===============
</TABLE>

5.  DEBT, LEASE AND OTHER OBLIGATIONS

LINE OF CREDIT

The Company has a renewable $5,000,000 revolving credit agreement with a major
bank with interest at the bank's base rate or LIBOR plus 2.25 percent. Any
borrowings outstanding under the line of credit are due on demand or according
to a payment schedule established at the time funds are borrowed. The line of
credit is unsecured. The agreement contains restrictive covenants limiting the
establishment of new liens, and the purchase of margin stock. No amounts were
outstanding under the line of credit as of June 29, 2002 and June 30, 2001.

SUBORDINATED NOTES

     On October 15, 1998, we issued eight-year, 9.75% subordinated term notes to
three investors in the aggregate amount of $3.7 million, secured by the
Company's assets. In addition, we issued warrants to purchase 555,000 shares of
common stock to the note holders that have an exercise price of $4.00 per
warrant, which yield 1.5 shares of common stock. The relative fair value
ascribed to the warrants was $836,000 and was recorded as a component of
Additional

                                      F-10
<PAGE>

Paid-In Capital in Stockholders Equity. The relative fair value of the debt was
recorded as $2,864,000. The debt is being accreted to face value using the
interest method over eight years, which will result in interest expense of
$836,000 over the eight-year period in addition to the 9.75% stated interest
rate. As of June 29, 2002, a total of $361,100 has been accreted to the notes,
resulting in a long-term liability balance of $2.1 million and a short-term
balance of $740,000; furthermore, a total of $374,200 of interest expense has
been recorded in fiscal year 2002 in connection with these notes.

     The notes, which become due in October 2006, require quarterly interest
payments and permit early repayment with a decreasing penalty percentage
through October 31, 2004. Given the lower current interest rates and the rate
on the loan, the Company is giving consideration to repaying the entire debt
as of November 1, 2002. If the Company were to take advantage of the early
repayment option on November 1, 2002, it would be required to accrete the
remaining debt balance at that time, resulting in a non-cash interest expense
of $440,502. The Company would also be required to pay a cash penalty of
$236,800 and the outstanding principal balance of $2.96 million. Such a
repayment would result in cash interest expense savings of $353,423 over the
remaining term of the debt net of the cash penalty.

     The agreement contains restrictive covenants establishing maximum leverage,
certain minimum ratios, and minimum levels of net income. As of June 29, 2002,
the Company is in violation of minimum net worth levels, for which a waiver has
been received for the fourth quarter of fiscal 2002.

LONG-TERM DEBT

The Company's long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                             JUNE 29,            JUNE 30
                                              2002                2001
                                              -----               ----
<S>                                          <C>                 <C>
Subordinated notes                            $2,855               $3,123
Obligations under capital leases                  --                   10
                                              ------               ------
Total long-term debt                           2,855                3,133
Less current portion                             740                  318
                                              ------               ------
Total long-term debt                          $2,115               $2,815
                                              ======               ======
</TABLE>

As of June 29, 2002, the Company's scheduled maturities under debt obligations
are as follows (in thousands):

<TABLE>
<S>                          <C>
      2003                       $     740
      2004                             740
      2005                             740
      2006                             740
      2007                             370
                              -------------
       Total obligations             3,330
       Less: future accretion         (475)
                              -------------
      Total long-term debt      $    2,855
                              =============
</TABLE>

OPERATING LEASE COMMITMENTS

The Company leases several facilities and automobiles under non-cancelable lease
arrangements. The facility leases may be adjusted for increases in maintenance
and insurance costs above specified levels. In addition, certain facility leases
contain escalation provisions based on certain specified criteria, and one lease
calls for the payment of additional rent based on a percentage of gross revenues
above a base gross sales level for that particular location. These operating
leases expire in various years through 2009. These leases may be renewed for
periods ranging from one to five years.

Future minimum lease payments under non-cancelable operating leases with initial
terms of one year or more consisted of the following at June 29, 2002, (in
thousands):

                                      F-11
<PAGE>

<TABLE>
          <S>                            <C>
             2003                        $  1,287
             2004                           1,307
             2005                           1,091
             2006                             839
             2007                             543
       Thereafter                           1,191
                                         ----------
       Total minimum lease payments      $  6,258
                                         ==========
</TABLE>

Total rent expense was approximately $1,043,000, $935,000 and $912,000 in fiscal
2002, 2001, and 2000, respectively.

ROYALTY

In August 2000 the Company entered into an agreement to amend the license
agreement with The University of California whereby in exchange for an
exclusivity fee of approximately $1.7 million, which was prepaid in full,
Candela obtained exclusive license rights to the DCD (subject to certain limited
license rights of Cool Touch, Inc ("Cool Touch")) in the following fields of
use: procedures that involve skin resurfacing and rejuvenation, vascular skin
lesions, and laser hair removal. Cool Touch, Inc., a subsidiary of New Star
Technology, Inc., obtained a license to the DCD on a co-exclusive basis with
Candela, in certain narrower fields of use. Cool Touch is restricted in its
ability to assign its license rights to certain existing competitors of Candela.
Candela is entitled to one-half of all royalty income payable to the Regents
from Cool Touch. Under the amended agreement, Candela no longer is required by
the Regents to negotiate sublicenses to third parties. However, Candela is
entitled to one-half of all royalties due from any other entity that licenses
the DCD technology from the Regents in other fields of use. The Company
recognized royalty expense of $2.8 million and $2.6 million for fiscal 2002 and
fiscal 2001, respectively.

6. STOCKHOLDERS' EQUITY

STOCK PLANS

1990 CANDELA CORPORATION EMPLOYEE STOCK PURCHASE PLAN

The 1990 Employee Stock Purchase Plan (the "Purchase Plan") provides for the
sale of up to 750,000 shares of common stock to eligible employees. The shares
are issued at the lesser of 85% of the average market price on the first or last
day of semiannual periods. Substantially all full-time employees are eligible to
participate in the Purchase Plan. At June 29, 2002 there were 420,732 shares
available for sale.

The following is a summary of shares issued under the Purchase Plan:

<TABLE>
<CAPTION>
                                                 RANGE OF
                          SHARES              PRICE PER SHARE
<S>                       <C>                 <C>
       2000               25,382               $7.75 - $8.33
       2001               30,885                   $4.75
       2002               31,994                   $3.50
</TABLE>

1985, 1987, 1989 AND 1998 CANDELA CORPORATION STOCK OPTION PLANS

The 1985, 1987, 1989 and 1998 Stock Option Plans (the "Stock Option Plans")
provide for the granting of incentive stock options to employees for the
purchase of common stock at an exercise price not less than the fair market
value of the stock on the date of grant. The Stock Option Plans also provide for
the granting of non-qualified stock options.

The Board of Directors has terminated the granting of options under the 1985 and
1987 Stock Option Plans. Options granted under the 1989 Stock Option Plan become
exercisable ratably over two or four years from the date of grant and expire ten
years from the date of the grant. Options granted under the 1998 Stock Option
Plan become exercisable on the date of grant or in installments, as specified by
a Committee established by the Board of Directors, and expire ten years from the
date of the grant. The maximum number of shares for which options may be granted
under the 1989 Stock Option Plan is 1,500,000 shares. The maximum number of
shares for which options may be granted under the 1998 Stock Option Plan is
750,000 shares.

                                      F-12
<PAGE>

1990 AND 1993 CANDELA CORPORATION NON-EMPLOYEE DIRECTOR STOCK OPTION PLANS

The 1990 and 1993 Non-Employee Director Stock Option Plans (the "Non-Employee
Director Plans," collectively with the Stock Option Plans, the "Plans") provide
for the issuance of options for the purchase of up to 90,000 and 120,000 shares
of common stock, respectively. Under the Non-Employee Director Plans, each
director who is neither an employee nor an officer receives a one-time grant of
an option to purchase 10,000 shares of common stock at an exercise price equal
to the fair market value of the common stock on the date of grant. Under the
1990 and 1993 Non-Employee Director Plans, options become exercisable in equal
amounts over a period of four and two years, respectively. Shares under the
Non-Employee Director Plans expire four and ten years, respectively, after the
date of grant and are nontransferable.

The following is a summary of stock option activity under the Plans:

<TABLE>
<CAPTION>
                                                                                      WEIGHTED AVG.
                                         NUMBER OF                                   EXERCISE PRICE
                                          SHARES             OPTION PRICE              PER SHARE
                                      ---------------      ----------------        ------------------
<S>                                   <C>                  <C>                     <C>
Balance at July 3, 1999               1,473,607                                            $    3.05
Granted                                 172,500               $8.33-$12.04                 $   10.19
Exercised                              (635,294)               $1.00-$5.63                 $    3.31
Canceled                               (165,375)               $2.17-$9.67                 $    5.92
                                      ---------
Balance at July 1, 2000                 845,438                                            $    5.09

Granted                                 473,161                $6.66-$9.25                 $    7.95
Exercised                              (125,101)               $2.13-$5.63                 $    3.88
Canceled                                (78,099)              $2.17-$12.04                 $    7.10
                                      ---------
Balance at June 30, 2001              1,115,399                                            $    6.22

Granted                                 281,567                $3.50-$6.61                 $    5.70
Exercised                               (83,560)               $2.13-$3.13                 $    2.25
Canceled                               (154,794)             $1.833-$12.04                 $    5.94
                                      ---------
Balance at June 29, 2002              1,158,609                                            $    6.41
                                      =========
Options available for grant
  at June 29, 2002                      447,133
                                      =========
</TABLE>

The following table summarizes information about stock options outstanding under
the Plans as of June 29, 2002:

<TABLE>
<CAPTION>
                            OPTIONS OUTSTANDING                                    OPTIONS EXERCISABLE
----------------------------------------------------------------------------   ----------------------------
                                                  WEIGHTED
                                                   AVERAGE       WEOGJTED                        WEIGHTED
          RANGE OF                                REMAINING       AVERAGE                        AVERAGE
          EXERCISE                 NUMBER        CONTRACTUAL     EXERCISE          NUMBER        EXERCISE
           PRICES               OUTSTANDING       LIFE (YRS)       PRICE         EXERCISABLE      PRICE
------------------------------ --------------- ---------------- ------------   ---------------- -----------
<S>                            <C>             <C>              <C>            <C>             <C>
 $ 2.0833   -   $  4.1250          247,343             5.06      $3.2079            237,343     $3.1788
 $ 4.6667   -   $  6.6100          364,983             8.08      $5.6226            262,235     $5.8567
 $ 6.6560   -   $  6.6560           52,500             8.57      $6.6560             30,000     $6.6560
 $ 6.8440   -   $  6.8440          234,000             8.32      $6.8440            175,501     $6.8440
 $ 7.3750   -   $ 12.0420          259,783             7.87     $10.1462            152,159    $10.1619
                                 ---------                                          -------

 $ 2.0833   -   $ 12.0420        1,158,609             7.46      $6.4149            857,238     $6.1095
                                 ---------                                          -------
</TABLE>

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for its
option plans. Accordingly, no compensation expense has been recognized for
options granted to employees and directors of the Company. Had compensation
expense for the Plans been determined based on the fair value at the grant date
for awards under the Plans consistent with the methodology prescribed under SFAS
No. 123, the Company's net income and net income per share would have been
reduced by $1.5 million or $0.15 per share in 2002, $1.3 million or $.11 per
share in 2001, and $579,000, or $.05 per share in 2000. The weighted average
fair value of the options granted under the Plans in 2002, 2001 and 2000,
calculated using the

                                      F-13
<PAGE>

Black-Scholes pricing model, was $3.37, $4.39 and $7.54 per share, respectively.
The weighted average fair value of shares issued under the Purchase Plan for
2002, 2001 and 2000 calculated using the Black-Scholes pricing model, were
$2.05, $3.85, and $4.87 per share, respectively. The following assumptions were
used in the Black-Scholes pricing model for options granted in fiscal years
2002, 2001 and 2000:

<TABLE>
<CAPTION>
                                                       2002         2001          2000
                                                      ----         ----          ----
<S>                                                   <C>          <C>           <C>
  risk-free interest rate                             5.19%        5.63%         6.61%
  estimated volatility                                  78%          82%           82%
  expected life for stock options (yrs)               3.65         3.55          4.06
  expected life for stock purchase plan (yrs)          0.5          0.5           0.5
  expected dividends                                   None         none         none
</TABLE>

RESERVED SHARES

The Company has reserved 2,491,474 shares of common stock for issuance under its
Purchase, Stock Option, Non-Employee Director Plans and warrants.

CANDELA CORPORATION STOCKHOLDER RIGHTS PLAN

On September 4, 1992, the Company adopted a Stockholder Rights Plan under which
it declared a dividend of one common stock purchase right (the Right) for each
share of the Company's common stock outstanding on September 22, 1992. The
Rights expired on September 22, 2002. The rights would have become exercisable
if certain triggering events had occurred, such as the initiation of certain
tender offers for the Company's common stock. If such an event had occurred,
each Right would have initially entitled shareholders to purchase one share of
the Company's common stock at an exercise price of $48 per share, subject to
adjustment. In the event that the Rights were exercised after further triggering
events, each Right would have entitled holders to purchase, for the exercise
price then in effect, shares of the Company's common stock (or other property,
under certain circumstances) having a value of twice the exercise price.

Such Rights would not have extended to any shareholders whose action triggered
the Rights. The Company also could have redeemed the Rights, in certain
circumstances, at $0.005 per Right.

7. INCOME TAXES

The components of income before income taxes and the related provision for
income taxes consists of the following periods (in thousands):

<TABLE>
<CAPTION>
                                                                           For Years Ended
                                                           ------------------------------------------------
                                                             June 29,        June 30,          July 1,
                                                               2002            2001              2000
                                                           -------------    ------------    ---------------
<S>                                                       <C>               <C>             <C>
    Income (loss) before income taxes:
          Domestic                                        $(4,029)           $ 3,350            $ 16,559
          Foreign                                           1,233                610               1,645
                                                          -------            -------            --------
          Total income (loss) before income taxes         $(2,796)           $ 3,960            $ 18,204
                                                          =======            =======            ========

    Provision for income taxes:
          Current provision (benefit):
             Federal                                      $(1,391)           $ 1,280            $  5,341
             State                                             --                336                 707
             Foreign                                          864                501               1,136
                                                          -------            -------            --------
          Total current provision for (benefit from)
            income taxes                                     (527)             2,117               7,184
          Deferred provision (benefit)
             Federal                                         (115)              (684)             (3,543)
                                                          -------            -------            --------
     Total provision for (benefit from)  income taxes     $  (642)           $ 1,433            $  3,641
                                                          =======            =======            ========
</TABLE>

The components of the Company's deferred tax assets consist of the following (in
thousands):

                                      F-14
<PAGE>

<TABLE>
<CAPTION>
                                                                June 29,         June 30,
                                                                  2002             2001
                                                           ---------------     -------------
      <S>                                                  <C>                 <C>
          Warranty reserve                                        $ 2,618       $   2,336
          Inventory valuation reserves                                714             670
          Restructuring reserve                                       240             669
          Deferred revenue                                            497             470
          Federal and state tax credit carryforwards                  518             321
          Bad debt reserve                                            334             319
          Pre-opening expense                                         257             257
          Other                                                       264             285
                                                           ---------------     -----------
          Deferred tax assets                                     $ 5,442       $   5,327
                                                           ===============     ===========
</TABLE>

A reconciliation from the federal statutory tax rate to the effective tax rate
is as follows:

<TABLE>
<CAPTION>
                                                        June 29,         June 30,          July 1,
                                                          2002             2001             2000
                                                     ---------------    ------------    --------------
<S>                                                  <C>                <C>             <C>
    Statutory rate                                              34%             34%               35%
    State income taxes                                          --               4%                4%
    Difference between foreign and US tax rates                (16%)             8%                2%
    Utilization of research and
      experimentation credit                                     0%             (4%)              (4%)
    Benefit from foreign sales credits                           0%             (4%)              (1%)
    Increase (utilization) of deferred tax assets                4%              0%              (17%)
    Other                                                        1%             (2%)               1%
                                                     ---------------    ------------    --------------
    Effective tax rate                                          23%             36%               20%
                                                     ===============    ============    ==============
</TABLE>

As of June 29, 2002, the Company has no valuation allowance against the
deferred tax asset. In accounting for the deferred tax asset, the Company has
relied on historical data to determine the necessity of providing a valuation
allowance for this asset. Under the requirements of SFAS No. 109, "Accounting
for Income Taxes", Candela believed it is more likely than not that the
deferred tax asset would be fully utilized against future income taxes. At
June 29, 2002, the Company had available research and development tax credits
for federal income tax purposes of approximately $197,000 and approximately
$321,000 for state income tax purposes which will begin expiring in fiscal
year 2006.

8. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION

The Company operates principally in two industry segments; the design,
manufacture, sale, and service of medical devices and related equipment, and the
performance of services in the skin care/health spa industry.

GEOGRAPHIC DATA

Geographic information for fiscal 2002, 2001 and 2000 is as follows (in
thousands):

<TABLE>
<CAPTION>
Revenue:                                                  2002             2001            2000
                                                          -----            -----           -----
<S>                                                      <C>              <C>            <C>
   United States                                         $ 39,515        $ 40,947        $ 47,482
   Intercompany                                            14,362          14,699          17,690
                                                         --------        --------        --------
                                                           53,877          55,646          65,172
   Europe                                                   6,854           7,961           8,010
   Japan                                                   15,178          15,864          19,898
                                                         --------        --------        --------
                                                           75,909          79,471          93,080
   Elimination                                            (14,362)        (14,699)        (17,690)
                                                         --------        --------        --------
        Consolidated total                               $ 61,547        $ 64,772        $ 75,390
                                                         ========        ========        ========
Income (loss) from operations:
   United States                                         $ (3,453)       $  1,550        $ 16,034
   Europe                                                    (692)           (290)           (782)
   Japan                                                    1,329             982           1,709
   Elimination                                               (538)            470              56
                                                         --------        --------        --------
        Consolidated total                               $ (3,354)       $  2,712        $ 17,017
                                                         ========        ========        ========
Geographic identification of long-lived assets:
   United States                                         $  3,057        $  2,623        $  7,291
   Europe                                                      99              55              51
   Japan                                                       --              --              --
                                                         --------        --------        --------
        Consolidated total                               $  3,156        $  2,678        $  7,342
                                                         ========        ========        ========
</TABLE>

                                      F-15
<PAGE>

United States revenue includes export sales to unaffiliated companies located
principally in Europe and in the Asia-Pacific region, which approximated
$10,715,000, $12,252,000 and $11,781,000 in fiscal 2002, 2001 and 2000,
respectively.

LINE OF BUSINESS DATA

<TABLE>
<CAPTION>
                                                       2002                  2001                 2000
                                                       -----                 -----                -----
<S>                                                     <C>                    <C>                 <C>
Revenue:
   Product sales and service                            $  58,688              $  60,873           $  71,660
   Skin care/health spa services                            2,859                  3,899               3,730
                                                  ----------------      -----------------     ---------------
   Total revenue                                        $  61,547              $  64,772           $  75,390
                                                  ================      =================     ===============
Income (loss) from operations:
   Product sales and service                          $    (2,390)             $   5,350           $  17,647
   Skin care/health spa services                             (964)                (2,638)               (630)
                                                  ----------------      -----------------     ---------------
   Total income from operations                       $    (3,354)             $   2,712           $  17,017
                                                  ================      =================     ===============
Other income (expense):
   Product sales and service                             $    558              $   1,246           $   1,194
   Skin care/health spa services                                0                      2                  (7)
                                                  ----------------      -----------------     ---------------
   Total other income:                                   $    558              $   1,248           $   1,187
                                                  ================      =================     ===============
Depreciation and amortization:
   Product sales and service                             $    355              $     332            $    331
   Skin care/health spa services                              194                  1,059                 384
                                                  ----------------      -----------------     ---------------
   Total depreciation and amortization                   $    549              $   1,391            $    715
                                                  ================      =================     ===============
Capital expenditures:
   Product sales and service                            $   1,058              $   1,120            $    336
   Skin care/health spa services                                0                     23                 218
                                                  ----------------      -----------------     ---------------
   Total capital expenditures                           $   1,058              $   1,143            $    554
                                                  ================      =================     ===============
Total assets (net of intercompany accounts):
   Product sales and service                            $  67,130              $  72,718           $  71,151
   Skin care/health spa services                              761                  1,300               2,013
                                                  ----------------      -----------------     ---------------
   Total assets                                         $  67,891              $  74,018           $  73,164
                                                  ================      =================     ===============
</TABLE>

                                      F-16
<PAGE>

9. EMPLOYEE BENEFIT PLANS

The Company offers a savings plan which allows eligible U.S. employees to make
tax-deferred contributions, a portion of which are matched by the Company.
Company contributions vest ratably with three years of employment and amounted
to $184,000, $173,000 and $168,000, in fiscal 2002, 2001 and 2000, respectively.

10. RESTRUCTURING COSTS AND OTHER CHARGES

During the quarter ended June 30, 2001, the Company determined that impairment
indicators existed relating to its Skin Care Center in Boston. In accordance
with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed Of," the Company evaluated the recoverability
of its spa-related long-lived assets, principally leasehold improvements. The
Company determined that the estimated future undiscounted cash flows were below
the carrying value of the spa-related long-lived assets at June 30, 2001.
Accordingly, the Company wrote off all remaining undepreciated long-lived
spa-related assets of $640,000. The estimated fair value was based on
anticipated future cash flows discounted at a rate of 9.5%, which is
commensurate with the risk involved.

During the quarters ended December 27, 1997 and June 30, 2001, the Company
recorded combined restructuring charges of $3,721,000 resulting from
management's decision to close the skin care center located in Scottsdale,
Arizona. During the three month-period ended December 29, 2001, the Company
secured a sublease for the Scottsdale facility. Per the sublease agreement, the
sublessee will pay all costs associated with the facility through the end of the
lease term ending June 2006. As an incentive to the sublessee, the Company
agreed to pay eight months of rent during the life of the sublease. The
sublessee commenced making payments to the landlord on behalf of the Company on
April 1, 2002.

As a result of the sublease, the Company revised the estimate of future costs
associated with the Scottsdale facility and, in the quarter ended March 30,
2002, reversed $693,000 of the restructuring reserve which represents primarily
the amount of future contractual sublease payments as well as revisions to the
net realizable value of certain leasehold improvements.

The following table reflects the restructuring charges incurred during fiscal
years 2000, 2001 and 2002:

<TABLE>
<CAPTION>
                                    PAYROLL &      FIXED          FACILITY
                                   SEVERANCE       ASSETS           COSTS*         TOTAL
<S>                                <C>             <C>           <C>            <C>
BALANCE AT JUNE 27, 1999              $ 210          $ 797            $ 512         $ 1,519

 Cash charges                           (65)            --             (206)           (271)
 Non-cash charges                        --           (205)              --            (205)
                                      -----          -----            -----         -------
BALANCE AT JULY 1, 2000                 145            592              306           1,043

  Cash charges                          (80)            --             (189)           (269)
  Non-cash charges                       --           (198)              --            (198)
  Restructure reserve                   113            447              553           1,113
                                      -----          -----            -----         -------
BALANCE AT JUNE 30, 2001                178            841              670           1,689

  Cash charges                          (60)            --             (185)           (245)

  Non-cash charges                       --           (192)              --            (192)

  Restructure reserve                    (6)          (239)            (448)           (693)
                                      -----          -----            -----         -------
BALANCE AT JUNE 29, 2002              $ 112          $ 410            $  37         $   559
                                      =====          =====            =====         =======
</TABLE>

                                      F-17
<PAGE>

As of June 29, 2002, the payroll and severance costs will be paid through
December, 2003, the leasehold improvements will continue to be amortized through
the end of the lease in 2006, and the facility costs represent rent to be paid
by Candela in each of fiscal years 2003, 2004 and 2005.

11. LEGAL PROCEEDINGS

During Candela's second fiscal quarter ended December 29, 2001, Candela notified
Physicians Sales and Service, Inc. ("PSS") a division of PSS World Medical,
Inc., that Candela was terminating its exclusive Distribution Agreement between
Candela and PSS due to PSS's failure to pay outstanding invoices totaling
approximately $2.3 million. These invoices arose as of June 30, 2001, in
connection with Candela's shipment of various units of equipment to PSS pursuant
to firm purchase orders received by Candela from PSS and were due and payable in
full on or before September 30, 2001. After receiving the Notice of Termination
from Candela, PSS filed a lawsuit against Candela in Middlesex County Superior
Court in Massachusetts as well as a demand for arbitration pursuant to the
mandatory arbitration clause in the distribution agreement. Both of PSS's
complaints allege breach of contract, a violation of the Massachusetts Unfair
Trade Practices Act, breach of the covenant of good faith and fair dealing,
promissory estoppel and intentional interference with contractual relations
resulting from Candela's termination of its distribution agreement with PSS.
PSS's motion for injunctive relief was denied, and Candela's motion to stay the
lawsuit pending the outcome of arbitration was allowed. Candela has filed
counterclaims in the arbitration for breach of contract and unfair competition,
among other claims, and seeking payment on all outstanding invoices. The
arbitration proceeding is in discovery at this time. Candela believes that PSS's
claims are without merit and intends to vigorously prosecute its claim for
payment of outstanding amounts and to defend against all of PSS's claims in the
arbitration proceeding. Candela is carrying a reserve of $300,000 included in
its reserve for bad debts as of the end of fiscal year 2002 to safeguard against
the risk of some nonpayment by PSS. Since PSS has challenged its obligation to
pay any of the $2.3 million of invoices at issue in the arbitration, if Candela
were to lose the arbitration proceeding, such loss would have a material adverse
effect on Candela.

From time to time, Candela is a party to various legal proceedings incidental to
its business. Apart from any possible adverse outcome in the PSS arbitration,
Candela believes that none of the legal proceedings which are presently pending
will have a material adverse effect upon our financial position, results of
operations or liquidity.

12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    QUARTER
2001                                      FIRST              SECOND          THIRD                   FOURTH
----                                    ---------          -----------     ----------              ---------
<S>                                       <C>              <C>             <C>                     <C>
Revenues                                  $ 13,111           $ 14,689           $ 18,796           $ 18,177
Gross profit                                 6,624              7,762              9,432              9,658
Net income (loss)                              169                848              1,554                (44)
Earnings per common share
     Basic earnings per share             $   0.02           $   0.08           $   0.14           $     --
     Diluted earnings per share           $   0.01           $   0.07           $   0.14           $     --
</TABLE>

<TABLE>
<CAPTION>
                                                                    QUARTER
2002                                      FIRST              SECOND          THIRD                   FOURTH
----                                    ---------          -----------     ----------              ---------
<S>                                       <C>              <C>             <C>                     <C>
Revenues                                  $ 10,380           $ 14,156           $ 16,147           $ 20,864
Gross profit                                 4,749              6,112              7,349              9,418
Net income (loss)                           (1,231)            (1,161)              (291)               529
Earnings per common share
     Basic earnings (loss) per share      $  (0.11)          $  (0.11)          $  (0.04)          $   0.05
     Diluted earnings (loss) per share    $  (0.11)          $  (0.11)          $  (0.04)          $   0.05
</TABLE>

During the fourth quarter of fiscal 2001, an additional restructuring charge
of $1.1 million was recorded resulting from the change in estimate of future
sublease payments regarding the skin care center located in Scottsdale,
Arizona. In the same quarter, an impairment of assets charge of $640,000 was
recorded for the long-lived assets, principally, leasehold improvements,
located at the skin care center located in Boston, Massachusetts. In the
third quarter of fiscal 2002, the Company reversed $693,000 of the
restructuring reserve to recognize future lease payments that will be made by
the sub-lessee for the Scottsdale facility.

                                      F-18
<PAGE>

                                   SCHEDULE II

                               CANDELA CORPORATION
                        VALUATION AND QUALIFYING ACCOUNTS
        FOR THE YEARS ENDED JUNE 29, 2002, JUNE 30, 2001 AND JULY 1, 2000

<TABLE>
<CAPTION>
                                                        COLUMN A        COLUMN B      COLUMN C       COLUMN D
                                                       Balance at      Additions     Deductions      Balance at
                                                        Beginning      Charged to        from          End of
  Description                                           of Period        Income        Reserves        Period
--------------                                        ---------------- -------------- -------------- -----------
<S>                                                   <C>             <C>              <C>              <C>
  Reserves deducted from assets to which they
    apply (in thousands):
    Allowance for doubtful accounts:

    Year ended June 29, 2002                               $  901           $449           $369           $  981
                                                           ======           ====           ====           ======
    Year ended June 30, 2001                               $1,207           $ 60           $366           $  901
                                                           ======           ====           ====           ======
    Year ended July 1, 2000                                $  998           $312           $103           $1,207
                                                           ======           ====           ====           ======
</TABLE>









                                      F-19
<PAGE>

     EXHIBIT INDEX
<TABLE>
<S>           <C>
21.1          Subsidiaries of the Company
23.1          Consent of Ernst & Young LLP, Independent Auditors
99.1          Certification pursuant to 18 U.S.C. Section 1350
99.2          Certification pursuant to 18 U.S.C. Section 1350
</TABLE>