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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 28,
2008                                  Commission file number 000-14742


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

Delaware(State or other jurisdiction of
incorporation or organization)

04-2477008(I.R.S. Employer
Identification No.)530 Boston Post Road, Wayland, Massachusetts(Address of principal executive offices)

01778(Zip Code)Registrant's telephone number, including area code508-358-7400


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 per share(Title of Class)

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ý    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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

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. o

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act)
Yes o    No ý

The aggregate market value of our voting stock held by non-affiliates was approximately $125,875,893 on December 29, 2007 based on the last
reported sale price of our common stock on the NASDAQ Stock Market on that day. As of September 9, 2008, 22,868,829 shares of the registrant's common stock, $.01 par value, were issued and
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference certain information from the registrant's definitive Proxy Statement relating
to the 2008 meeting of stockholders, which the registrant expects to file prior to October 26, 2008.



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CANDELA CORPORATION

2008 Form 10-K Annual Report

Table of Contents



Begins on
PagePART IItem 1.

Business

3Item 1A.

Risk Factors

19Item 1B.

Unresolved Staff Comments

24Item 2.

Properties

24Item 3.

Legal Proceedings

25Item 4.

Submission of Matters to a Vote of Security Holders

27PART IIItem 5.

Market for the Registrant's Common Equity; Related Stockholder Matters and Issuer Purchases of Equity
Securities

27Item 6.

Selected Financial Data

29Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

30Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

38Item 8.

Financial Statements and Supplementary Data

39Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

70Item 9A.

Controls and Procedures

70Item 9B.

Other Information

71PART IIIItem 10.

Directors, Executive Officers, and Corporate Governance

72Item 11.

Executive Compensation

72Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters

72Item 13.

Certain Relationships and Related Transactions; and Director Independence

72Item 14.

Principal Accountant Fees and Services

73PART IVItem 15.

Exhibits and Financial Statement Schedules

75


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PART I

Item 1.    Business.

Introduction

Candela Corporation ("Candela" or the "Company") is a pioneer in the development and commercialization of advanced aesthetic laser and
light-based systems that allow physicians and personal care practitioners to treat a wide variety of cosmetic and medical conditions including:



Since
our founding 38 years ago, we have continuously developed and enhanced applications for laser and light-based technology. In the mid-1980's we began developing
laser technology for medical applications, and since that time have shipped approximately 13,500 systems to over 85 countries. Since the early 1990's we have focused our organizational resources on
developing laser and light-based technology for use solely in cosmetic, dermatological, and aesthetic applications. Below is a sampling of Candela's innovations in the laser and light-based
technologies market:



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Candela's
current product line offers comprehensive and technologically sophisticated cosmetic and aesthetic lasers and light-based systems used by physicians and personal care
practitioners to treat a wide variety of cosmetic and medical conditions. Candela's product line includes the following innovative products:



There
were nearly 11.7 million surgical and non-surgical cosmetic procedures performed in the United States in 2007, as reported by the American Society for Aesthetic
Plastic Surgery ("ASAPS"). Women represented 91% of this total market or nearly 10.6 million procedures. The growth in the market for using aesthetic laser and light-based products is currently
a worldwide phenomenon being driven by an increase in discretionary income of aging baby-boomers, which continues to create new opportunities for Candela. This market demographic places a
premium on good health and personal appearance, and has demonstrated a willingness to pay for health and cosmetic products and services.

In
addition, continuous growth in the popularity of laser and light-based treatments among the general population is also spurring demand for Candela's products. In calendar 2007,
according to The American Society for Aesthetic Plastic Surgery, Americans spent an estimated $13.2 billion on non-surgical cosmetic procedures. In particular, lasers and
light-based systems are proving an attractive alternative for eliminating unwanted hair. Of the top five non-surgical cosmetic procedures performed in 2007, laser hair removal was the
third most popular and is one of the most common procedures performed on patients aged 18 and under. According to a 2007 report published by the Millenium Research Group, it is estimated that by 2011
the U.S. market for laser hair removal will reach approximately $238.5 million, representing a CAGR of 10.8%.

Candela
is dedicated to developing safe and effective products. Our aesthetic laser and light-based systems are further distinguished by being among the fastest, smallest and most
affordable in their respective markets. We believe that we have the largest worldwide market share because of these product attributes, our commitment to customer service, and continued innovation as
we meet the needs of our markets.

Candela
was incorporated in Massachusetts on October 22, 1970 and subsequently reincorporated in Delaware on July 1, 1985.

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Industry Overview

Lasers and light-based devices use the unique characteristics of light to achieve precise and efficacious therapeutic effects, often in
a non-invasive manner. The precise color, concentration and controllability of different types of 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 and light-based devices are
today 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 and light-based devices for performing aesthetic, dermatological, and cosmetic procedures including:



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. Light-based devices commonly referred to as intense pulsed light ("IPL"), feature a broad range of wavelength of light designed to target vascular and pigmentary
targets for facial rejuvenation procedures. 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 sun spots, age 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 or light-based devices with specific power requirements and optimized operating parameters. An active aesthetic
practice addressing a broad range of cosmetic procedures may need multiple lasers and light-based devices.

We
believe the aesthetic and cosmetic laser industry is now in an era of broad-based growth. The major factors converging to drive this growth
are:



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

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Managed
care and reimbursement restrictions in the United States, and similar constraints outside the United States, such as socialized medicine, 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
practitioners, family care practitioners, obstetricians, gynecologists and general and vascular surgeons.

Key
technical developments required for the broader cosmetic laser and light-based treatment markets relate to ease-of-use, versatility, 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 and light-based treatment
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 believes that a convergence of price, performance and technology is occurring in the aesthetic and cosmetic laser industry
which is driving market expansion. We believe we have the necessary infrastructure in place to capitalize on this expansion. Candela's objective is to continue to be the leading provider of aesthetic
and cosmetic lasers and light-based devices 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:



Increase Penetration of Our Traditional Customer Base.Our traditional customer base consists of dermatologists and plastic and cosmetic surgeons. We believe that
the continued innovation that results in the introduction of devices and applications that enable our traditional customers to deliver new services to their patients is the key to growth in this
segment. In addition, more versatile devices, differentiated features and increased efficacy and speed will enable Candela to continue to grow our share in this market.

Expand beyond our traditional customer base.As reimbursement rates have dropped over the past several years, many primary care physicians (family and general
practice, and obstetrics and gynecology physicians) have begun to seek new services to offer to their patients. Cosmetic laser and light-based procedures represent an ideal new service that is
appealing to their patients, and adds a new "cash-pay" revenue stream to their practices. As more primary care physicians realize that these procedures are safe and easy to perform and
that the devices are versatile and affordable, awareness of cosmetic laser and light-based procedures will continue to grow.

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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 devices with fewer parts and greater manufacturing efficiency, resulting in lower production costs. This enables us to offer more reliable
products at more affordable prices.

Expand Our Direct Domestic Distribution Channels.North America presently is the largest single geographic market for our products. We continue to upgrade our
United States direct and indirect sales forces to better address the needs of our traditional core markets.

Expand Our International Distribution Channels.Outside of the Unites States, we continue to strengthen our long-standing positions in Europe and Japan
and are seeking to expand our markets in Asia-Pacific and Latin America. We currently have direct sales offices in Madrid, Lisbon, Rome, Frankfurt, Paris, Cwmbran (U.K.), Osaka, Fukuoka,
Nagoya, Tokyo, Prospect (Australia), Netanya, and direct representation in China. Over the past year we increased the number and improved the quality of our international independent distributor
channels.

Introduce New Technologies that Improve Current Treatment Procedures.As the market for non-invasive cosmetic procedures continues to expand, Candela
has a strong focus on how to improve existing treatments to enable our customers to improve results and the overall experience for their customers. For example, reducing the pain associated with many
procedures while maintaining or improving efficacy is an area where Candela is committed to delivering new solutions. The introduction of the Serenity Pro device, utilizing
PSF technology for the reduction of pain during laser and light based procedures continues to be developed to expand the application range as well as the number of machines with which it
can be adapted to work with. This offers our customers a key differentiator in their market.

Develop Home Use Products.Candela has a dedicated Home Use product group to leverage initiatives that had previously been underway for medical office use within
our research and development organization. We are currently focused on the proof of concept development phase for two products for use in the home.

Continue Investing in Research & Development.We believe that continued investment in research and development is necessary to maintain our position as a
leader in the aesthetic laser and light-based device market. Our research and development approach is to develop high quality, reliable, and affordable products that address our existing markets and
also allow us to expand into larger, growing markets. In support of this approach, our research and development staff works closely with our marketing and operations teams to identify new clinical
applications that serve our markets. We have numerous research and development arrangements with leading physicians, hospitals and academic laboratories in the United States and throughout the world.
In a parallel effort, our research and development and engineering teams continue to optimize our existing products by adding new
technologies, increasing the speed of treatment and ease of use for our customers as well as reduce the overall size of our products.

The Market for Aesthetic and Cosmetic Laser and Light-Based Systems

Our traditional customer base for aesthetic and cosmetic devices consists of dermatologists and plastic and cosmetic surgeons. In
addition, other practitioner groups are emerging as potential customers, including general and family practitioners, obstetricians, gynecologists, and general and vascular surgeons. In the United
States, according to the American Medical Association and various professional societies, there are approximately 12,000 dermatologists, 8,000 plastic and cosmetic surgeons and 11,000 ear, nose and
throat specialists. Practitioners in other specialties that are beginning to buy aesthetic and cosmetic laser and light-based systems include 70,000 general and family practitioners, 35,000
obstetricians and gynecologists, and 28,000 general and vascular surgeons. In

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addition,
the aesthetic and cosmetic laser and light-based system market includes non-medical practitioners, notably electrologists, of which there are an estimated 6,000 in the United
States and approximately 4,000 med spa owners in the United States.

The
end markets for cosmetic procedures encompass broad and growing patient groups, including aging "baby boomers" as well as younger age groups. Baby boomers were approximately
80 million, representing approximately 29% of the total United States 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 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 United States underlie the growth of the aesthetic and cosmetic market outside of the United States as well.

Hair Removal.We believe that the great majority of the 108 million women over the age of 16 in the United States 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.

We
believe the market for laser and light-based hair removal is growing as the customer compares laser and light-based treatments to the other hair removal methods currently available.
The benefits of a laser and light-based system treatment include:



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:



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Pigmented Lesions/Tattoos.Benign pigmented lesions can be both epidermal, on the outer layer of skin, and dermal, on the innermost layer of skin, natural or
man-made (tattoos) and can constitute a significant cosmetic problem to those who have them. There has been significant increase in recent years in the number of people getting tattoos.
This growth is expected to result in a compounded annual growth rate of 16.8% for the Tattoo Removal Laser market between 2007 and 2010.

Skin Rejuvenation.Skin rejuvenation is one of the fastest growing segments of the aesthetic laser and light-based system market. 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 and skin
tightening treatments. While the market for skin rejuvenation is greatest in the United States, significant opportunities abound in international markets where there is an aging demographic, such as
Japan, or a high prevalence of photo-damaged skin, such as Australia and Latin America.

Acne.Patients have expressed dissatisfaction with existing therapies for acne and acne scarring. These therapies include the following: drug therapy,
dermabrasion, ablation, excision, chemical peeling and injections of filler materials. These therapies have minimal efficacy, a significant side-effect profile, require long recovery
periods and, in most cases, do not meet patient expectations. For many of these patients, laser treatment can represent a better treatment alternative. Laser therapy can effectively target the
sebaceous gland which is the root cause of acne.

Acne Scars.The majority of existing acne scar patients that initially seek traditional treatments decide not to undertake a procedure due to the
side-effects and social down-time. A more acceptable alternative for acne scar treatment is laser therapy. In the treatment of acne scars, the laser initiates deposition of new
collagen to raise depressions in the skin, reducing the appearance of acne scars. Over a series of treatments, new collagen can fill in and soften the appearance of acne scars.

Psoriasis.The National Psoriasis Foundation estimates that psoriasis afflicts more than seven million Americans and that between 150,000 and 260,000 new cases are
diagnosed each year.

Skin Resurfacing.In calendar 2006, there were approximately 575,000 skin resurfacing procedures performed in the U.S., most using non-ablative skin
resurfacing technologies. In addition to these procedures there were also approximately 560,000 chemical peels and 995,000 microdermabrasion procedures conducted in the U.S., respectively.

Candela's Products

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

Our
objective is to remain a leading provider of aesthetic and cosmetic lasers by continually striving to develop effective, versatile, smaller, faster, and less expensive devices.
Candela has been, and continues to be, a pioneer in the laser industry. From the start, our mission has been to lead the way in the development of innovative laser products which include:

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Dynamic Cooling Device ("DCD").The DCD cools 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.

GentleMax



SmoothPeel



AlexTriVantage



Serenity Pro



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GentleLASE®



GentleYAG®



Vbeam®



Smoothbeam®



Sales and Distribution

We market and sell our products worldwide. Executives in North America, Latin America, Japan, Asia-Pacific, 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 distributor sales varies by region. Generally, our distributors enter into 2-3 year exclusive agreements during which they typically agree
not to sell our competitors' products.

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Our
sales strategy is to choose the most productive and practicable distribution channel within each of our geographic markets.

We
sell products in the United States primarily through our direct sales force to our traditional customer base of dermatologists and plastic and cosmetic surgeons. Candela's products
are distributed to our non-traditional markets through an exclusive arrangement with McKesson's Medical Surgical Division. McKesson has approximately 450 dedicated sales representatives
that showcase a wide range of products to family and general practice, and obstetrics and gynecology, physicians.

Outside
the United States, we sell our products in Europe, Japan, Latin America, the Middle East, and Asia-Pacific through direct sales offices and distribution
relationships. We have a total of 144 employees in our direct sales offices in Madrid, Lisbon, Rome, Frankfurt, Paris, Tokyo, Nagoya, Fukuoka, Osaka, Cwmbran, Sydney and Netanya. We also have
established distribution relationships in China, Europe, Japan, Africa, Latin America, and the Middle East. Outside the United States, we are utilizing approximately 60 distributors. Refer to
Note 12 of our Consolidated Financial Statements for additional financial information about segments and geographical areas.

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 United States includes sales from our German, Spanish, Italian, United Kingdom, French, Japanese, Israeli, and Australian subsidiaries, as well as sales shipped directly to international locations
from the United States.

Revenues:

June 28,
2008

June 30,
2007

July 1,
2006(in thousands)United States and Canada

$
56,210

$
64,885

$
69,330Europe


55,652


42,356


34,618Japan and Asia-Pacific


31,329


29,950


30,175Latin America & all others


5,027


11,366


15,343$
148,218

$
148,557

$
149,466


Service and Support

Candela believes that quick and effective delivery of service is important to our customers. 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, Australia, the U.K., Spain, Portugal, Italy, Germany, and France. Independent
distributors also maintain parts depots.

We
also believe a highly trained and qualified service staff is important 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 authorized. We provide service training in Asia, Europe and the United States. In addition, we have
service and technical support staff in each of our markets worldwide.

Post-warranty
product maintenance and repair provides an additional recurring source of revenue. Customers may elect to purchase a service contract or purchase service on a
time-and-materials basis. Candela's service contracts offer a range of service levels and options, including additional clinical support. The contract terms generally run in 12
or 24-month intervals (See Item 8).

Candela
emphasizes education and support of its customers. Periodic device calibration/verification, coupled with the continuous training of our service providers, helps to ensure
product reliability. We extend prompt and courteous technical and clinical support to our customers when needed.

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Manufacturing and Raw Materials

We design, assemble, and test our branded products at our Wayland, Massachusetts, South Plainfield, New Jersey, and Netanya, Israel
facilities. Ensuring adequate and flexible production capacity, applying lean manufacturing techniques, continually reducing costs, and maintaining superior product quality are top priorities of our
manufacturing organization. We achieve our goals by:



Our
facility has ISO 13485 certification and has established and is maintaining a quality system that meets the requirements of ISO 13485:2003 from both the EC Directive
93/42/EEC and Canadian Medical Devices Regulation. The ISO 13485 certification provides evidence that Candela conforms to quality system requirements for the design, development, production,
servicing and distribution of medical lasers and accessories.

Our
products are manufactured with standard components and subassemblies supplied by third party manufacturers 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, Alexandrite rods and other raw materials for our products. We believe that over time
alternative component and subassembly manufacturers and suppliers can be identified if our current third party manufacturers and suppliers fail to fulfill our requirements.

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 (R&D) staff has demonstrated its ability to develop innovative new products
that meet evolving market needs. Our core competencies include:



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

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research
institutions. In the United States in particular, we must receive United States Federal Drug Administration ("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 create and respond to
market opportunities. We believe this interaction between functional groups facilitates the introduction of new products with the right balance of features, clinical benefits, performance, quality,
and cost. Historically, our research and development effort has relied primarily on internal development building on our core technologies. In addition to our acquisition of Inolase during fiscal
2007, which has permitted us to expand our internal R&D capabilities, we have engaged the services of several independent engineering and development firms to assist in the acceleration of new product
development.

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
Dynamic Cooling Device which was developed in conjunction with the Beckman Laser Institute at the University of California, Irvine. We anticipate continuing joint research and licensing arrangements
with reputable medical research institutions in future periods.

Our
expenditures on research and development are set forth in Item 7.

Backlog

We typically have not had, and do not anticipate having, significant backlog in the future. Accordingly, we do not believe that our
backlog at any particular date is necessarily an accurate predictor of revenue for any succeeding period.

Customers

Our sales are not dependent on any single customer or distributor, and we continue to expand our distribution channel worldwide through
direct and indirect sales forces. We experience some seasonal reduction of our product sales in our first fiscal quarter due to the summer holiday schedule of physicians and their patients.

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 technologies and products able to address
multiple clinical applications. Unlike Candela, few of our competitors focus exclusively on the cosmetic and aesthetic laser market and several rely on a single technology which can be limiting. 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:



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Proprietary Rights

We have numerous patents and have a number of patent applications pending to protect our rights in certain technical aspects of our
hair removal, wrinkle removal, acne treatment, benign vascular lesion, pigmented lesion, and other laser systems.

In
addition to our portfolio of issued patents and patent applications, we license patented technology from third parties. We use our patented DCD under a license agreement to patent
rights owned by the Regents of the University of California ("Regents").

In
August 2000, we 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:



Cool
Touch 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 agreement, Candela is no
longer 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 United States. The loss of any material
patent, trademark, trade name, trade secret or copyright could hurt our business, results of operations and financial condition.

We
believe that our products do not infringe the rights of third parties, although two parties are presently asserting that our products infringe their patents (see Item 3). We
cannot be certain that third parties will not assert infringement claims against us in the future or that any such assertions 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 FDA pursuant to the Federal Food, Drug, and Cosmetic Act. The FDA's 510(k) clearance process usually takes from three 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

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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
can also 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 non-significant 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.

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Pervasive and Continuing FDA Regulation.A host of regulatory requirements apply to marketed devices such as our laser and light-based products, including labeling
regulations, the Quality System Regulation (which requires manufacturers to follow 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. Our Class II devices 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 United States 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 on
a product prior to sale of those products within the European Union. During this process, the sponsor must demonstrate conformance to quality system requirements; i.e., ISO13485:2003.

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.
To date, Candela's compliance with laws that regulate the discharge of materials into the environment or otherwise relate to the protection of the environment has not had a material effect on its
ongoing operations. Candela has not made any material expenditure for environmental control facilities. However, we cannot be certain that we will not be required to incur significant costs to comply
with such laws and regulations in the future.

Product Liability and Warranties

Our products are generally covered by a standard warranty, with an option to purchase extended warranty contracts at the time of
product sale or service contracts after the time of sale. We maintain a reserve based on anticipated standard 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 believe that we maintain appropriate product liability insurance with respect to our products. We cannot be
certain that with respect to our current or future products, such insurance coverage will continue to be available on

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terms
acceptable to us or that such coverage will be adequate for liabilities that may actually be incurred.

The Skin Care Centers

In 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 a spa in Boston, Massachusetts in 1996, and opening a new facility in Scottsdale,
Arizona in 1997. We subsequently decided to discontinue our skin care center efforts. We closed our Scottsdale facility in 1997 and the Boston facility in 2003.

Applied Optronics

In 2003, Candela acquired substantially all of the assets of Applied Optronics, the diode division of Schwartz
Electro-Optics, Inc. Applied Optronics was a leading manufacturer of high-powered, pulsed and CW diode lasers, and was a component supplier to the OEM market that serves a variety
of industries including the military, medical, industrial, research and robotics fields. Applied Optronics was the lead supplier of the diodes for our
Smoothbeam®diode laser system. The Applied Optronics division of Candela, located in South Plainfield, New Jersey, generates revenue from
diode sales to third-party customers.

Inolase

On March 6, 2007, we acquired Inolase (2002) Ltd. ("Inolase") a non-public company engaged in the development
and manufacture of proprietary pneumatic skin flattening PSF devices for the aesthetic light-based treatment industry as well as the development of intellectual property related to medical devices and
light sources. It is now a wholly
owned subsidiary of Candela which continues to engage in commerce under the name Inolase. This operation which includes research and development, sales and marketing, and manufacturing (including
ISO 13485 certification) is located in Netanya, Israel.

Employees

As of June 28, 2008, we employed 405 employees, 261 in the United States and 144 internationally. None of our employees are
subject to collective bargaining agreements.

Available Information

Access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to these reports filed with or furnished to the Securities and Exchange Commission may be obtained through the Investor Relations section of our website at
www.candelalaser.com/ir_corp.asp as soon as reasonably practical after we electronically file or furnish these reports. We do not charge for access to and viewing of these reports. Information on our
Investor Relations page and on our website is not part of this Annual Report on Form 10-K or any of our other securities filings unless specifically incorporated herein by
reference. In addition, our filings with the Securities and Exchange Commission may be accessed through the Securities and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval
system at www.sec.gov. All statements made in any of our securities filings, including all forward-looking statements or information, are made as of the date of the document in which the statement is
included, and we do not assume or undertake any obligation to update any of those statements or documents unless we are required to do so by law.

Forward-looking and Cautionary Statements

Certain statements contained in this Form 10-K may constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 ("Reform Act"). We may

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also
make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to stockholders and in press releases. In addition, our representatives
may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does
not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects," and similar expressions, may identify such
forward-looking statements. Such forward looking statements include but are not limited to: that we have the necessary infrastructure in place to capitalize on expansion; the affordability of our
products will allow for expansion; that we can lower production costs; or that the market will expand beyond baby boomers. Candela assumes no obligation to update or revise any forward-looking
statements. In accordance with the Reform Act, set forth under Item 1A "Risk Factors", are cautionary statements that accompany those forward-looking statements. Readers should carefully review
such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends.
Those cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this Annual Report, in our filings with the Securities and Exchange Commission, or in
materials incorporated therein by reference.

Candela
GentleLASE, Vbeam, GentleYAG and Smoothbeam are registered trademarks and GentleMax, AlexTriVantage, SmoothPeel, Dynamic Cooling Device, DCD and the Candela flame are trademarks
of Candela Corporation. Serenity, Pneumatic Skin Flattening, and, PSF are trademarks of Inolase (2002), Ltd.

Item 1A.    Risk Factors.

The following important factors, among others, could cause our actual operating results to differ materially from those indicated or
suggested by forward-looking statements made in this Form 10-K or presented elsewhere by management from time to time.

Unfavorable results in our intellectual property litigation with Palomar Medical Technologies may result in significant decline to our
stock price.

On August 9, 2006, one of our competitors, Palomar Medical Technologies ("Palomar"), alleged that the manufacture, use and sale of our products for laser
hair removal infringe a certain United States patent. Public announcements concerning this litigation that are unfavorable to us may result in significant declines in our stock price. An adverse
ruling or judgment in this matter could cause our stock price to decline significantly.

Litigation
with Palomar will be expensive and protracted, and our intellectual property position may be weakened as a result of an adverse ruling or judgment. Whether or not we are
successful in the pending lawsuits, litigation consumes substantial amounts of our financial resources and diverts management's attention away from our core business. See
Item 3"Legal Proceedings."

The class action litigation with the Western Pa. Elec. Employees Pension Fund, and other litigation, could adversely affect our business,
results of operations, and financial condition, as well as cause our stock price to decline.

Regardless of whether we are successful, the class action litigation and other litigation could consume a substantial amount of our financial resources and divert
management's attention away from our core business. This could adversely affect our business, results of operations, and financial condition. Additionally, adverse rulings or judgments could
negatively affect our business, results of operations, and financial condition and cause our stock price to decline significantly. Also, public announcements concerning the litigation that are
unfavorable to us could cause our stock price to decline significantly. See Item 3"Legal Proceedings."

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We depend on sales from outside the United States that could be adversely affected by changes in international markets.

We sell more than half of our products and services outside the United States. International sales accounted for approximately 62% of our revenue for fiscal year
2008 and we expect that they will continue to be significant. Accordingly, a major part of our revenues and operating results could be
adversely affected by risks associated with international commerce. Significant fluctuations in the exchange rates between the United States 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 business include:



The failure to obtain Alexandrite rods for the GentleLASE® and the AlexTriVantage systems from our sole supplier
would impair our ability to manufacture and sell these systems.

We use Alexandrite rods to manufacture the GentleLASE®and the AlexTriVantage systems,
which accounts for a significant portion of our total revenues. We depend exclusively on our contract manufacturer to supply these rods, for which no alternative supplier meeting our quality standards
exists. We cannot be certain that our contract manufacturer 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



Customer behavior



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Company operations



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 if 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 United States generally must receive either "510(k) clearance" or "PMA approval" in advance from the
United States Food and Drug Administration ("FDA") pursuant to the Federal Food, Drug, and Cosmetic Act. The FDA's 510(k) clearance process usually takes from three 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. 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.

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

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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:



We may also be subject to state regulations. State regulations, and changes to state regulations, may prevent sales to particular end
users or may restrict use of the products to particular end users or under particular supervision which may decrease revenues or prevent growth of revenues.

Our products may also be subject to state regulations. Federal regulation allows our products to be sold to and used by licensed practitioners as determined on a
state-by-state basis, which complicates monitoring compliance. As a result, in some states non-physicians may purchase and operate our products. In most states, it
is within a physician's discretion to determine whom they can supervise in the operation of our products and the level of supervision. However, some states have specific regulations as to appropriate
supervision and who may be supervised. A state could disagree with our decision to sell to a particular type of end user or change regulations to prevent sales to particular types of end users or
change regulations as to supervision requirements. In several states applicable regulations are in flux. Thus, state regulations and changes to state regulations may decrease revenues or prevent
growth of revenues.

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 United States until such patents are issued and are maintained in secrecy for a period of time outside the United States. 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:



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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 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:



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 that 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 and considerations, we have no present understandings, commitments, or
agreements with respect to any acquisitions or joint ventures.

We face risks associated with product warranties.

We could incur substantial costs as a result of product failures for which we are responsible under warranty obligations.

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

Some of our customers and prospective customers have had difficulty in procuring or maintaining liability insurance to cover their operation and use of our
products. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using our
products and, industry-wide, potential customers may opt against purchasing laser and other light-based products due to the cost of or inability to procure insurance coverage.

Failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, operating
results and stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include a report by our management on our internal control over financial reporting. Such
report must contain an assessment by management of the effectiveness of our internal control over financial reporting as of the end of our fiscal year and a statement as to whether or not such
internal control is effective.

Effective
internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. If we cannot provide reasonable
assurance with respect to our financial reports and effectively prevent fraud, our brand and operating results could be harmed. Internal control over financial reporting may not prevent or detect
misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls cannot
provide absolute assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial
reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their
implementation, our business and operating results could be harmed, and we could fail to meet our reporting obligations, which could have a material adverse effect on our business.

Our
efforts to comply with Section 404 have resulted in, and are likely to continue to result in, significant costs, the commitment of time and operational resources and the
diversion of management's attention.

Item 1B.    Unresolved Staff Comments.

Not applicable.

Item 2.    Properties.

We lease two facilities totaling approximately 38,000 square feet for our operations in Wayland, Massachusetts, which is located
approximately 20 miles west of Boston. The leases on these facilities expire September 2009. We also lease a 12,000 square foot facility in South Plainfield, New Jersey for our diode operation. This
lease ends on October 31, 2011. Our management believes that its current facilities are suitable and adequate for our near-term needs.

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Our subsidiaries currently lease the following facilities:



Item 3.    Legal Proceedings.

The Company is currently involved in three litigation matters with Palomar Medical Technologies, Inc. ("Palomar").



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While
the Company intends to vigorously contest Palomar's allegations, and to pursue its own claims against Palomar, each lawsuit is inherently uncertain and unpredictable as to its
ultimate outcome. An adverse outcome in Palomar's suit against the Company would materially hurt the Company's business, financial condition, results of operations and cash flows. In contrast, an
adverse outcome in either of the two lawsuits which the Company has initiated against Palomar would not likely have a material adverse effect on the business or financial condition of the Company.

On
February 19, 2008, Cardiofocus, Inc. ("Cardiofocus") filed suit against the Company and eight other companies in the United States District Court for the District of
Massachusetts, asserting willful infringement by the Company of U.S. Patent 6,547,780, 6,159,203 and 5,843,073. Cardiofocus seeks compensatory and treble damages, as well as attorneys' fees and
injunctive relief. On April 21, 2008, the Company answered Cardiofocus' complaint and asserted a variety of counterclaims against Cardiofocus.

On
April 2 and April 22, 2008, respectively, two substantially similar putative class action lawsuits, entitled Western Pa. Elec. Employees Pension Fund, et al.,
1:08-cv-10551-DPW ("Western Pa.") and Caballero v. Candela Corp., et al., Civ. No. 1:08-cv-10673-DPW ("Caballero"), were
filed against Candela and two of its officers in the United States District Court for the District of Massachusetts purporting to assert claims for violations of §§10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeking, among other things, compensatory damages and reasonable costs and expenses. On
June 2, 2008, plaintiffs in the Western Pa. case formally moved for consolidation and the appointment of lead plaintiff and lead counsel. On July 10, 2008, that motion was granted, the
cases were consolidated, and a lead plaintiff and lead counsel were appointed. On August 25, 2008, lead plaintiff filed a consolidated amended complaint. The consolidated and amended complaint
purports to be brought on behalf of all open-market purchasers of Candela common stock from November 1, 2005 through August 21, 2006 and alleges that Candela made certain
false and misleading statements to investors expressing optimism regarding its financial condition and failed to disclose (i) the possibility that Palomar, one of Candela's leading competitors,
would initiate patent enforcement litigation against Candela and (ii) that Candela was purportedly losing market share to its

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competitors.
The Company believes the case is without merit and intends to defend against it vigorously.

On
April 16, 2008, a shareholder derivative action entitled Forlenzo v. Puorro, et al., Civ. No. 08-1532, was filed in Middlesex County, Massachusetts Superior
Court against the individual members of Candela's board of directors and certain of its current and former officers purporting to assert claims for breach of fiduciary duty and related claims arising
out of allegations similar to those asserted in the class action litigation discussed above. The complaint seeks on behalf of Candela, among other things, damages, restitution, and injunctive relief.
The Company is considering what action to take in response.

Item 4.    Submission of Matters to a Vote of Security Holders.

Not applicable.

PART II

Item 5.    Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

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

At
September 9, 2008, there were approximately 307 holders of record of our common stock and the closing sale price of our common stock was $3.04.

Market Price of Common Stock

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

High

LowFiscal 2007First Quarter

$
16.13

$
10.06Second Quarter


14.38


10.53Third Quarter


12.79


10.07Fourth Quarter


12.68


10.47Fiscal 2008First Quarter

$
11.65

$
7.14Second Quarter


8.76


5.44Third Quarter


5.58


3.01Fourth Quarter


3.40


2.12


Repurchase of our Equity Securities

We did not repurchase any of our common stock during the three-month period ended June 28, 2008.

Dividend Policy

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

Securities Authorized for Issuance under Equity Compensation Plans

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

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Stock Performance Graphs

The following performance graph shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject
to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Candela under the Securities Act or the Exchange Act.

The
graph below compares Candela Corporation's cumulative 5-year total shareholder return on common stock with the cumulative total returns of the S&P 500 index and
SIC Code 3845. The companies in SIC Code 3845 are listed respectively in footnote (a) below. The graph tracks the performance of a $100 investment in our common stock, in each of the peer
groups, and the index (with the reinvestment of all dividends) from 6/28/2003 to 6/28/2008.

GRAPHIC

6/28/03

7/3/04

7/2/05

7/1/06

6/30/07

6/28/08Candela Corporation


100.00


180.86


195.53


283.72


207.16


42.58S&P 500


100.00


119.11


126.64


137.57


165.90


144.13SIC Code 3845


100.00


110.80


117.90


111.22


122.91


124.32


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Item 6.    Selected Financial Data.

The table set forth below contains certain consolidated financial data for each of the last five fiscal years of Candela. 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.

For the Year Ended(in thousands, except per share data)
Consolidated Statement of Operations Data:

June 28,
2008

June 30,
2007

July 1,
2006

July 2,
2005

July 3,
2004Revenue:Lasers and other products

$
106,050

$
113,225

$
121,838

$
102,323

$
87,965Product-related service


42,168


35,332


27,628


21,578


16,473Total revenue


148,218


148,557


149,466


123,901


104,438Cost of sales:Lasers and other products


50,452


49,303


54,748


45,235


36,413Product related service


30,968


24,191


20,869


17,918


14,860Litigation related charges











4,829


Total cost of sales


81,420


73,494


75,617


67,982


51,273Gross profit:


66,798


75,063


73,849


55,919


53,165Operating expenses:Selling, general and administrative


69,636


53,562


44,297


40,165


33,978Research and development


12,705


18,146


8,879


6,890


5,302Litigation related charges











773


Total operating expenses


82,341


71,708


53,176


47,828


39,280(Loss) income from operations:


(15,543
)

3,355


20,673


8,091


13,885Other income (expense):Interest income


1,628


2,719


1,748


640


308Other income (expense), net


(1,645
)

3,725


(19
)

(73
)

905Total other income (expense)


(17
)

6,444


1,729


567


1,213(Loss) income from continuing operations before income tax:


(15,560
)

9,799


22,402


8,658


15,098(Benefit from) provision for income taxes


(6,489
)

3,543


7,468


2,194


4,586(Loss) income from continuing operations


(9,071
)

6,256


14,934


6,464


10,512Discontinued operations:Loss from discontinued skin care center operations of $473 net of income tax benefit of $175














(298
)Gain (loss) on disposal of skin care center, including revision of leasehold obligations of $1,374 and provision for operating losses of $(3,348) less income tax of
$(515) and income tax benefit of $1,253 in 2005 and 2004, respectively











859


(2,095
)Net (loss) income

$
(9,071
)
$
6,256

$
14,934

$
7,323

$
8,119Net (loss) income per share of common stockBasic:Income (loss) from continuing operations

$
(0.40
)
$
0.27

$
0.65

$
0.29

$
0.48Income (loss) from discontinued operations











0.04


(0.11
)Net (loss) income

$
(0.40
)
$
0.27

$
0.65

$
0.33

$
0.37Diluted:Income (loss) from continuing operations

$
(0.40
)
$
0.27

$
0.62

$
0.28

$
0.46Income (loss) from discontinued operations











0.04


(0.10
)Net (loss) income

$
(0.40
)
$
0.27

$
0.62

$
0.32

$
0.36Basic weighted average shares outstanding


22,725


23,086


23,017


22,388


21,902Diluted weighted average shares outstanding


22,725


23,525


23,948


23,073


22,712


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For the Year EndedConsolidated Balance Sheet Data, in thousands:

June 28,
2008

June 30,
2007

July 1,
2006

July 2,
2005

July 3,
2004Cash, restricted cash, and cash equivalents

$
21,059

$
27,200

$
40,360

$
56,383

$
37,139Marketable securities


12,131


11,773


27,332





Marketable securities (long-term portion)


3,512


12,260


11,953





Working capital


68,462


66,775


81,910


70,378


61,387Total assets


158,095


150,230


149,656


116,816


100,479Long-term debt














Total stockholders' equity


99,789


101,510


100,012


74,339


66,769


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,"
"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
Item1A. "Risk Factors" as well as other risks and uncertainties referenced in this Annual Report on Form 10-K.

Critical 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 liabilities in the consolidated financial statements and accompanying notes.
Estimates are used for, but not limited to, receivables valuation, valuation of investments, inventory valuation, depreciable lives of fixed assets, valuation of goodwill and acquired intangibles,
income taxes, stock-based compensation, and accrued warranties. 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.We generally recognize revenue upon shipment of product to customers and the fulfillment of all contractual terms and conditions, pursuant to
the guidance provided by SAB No. 104,"Revenue Recognition."Credit is not extended to customers and revenue is not recognized until
collectibility is reasonably assured. 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 us that is not covered by a service contract is recognized as the services are provided. In certain instances, we may sell products together with extended warranties or maintenance
contracts. The revenue recognized per element is determined by allocating the total sales price to each element, based on the relative fair values in accordance with Emerging Issues Task Force
("EITF") 00-21,"Revenue Arrangements with Multiple Deliverables."Separately priced extended warranty and maintenance products are
accounted for over the life of the contract. Unearned revenue is reported on the balance sheet as deferred revenue.

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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. We will also provide a general reserve based on the aging of the accounts and notes receivable based on
historical experiences of write-offs.

As
of June 28, 2008, our accounts receivable balance of $43.3 million is reported net of allowances for doubtful accounts of $2.3 million. We believe our reported
allowances at June 28, 2008, 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 that would result in additional selling, general and administrative expenses being recorded for the period in which such determination is 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 28, 2008, our inventory of $33.1 million is stated net of inventory reserves
of $2.4 million. If actual demand for our products deteriorates, or market conditions are less favorable than those that we project, additional inventory reserves may be required.

Fair Value of Financial Instruments.Carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate their fair values due to the short term nature of these instruments. Held-to-maturity marketable securities, which are generally comprised of
short-duration certificates of deposit or government-backed bonds, are valued at amortized cost which approximates market value. Available-for-sale securities are
marked-to-market on a quarterly basis and the associated change is reflected as a component of other comprehensive income (loss), net of tax.

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 28, 2008, 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

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or
material or service delivery costs differ from our estimates, our warranty liability would need to be revised accordingly.

Stock based compensation.Effective July 3, 2005, we implemented the fair value recognition provisions of Statement of Financial Accounting Standards
No. 123 revised ("SFAS No. 123R") and Staff Accounting Bulletin 107 ("SAB 107") for all share-based compensation that was not vested as of July 2, 2005. We adopted SFAS
No. 123R using a modified prospective application, as permitted under SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application, we were required to
record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Compensation
cost is recognized over the period that an employee provides service in exchange for the award.

The
fair value of each option/stock appreciation rights ("SARs") award is estimated on the date of grant using the Black-Scholes option-pricing model incorporating various assumptions.
Expected volatility is determined using both current and historical implied volatilities of the underlying stock which is obtained from public data sources. The expected life of the options is based
on historical observations adjusted for the estimated exercise dates of unexercised options/SARS. Additionally, separate groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The average risk-free interest rate is based on the U.S. treasury security rate with a term to maturity that approximates the option's
expected life as of the grant date. The forfeiture rate is based on historical experience as well as future expectations. Forfeitures are required to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.

Contingencies.We are subject to proceedings, lawsuits and other claims. We assess 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. We record charges for the costs we
anticipate incurring in connection with litigation and claims against us when we can reasonably estimate these costs.

Restructuring.We record restructuring charges incurred in connection with consolidation or relocation of operations, exited business lines, or shutdowns of
specific sites. These restructuring charges, which reflect our 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.

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 (see Note 11).

On
July 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, ("FIN 48"), "Accounting for Uncertainty in Income Taxes", as
discussed more fully below.

FIN
48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.
FIN 48 also

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provides
guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

FIN
48 prescribes a two-step process to determine the amount of tax benefit to be recognized. The first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The
second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective
to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation
is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition
or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period (see Note 11).

Overview

We research, develop, manufacture, market, sell, distribute, and service lasers and light-based products used to perform aesthetic and
cosmetic procedures. We sell our lasers and light-based products principally to medical practitioners. We market our 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 generate our revenue from the sale of lasers, light-based devices, and other products, and
product-related services.

We
distribute products worldwide through our direct sales force and independent distributors.

We
assemble substantially all of our products in our Wayland, Massachusetts, South Plainfied, New Jersey, and Netanya, Israel facilities in the quarter in which they are shipped, and
backlog has not been significant. We experience some seasonal reduction of our product sales in our first fiscal quarter due to the summer holiday schedule of physicians and their patients.

Our
products are generally covered by a standard warranty, with an option to purchase extended warranty contracts at the time of product sale or service contracts after the time of sale.
Distributor sales generally include a parts warranty only. The anticipated cost associated with the standard warranty coverage is accrued at the time of shipment as a cost of sales. Any costs
associated with product installation are also recognized as costs of sales. 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.

International
revenue, consisting of sales from our subsidiaries in the United Kingdom, Germany, France, Italy, Spain, Japan, Israel and Australia, and sales consisting of products
shipped from the United States directly to international locations from the United States during the fiscal years ended June 28, 2008, June 30, 2007, and July 1, 2006 represented
62%, 56%, and 54% 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 28, 2008, June 30,
2007, and July 1, 2006 contained 52 weeks each, respectively.

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Results of Operations

The following tables set forth selected financial data for the periods indicated, expressed as a percentage of total revenue.

For the Year EndedJune 28,
2008

June 30,
2007

July 1,
2006Revenue Mix:Lasers and other products


71.6
%

76.2
%

81.5
%Product-related services


28.4
%

23.8
%

18.5
%Total revenue


100.0
%

100.0
%

100.0
%Gross profit:Lasers and other product


37.5
%

43.0
%

44.9
%Product-related services


7.6
%

7.5
%

4.5
%Total gross profit


45.1
%

50.5
%

49.4
%Operating expenses:Selling, general & administrative


47.0
%

36.0
%

29.7
%Research and development


8.6
%

12.2
%

5.9
%Total operating expenses


55.6
%

48.2
%

35.6
%(Loss) income from operations


-10.5
%

2.3
%

13.8
%Other income, net


0.0
%

4.3
%

1.2
%(Loss) income before income taxes


-10.5
%

6.6
%

15.0
%(Benefit from) Provision for income taxes


-4.4
%

2.4
%

5.0
%Net (loss) income


-6.1
%

4.2
%

10.0
%


Fiscal Year Ended June 28, 2008 Compared to Fiscal Year Ended June 30, 2007

Revenue.Revenue for the year ended June 28, 2008 was $148.2 million as compared to $148.6 million in the prior fiscal year. The slight
decrease is primarily related to the slowdown in our domestic market that is related to the current economic conditions which has been offset by growth in our international operations as well as our
service area.

International
revenue increased approximately $8.3 million over the prior year and accounted for approximately 62% of total revenue for fiscal 2008 as compared to approximately
56% for fiscal 2007. This $8.3 million increase, was net of an approximate $6.3 million decreases in sales in Latin America, which represents approximately a 56% decrease in sales for
that region. Sales in Europe increased approximately 31%, representing a $13.3 million increase in Europe as compared to fiscal year 2007. Sales in our Asia Pacific area also had strong growth
of approximately $3.9 million.

Product-related
service revenue increased approximately 16% to $42.2 million in fiscal year 2008 from $35.3 million in fiscal year 2007. This increase was consistent with
the increase in systems sold over the past few years and increase in renewal contracts.

Gross Profit.Gross profit decreased approximately $8.3 million to $66.8 million, or 45.1% of revenue, in fiscal year 2008 from $75.1 million,
or 50.5% of revenue, in fiscal year 2007. The decrease in gross profit results from a shift in our revenue mix from domestic sales to more international.

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International
sales increased to approximately 62% of our overall business in fiscal 2008 as compared to approximately 56% in fiscal year 2007. International sales typically have lower gross margins
since a greater proportion of that volume is sold through distributors as compared to domestically which are primarily sold through our direct sales force. Our product related services portion of our
revenue increased to 28% of our overall revenue in the current fiscal year as compared to 24% in fiscal year 2007. The product-related services typically carry a lower gross profit than our product
revenue. We also encountered certain product reliability problems during fiscal year 2008 that resulted in increased service-related costs, thus eroding such margins further. We believe we have
identified the causes of these problems and will be implementing the necessary solutions in future periods.

Research and Development Expense.Research and development spending decreased approximately $5.4 million to $12.7 million in fiscal year 2008 as
compared to $18.1 million for fiscal year 2007. The decrease was attributable primarily to the completion of approximately $5.7 million of outsourced project-related work which was part
of the new-product introduction initiative in the prior fiscal year. As a percentage of revenue, research and development expenses were approximately 8.6% and 12.2% for fiscal years 2008
and 2007, respectively.

Selling, General and Administrative Expense.Selling, general and administrative expense increased to approximately $69.6 million or 47.0% of revenue during
fiscal year 2008 as compared to $53.6 million or 36.0% during fiscal year 2007. Of the $16.0 million increase legal expenses represent approximately $8.9 million primarily related
to our current lawsuits and approximately $2.0 million was due to higher personnel expense for increased headcount and salary increases.

Other Income/Expense.Other expense was approximately $1.6 million for the fiscal year ended June 28, 2008, as compared to other income of
approximately $3.7 million for the same period ended June 30, 2007. The decrease is primarily due to the Company having recognized a $3.5 million gain on the initial exchange of
common stock of Solx, Inc. for cash and common stock of OccuLogix, Inc. during the fiscal year ended 2007, as compared to the recognition of a $2.5 million loss on the
other-than-temporary impairment of our holdings of common shares of OccuLogix, Inc. during the fiscal year 2008 (see Note 16).

The
decrease in interest income earned during the fiscal year ended 2008, as compared to the fiscal year ended 2007, is related to a decrease in market interest rates combined with an
overall decrease in cash and cash equivalents and in marketable securities.

Income Taxes.The provision for income taxes results from a combination of activities of both the domestic and foreign subsidiaries. The Company recorded a 42%
effective tax rate for the fiscal year ended 2008 compared to a 36% effective tax rate for the fiscal year ended 2007. The provision for income taxes for the year ended June 28, 2008 includes
the effect of the changing mix of foreign and U.S. pre-tax income (loss), the expiration of the research and experimentation credit, and other permanent items.

Fiscal Year Ended June 30, 2007 Compared to Fiscal Year Ended July 1, 2006

Revenue.Revenue for the year ended June 30, 2007 was $148.6 million as compared to $149.5 million in the prior fiscal year. The slight
decrease is primarily related to a decrease in volume of our legacy products and the inability to ship all the announced new products.

International
revenue increased approximately $3.5 million over the prior year and accounted for approximately 56% of total revenue for fiscal 2007 as compared to approximately
54% for fiscal 2006. This $3.5 million increase, was net of an approximate $4.2 million decreases in sales in Latin America, which represents approximately a 28% decrease in sales for
that region. Sales in Europe increased approximately 22%, representing a $7.7 million increase in Europe as compared to the fiscal 2006.

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Product-related
service revenue increased approximately 28% to $35.3 million in fiscal 2007 from $27.6 million in fiscal 2006. This increase was consistent with the
increase in systems sold over the past few years and increase in renewal contracts.

Gross Profit.Gross profit increased approximately $1.2 million to $75.1 million, or 50.5% of revenue, in fiscal 2007 from $73.8 million, or
49.4% of revenue, in fiscal 2006. The increase in gross profit was primarily driven by improvements in the overall product-related service area. These improvements were the result of the staffing
efficiencies that were achieved through the world-wide service organization and the increased service contracts.

Research and Development Expense.Research and development spending increased approximately $9.2 million to $18.1 million in fiscal 2007 as compared
to $8.9 million for fiscal 2006. The increase was attributable primarily to $6.3 million of higher outsourced project-related work utilized to expedite the completion of the new product
introduction cycle, $1.1 million of increased project materials expenditures related to the same, and $0.9 million related to increased personnel expenses including share-based
compensation. As a percentage of revenue, research and development expenses were approximately 12.2% and 5.9% for fiscal 2007 and 2006, respectively.

Selling, General and Administrative Expense.Selling, general and administrative expense increased to approximately $53.6 million or 36.0% of revenue during
fiscal 2007 as compared to $44.3 million or 30% during fiscal 2006. Of the $9.3 million increase, $3.9 million was due to higher personnel expense for increased headcount, higher
commission expense due to increased commissionable revenue, and stock-based compensation. The increase is also attributable to a $0.8 million increase in marketing-related expenses such as
customer-related work-shops, advertising, trade shows, and an increase of $2.9 million due to an increase in legal and professional fees.

Other Income/Expense.Total other income increased approximately $4.7 million for the fiscal 2007 to $6.4 million, from approximately
$1.7 million for the fiscal 2006. This increase is primarily attributable to the recognition of a $3.5 million gain on the exchange of common stock of Solx Inc. for cash and
common stock of Occulogix Inc. (NasdaqGM: OCCX). The gain was a result of the acquisition of Solx Inc., a privately-held company, by Occulogix Inc., a publicly traded
company. The Company held 19.99% of the outstanding common stock of Solx Inc. on an as-converted basis, prior to the merger. As a result of the acquisition of Solx, Inc., the
Company received approximately $1.0 million in cash plus approximately 1.3 million shares of common stock in Occulogix Inc.

Income Taxes.The provision for income taxes results from a combination of activities of both the domestic and foreign subsidiaries. The Company recorded a 36%
effective tax rate for the year ended
June 30, 2007 compared to a 33% effective tax rate for the year ended July 1, 2006. The provision for income taxes for the year ended July 1, 2006, includes a tax provision
calculated for taxable income generated at the foreign subsidiaries at rates below that of the United States statutory tax rate.

Liquidity and Capital Resources

Our cash and cash equivalents, and marketable securities at June 28, 2008 totaled approximately $36.7 million as compared
to approximately $51.2 million at June 30, 2007. We continue to have no long-term debt. We believe that the combination of existing cash and cash equivalents, and marketable
securities on hand, along with cash to be generated by future operations and amounts available under our line of credit, will be sufficient to meet our ongoing operating and capital expenditure
requirements for the foreseeable future. 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.

Cash
used by operating activities amounted to approximately $11.7 million for the fiscal year ended 2008 as compared to $7.4 million for the fiscal year ended 2007. This
increase in cash used by

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operating
activities was primarily due to our year-to-date net loss, the year-over-year growth in inventory, and the reduction in certain accrued
liabilities, offset by changes in other operating assets and liabilities in the normal course of business. The increase in our inventory during the fiscal year ended 2008 results primarily from the
addition of two new subsidiaries combined with our new product introductions.

Cash
provided by investing activities amounted to approximately $5.0 million for the fiscal year ended 2008 as compared to $2.2 million for the fiscal year ended 2007. This
increase in cash provided by investing activities primarily reflects the net maturities of held-to-maturity investments.

Cash
used by financing activities amounted to approximately $2.2 million for the fiscal year ended 2008 as compared to $8.4 million for the fiscal year ended 2007. The
decrease is directly related to the Company repurchasing less of its own equity shares in the fiscal year ended 2008 as compared to the fiscal year ended 2007.

Debt Instruments and Related Covenants

We maintain a renewable $10,000,000 revolving credit agreement with a major bank with interest at the bank's base rate of LIBOR plus
2.25%. 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 28, 2008 or
June 30, 2007.

Off-Balance Sheet Arrangements

Our only off-balance sheet arrangements consist of non-cancelable operating leases entered into in the ordinary
course of business and the license agreement with the Regents. The table below in the next section titled "Contractual Obligations" shows the amounts of our operating lease commitments and purchase
commitments payable by year. For liquidity purposes, we choose to lease our facilities and automobiles instead of purchasing them.

Contractual Obligations

In August 2000, Candela obtained exclusive license rights to the DCD from The Regents, 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, 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 an
amendment to the license 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.

Effective
July 3, 2005, we amended certain portions of our agreement with The Regents whereby for the annual license fee of $0.3 million, our royalty obligation was reduced
to 3% from its prior level of 6%. The annual fee of $0.3 million was paid by a lump sum of $3.0 million and is being amortized over the remaining life of the patent agreement, which as
of June 28, 2008 was approximately five years. This
reduced royalty rate and the amortization of the annual license fee payment is reflected in our financial statements as of June 28, 2008. The unamortized portion of the license fee payment is
reflected in prepaid licenses in the June 28, 2008 balance sheet. We recognized royalty expense associated with this patent of approximately $3.3 million for fiscal year 2008.

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Outstanding
contractual obligations are reflected in the following table:

(in thousands)

Total

Less than
1 year

1-3 years

3-5 years

After 5
yearsRoyalty commitments

$
3,250

$
1,000

$
1,250

$
500

$
500Operating leases


3,921


1,817


1,621


346


137Total contractual obligations

$
7,171

$
2,817

$
2,871

$
846

$
637


We
do not anticipate experiencing any significant increases or decreases in our unrecognized tax benefits within the fiscal year ended 2009. The Company has unrecognized tax benefits of
approximately $1.4 million at June 28, 2008.

Recent Accounting Pronouncements

Information with respect to Recent Accounting Pronouncements may be found in Note 1 of the Notes to Consolidated Financial
Statements in this Form 10-K, which information is incorporated herein by reference.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk.

We have cash equivalents and marketable securities that primarily consist of money market mutual funds, certificates of deposit, US
government securities and fixed income corporate securities. The majority of these investments have maturities within one to five years. We believe that our exposure to interest rate risk is minimal
due to the term and type of our investments and those fluctuations in interest rates would not have a material adverse effect on our results of operations.

We
have international subsidiaries that transact business in both local and foreign currencies and therefore we are exposed to foreign currency exchange risk resulting from fluctuations
in foreign currencies. This risk could adversely impact our results and financial condition. From time to time, we may enter into foreign currency exchange and option contracts to reduce our exposure
to foreign currency exchange risk and variability in operating results due to fluctuation in exchange rates underlying the value of current transactions and anticipated transactions denominated in
foreign currencies. These contracts obligate us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates. These contracts are denominated in the
same currency in which the underlying transactions are denominated and bear a contract value and maturity date that approximate the value and expected settlement date, respectively, of the underlying
transactions. Unrealized gains and losses on open contracts at the end of each accounting period, resulting from changes in the fair value of these contracts, are recognized in earnings generally in
the same period as exchange gains and losses on the underlying foreign denominated receivables are recognized. We do not engage in foreign currency speculation.

We
had three forward exchange contracts outstanding serving as a hedge of our Euro-denominated intercompany receivables in the notional amount of approximately
2.4 million Euros at June 28, 2008. These contracts serve as hedges of a substantial portion of our
Euro-denominated intercompany balances. The fair value of the foreign currency derivative contract outstanding at June 28, 2008 was approximately $3.8 million resulting in a
realized loss of approximately $16,000. The loss on the fair value of the derivative contract was largely offset by the gains on the underlying transaction.

38

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Table of Contents

Item 8.    Financial Statements and Supplementary Data.

Candela Corporation
Index to Consolidated Financial Statements



PageReport of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting

40Report of Independent Registered Public Accounting Firm on Financial
Statements

42Financial Statements:Consolidated Balance SheetsJune 28, 2008 and June 30, 2007

43Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)Years ended June 28, 2008, June 30, 2007,
and July 1, 2006

44Consolidated Statements of Stockholders' EquityYears ended June 28, 2008, June 30, 2007, and July 1,
2006

45Consolidated Statements of Cash FlowsYears ended June 28, 2008, June 30, 2007, and July 1,
2006

46Notes to Consolidated Financial Statements

47Supporting Financial Statement Schedule:Schedule IIValuation and Qualifying Accounts

74


39

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Table of Contents

Report of Independent Registered Public Accounting Firm  on Internal Control over Financial Reporting

Shareholders
and Board of Directors
Candela Corporation
Wayland, Massachusetts

We
have audited Candela Corporation's internal control over financial reporting as of June 28, 2008, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Candela Corporation's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management's Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, Candela Corporation maintained, in all material respects, effective internal control over financial reporting as of June 28, 2008, based on the COSO criteria.

40

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Table of Contents

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Candela Corporation as of
June 28, 2008 and June 30, 2007, and the related consolidated statements of income (loss) and comprehensive income (loss), stockholders' equity, and cash flows for each of the three
years in the period ended June 28, 2008 and our report dated September 11, 2008 expressed an unqualified opinion thereon.

/s/BDO SEIDMAN, LLPBDO Seidman, LLPBoston, Massachusetts
September 11, 2008


41

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Table of Contents

Report of Independent Registered Public Accounting Firm on Financial Statements

Shareholders
and Board of Directors
Candela Corporation
Wayland, Massachusetts

We
have audited the accompanying consolidated balance sheets of Candela Corporation as of June 28, 2008 and June 30, 2007 and the related consolidated statements of income
(loss) and comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended June 28, 2008. We have also audited the schedule listed in the
accompanying index for each of the three years in the period ended June 28, 2008. These financial statements and schedule 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements and schedule. 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 financial position of Candela Corporation at June 28, 2008
and June 30, 2007 and the results of its operations and its cash flows for each of the three years in the period ended June 28, 2008, in conformity with accounting principles generally
accepted in the United States of America.

As
discussed in Note 11 to the consolidated financial statements, effective July 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty
in Income Taxesan interpretation of FASB No. 109."

Also,
in our opinion, the schedule listed on the accompanying index, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein for each of the three years in the period ended June 28, 2008.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Candela Corporation's internal control over financial reporting
as of June 28, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria) and our report dated September 11, 2008, expressed an unqualified opinion thereon.

/s/BDO SEIDMAN, LLPBDO Seidman, LLPBoston, Massachusetts
September 11, 2008


42

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Table of Contents

CANDELA CORPORATION

Consolidated Balance Sheets

(in thousands, except share and per-share data)

June 28,
2008

June 30,
2007AssetsCurrent assets:Cash and cash equivalents

$
21,030

$
27,152Restricted cash


29


48Marketable securities


12,131


11,773Accounts receivable, net of allowance for doubtful accounts of $2,322 and $1,412 at June 28 and June 30, respectively


43,320


38,455Notes receivable


728


1,025Inventories, net


33,141


21,368Other current assets


9,043


7,136Total current assets


119,422


106,957Property and equipment, net


4,027


3,479Deferred tax assets


8,065


6,146Goodwill


13,225


10,997Acquired Intangible assets, net


6,916


8,151Marketable securities, long-term


3,512


12,260Other assets


2,928


2,240Total assets

$
158,095

$
150,230Liabilities and Stockholders' EquityCurrent liabilities:Accounts payable

$
15,917

$
10,850Accrued payroll and related expenses


4,680


5,344Accrued warranty costs, current


5,373


5,486Sales tax payable


919


1,161Royalties payable





459Other accrued liabilities


9,257


5,626Deferred revenue, current


13,614


10,000Current liabilities of discontinued operations


1,200


1,257Total current liabilities


50,960


40,183Deferred tax liability, long-term


2,099


2,659Accrued warranty costs, long-term


725


2,127Deferred revenue, long-term


4,522


3,751Total liabilities


58,306


48,720Stockholders' equity:Common stock, $.01 par value, 60,000,000 shares authorized;
26,123,000 and 26,082,000 issued at June 28 and June 30, respectively


261


261Treasury stock, 3,450,000 and 3,125,000 common shares at
June 28 and June 30, respectively, at cost


(24,855
)

(22,458
)Additional paid-in capital


73,174


69,466Accumulated earnings


45,588


54,536Accumulated other comprehensive income (loss)


5,621


(295
)Total stockholders' equity


99,789


101,510Total liabilities and stockholders' equity

$
158,095

$
150,230


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

43

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Table of Contents

CANDELA CORPORATION

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

For the years ended June 28, 2008, June 30, 2007, and July 1, 2006

(in thousands, except per share data)

2008

2007

2006RevenueLasers and other products

$
106,050

$
113,225

$
121,838Product-related service


42,168


35,332


27,628Total revenue


148,218


148,557


149,466Cost of salesLasers and other products


50,452


49,303


54,748Product-related service


30,968


24,191


20,869Total cost of sales


81,420


73,494


75,617Gross profit


66,798


75,063


73,849Operating expenses:Selling, general and administrative


69,636


53,562


44,297Research and development


12,705


18,146


8,879Total operating expenses


82,341


71,708


53,176(Loss) income from operations


(15,543
)

3,355


20,673Other income (expense):Interest income


1,628


2,719


1,748Other income (expense), net


(1,645
)

3,725


(19
)Total other income (expense)


(17
)

6,444


1,729(Loss) income before income taxes


(15,560
)

9,799


22,402(Benefit from) provision for income taxes


(6,489
)

3,543


7,468Net (loss) income

$
(9,071
)
$
6,256

$
14,934Net (loss) income per share of common stockBasic

$
(0.40
)
$
0.27

$
0.65Diluted

$
(0.40
)
$
0.27

$
0.62Weighted average shares outstanding:Basic


22,725


23,086


23,017Diluted


22,725


23,525


23,948Net (loss) income

$
(9,071
)
$
6,256

$
14,934Other comprehensive (loss) income:Foreign currency translation adjustment


5,139


246


521Reclassified loss on available-for-sale securities, net of tax


777





Unrealized loss on available-for-sale securities, net of tax





(777
)

Comprehensive (loss) income

$
(3,155
)
$
5,725

$
15,455


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

44

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Table of Contents

CANDELA CORPORATION

Consolidated Statements of Stockholders' Equity

For the years ended June 28, 2008, June 30, 2007, and July 1, 2006

(in thousands)

Common Stock



Treasury Stock



Accumulated
Other
Comprehensive
Income (Loss)Additional
Paid-in
Capital

Accumulated
EarningsShares

Amount

Shares

Amount

TotalBalance July 2, 2005


24,764

$
248

$
54,027


(2,250
)
$
(12,997
)
$
33,346

$
(285
)
$
74,339Sale of common stock under stock plans


1,150


11


8,111














8,122Net income

















14,934





14,934Stock-based compensation expense








1,285














1,285Tax beneifit of stock exercise








811














811Currency translation adjustment




















521


521Balance July 1, 2006


25,914


259


64,234


(2,250
)

(12,997
)

48,280


236


100,012Sale of common stock under stock plans


168


2


841














843Treasury stock activitypurchase of shares











(875
)

(9,461
)







(9,461
)Net income

















6,256





6,256Stock-based compensation expense








4,125














4,125Tax beneifit of stock exercise








266














266Unrealized loss on available-for-sale securities, net of tax




















(777
)

(777
)Currency translation adjustment




















246


246Balance June 30, 2007


26,082


261


69,466


(3,125
)

(22,458
)

54,536


(295
)

101,510Sale of common stock under stock plans


41





194














194Treasury stock activitypurchase of shares











(325
)

(2,397
)







(2,397
)Net loss

















(9,071
)




(9,071
)Cumulative effect of adoption of FIN 48

















123





123Stock-based compensation expense








3,502














3,502Tax beneifit of stock exercise








12














12Reclassified loss on available-for-sale securities, net of tax




















777


777Currency translation adjustment




















5,139


5,139Balance June 28, 2008


26,123

$
261

$
73,174


(3,450
)
$
(24,855
)
$
45,588

$
5,621

$
99,789


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

45

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Table of Contents

CANDELA CORPORATION

Consolidated Statements of Cash Flows

For the years ended June 28, 2008, June 30, 2007, and July 1, 2006

(in thousands)

2008

2007

2006Cash flows from operating activities:Net (loss) income

$
(9,071
)
$
6,256

$
14,934Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activities:Loss on other-than-temporary impairment of investment


2,546





Gain on exchange of stock





(3,540
)

Share-based compensation expense


3,502


4,125


1,285Depreciation and amortization


2,959


1,631


571Provision for bad debts


3,053


989


1,241Provision for deferred taxes


(3,160
)

45


(2,399
)Change in restricted cash


19


118


33Other non-cash items


(71
)

(144
)

95Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable


1,351


(4,943
)

(681
)Notes receivable


(310
)

586


(844
)Inventories


(10,892
)

(4,702
)

(3,561
)Other current assets


321


(266
)

75Other assets


3


(977
)

(2,684
)Accounts payable


1,723


(10,376
)

3,593Accrued payroll and related expenses


(950
)

(438
)

882Deferred revenue


3,323


3,422


2,243Accrued warranty costs


(1,696
)

(2,016
)

620Income taxes payable


136


(2,921
)

(779
)Other accrued liabilities


(4,451
)

5,732


(238
)Net cash (used for) provided by operating activities


(11,665
)

(7,419
)

14,386Cash flows from investing activities:Purchases of property and equipment


(1,780
)

(763
)

(715
)Maturities of held-to-maturity marketable securities


21,347


37,014


4,369Cash proceeds from exchange of stock





994


Purchases of held-to-maturity marketable securities


(14,250
)

(17,706
)

(43,654
)Acquisition of business, net of cash acquired





(15,986
)

Acquisition of intangible assets


(324
)

(1,380
)

Net cash (used for) provided by investing activities


4,993


2,173


(40,000
)Cash flows from financing activities:Proceeds from the issuance of common stock


194


843


8,122Purchase of treasury stock


(2,397
)

(9,461
)

Benefits of tax effects from exercise of stock options


12


266


811Net cash (used for) provided by financing activities


(2,191
)

(8,352
)

8,933Effect of exchange rates on cash and cash equivalents


2,741


556


492Net decrease in cash and cash equivalents


(6,122
)

(13,042
)

(16,189
)Cash and cash equivalents at beginning of period


27,152


40,194


56,383Cash and cash equivalents at end of period

$
21,030

$
27,152

$
40,194Cash paid during the year for:Interest

$


$


$
Income taxes


1,115


5,451


9,834Noncash investing and financing activities:Stock acquired on exchange of Solx, Inc. investment

$


$
2,546

$



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

46

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Table of Contents

Notes to Consolidated Financial Statements

1.     Description of Business and Summary of Significant Accounting Policies

Description of Business.Candela Corporation ("the Company" or "Candela") is involved 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.

Basis of Consolidations.The financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany transactions and balances
have been eliminated. Investments in which we are not able to exercise significant influence over the investee are accounted for under the cost method.

Reclassifications.Certain prior period amounts have been reclassified to conform to the current period presentation. There was no impact on operating income.

The
following table details the affect of the reclassification on the June 30, 2007 balance sheet to conform to the June 28, 2008 presentation relative to accounts payable
and other accrued liabilities.

(in thousands)

June 30, 2007
Originally
Reported

Reclassification

June 30, 2007
ReclassifiedAccounts payable

$
6,922

$
3,928

$
10,850Other accrued liabilities


9,554


(3,928
)

5,626


Fiscal Years.The Company's fiscal year ends on the Saturday nearest June 30. The years ended June 28, 2008, June 30, 2007, and July 1,
2006 each contain 52 weeks.

Use of Estimates.The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated
financial statements and accompanying notes. Estimates are used for, but not limited to, receivables valuation, valuation of investments, inventory valuation, depreciable lives of fixed assets,
valuation of goodwill and acquired intangibles, income taxes, stock-based compensation, and accrued warranties. On an ongoing basis, management evaluates its estimates. Actual results could differ
materially from those estimates.

Cash and Cash Equivalents.The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.
Substantially all cash and cash equivalents were invested in short duration certificates of deposit and overnight repurchase agreements with major financial institutions. These are valued at amortized
cost which approximates market value.

Marketable Securities.The Company accounts for marketable securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 establishes the accounting and reporting requirements for all debt securities and for investments in equity
securities that have readily determinable fair values. All marketable securities must be classified as one of the following: held-to-maturity,
available-for-sale, or trading. The Company classifies substantially all of its marketable securities as held-to-maturity as the Company has the intent
and ability to hold them to maturity. Held-to-maturity debt securities are reported at amortized cost which approximates fair value. The Company had classified its investment
in Occulogix, Inc, as available-for-sale. As such, prior to its other-than-temporary impairment as described in Note 16, this investment was
marked-to-market on a quarterly basis and the associated unrealized gain or loss reflected as a component of other comprehensive income (loss), net of tax.

Current
held-to-maturity marketable securities include investments that are expected to mature in more than three months and up to twelve months.
Long-term investments have remaining maturities of one to three years.

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Accounts Receivable and Notes Receivable.The Company's trade accounts receivable and notes receivable are primarily from sales to end users, leasing companies,
and distributors servicing the medical device 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.

The
Company's policy is to maintain reserves for potential losses resulting from the inability of our customers to make required payments. These reserves are charged to bad debts
expense. The Company determines the adequacy of this allowance by regularly reviewing the aging of its accounts and notes
receivable and evaluating the individual customer's balances considering the customer's financial condition, historical experience credit history and current economic conditions. Credit assessments
are established through a process of reviewing the financial history and stability of each customer prior to inception of the sale. Where appropriate, the Company will obtain credit rating reports and
financial statements of customers when determining or modifying their credit limits. When a customer's account balance becomes past due, the Company will initiate dialogue with the customer to
determine the cause. If it is determined that the customer will be unable to meet its financial obligation, 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, the Company will record an allowance to reduce the related receivable to the amount the Company expects to recover
given all information presently available. The Company will also provide a general reserve based on the aging of the accounts and notes receivable based on historical experiences of
write-offs.

Fair Value of Financial Instruments.Carrying amounts of the financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate their fair values due to the short term nature of these instruments. Held-to-maturity marketable securities, which are generally comprised of
short-duration certificates of deposit or government-backed bonds, are valued at amortized cost which approximates market value. Available-for-sale securities, if any, are
marked-to-market on a quarterly basis and the change is reflected as a component of other comprehensive income (loss), net of tax.

Derivative Instruments and Hedging Activity.The Company enters into financial instruments to reduce its exposure to fluctuations in foreign exchange rates by
creating offsetting positions through the use of foreign currency forward contracts. The Company recognizes all derivative instruments as either assets or liabilities in the statements of financial
position and measures those instruments at fair value. Changes to the fair value of derivative contracts that do not qualify for hedge accounting are reported in earnings in the period of the change.
For derivatives that qualify for hedge accounting, changes in the fair value of the derivatives are either recorded in shareholders' equity as a component of other comprehensive income (loss) or are
recognized currently in earnings, along with an offsetting adjustment against the basis of the item being hedged.

The
Company's 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.

We
have international subsidiaries that transact business in both local and foreign currencies and therefore we are exposed to foreign currency exchange risk resulting from fluctuations
in foreign currencies. This risk could adversely impact our results and financial condition. From time to time, we may enter into foreign currency exchange and option contracts to reduce our exposure
to foreign currency exchange risk and variability in operating results due to fluctuation in exchange rates underlying the value of current transactions and anticipated transactions denominated in
foreign currencies. These contracts obligate us to exchange predetermined amounts of specified foreign

48

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Table of Contents

currencies
at specified exchange rates on specified dates. These contracts are denominated in the same currency in which the underlying transactions are denominated and bear a contract value and
maturity date that approximate the value and expected settlement date, respectively, of the underlying transactions. Unrealized gains and losses on open contracts at the end of each accounting period,
resulting from changes in the fair value of these contracts, are recognized in earnings generally in the same period as exchange gains and losses on the underlying foreign denominated receivables are
recognized. We do not engage in foreign currency speculation.

We
had three forward exchange contracts outstanding serving as an economic hedge of our Euro-denominated intercompany receivables in the notional amount of approximately
2.4 million Euros at June 28, 2008. These contracts serve as hedges of a substantial portion of our Euro-denominated intercompany balances. The fair value of the foreign currency
derivative contract outstanding at June 28, 2008 was approximately $3.8 million resulting in a realized loss of approximately $16,000. The loss on the fair value of the derivative
contract was largely offset by the gains on the underlying transaction. These contracts do not qualify for hedge accounting.

Inventories.Inventories are stated at the lower of cost (first-in, first-out method) or market, using a standard costing system which
includes material, labor and manufacturing overhead Standard costs are monitored and updated as necessary, to reflect the changes in raw material costs and labor and overhead rates.

As
a designer and manufacturer of high technology equipment, the Company is exposed to a number of economic and industry factors that could result in portions of inventory becoming
either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes in markets, the Company's ability to meet changing customer requirements,
competitive pressures in products and prices, and the availability of key components from suppliers. The Company's policy is to establish inventory reserves when conditions exist that suggest
inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company's products and market conditions. The Company regularly evaluates the ability
to realize the value of 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, the reserves are
intended to reduce the carrying value of inventory to its net realizable value. Inventory of $33.1 million as of June 28, 2008 and $21.4 million as of June 30,
2007 is stated net of inventory reserves of $2.4 million and $2.1 million, respectively. If actual demand for the Company's products deteriorates, or market conditions are less favorable
than those projected, additional inventory reserves may be required.

Property and Equipment.Purchased property and equipment is recorded at cost. Laser systems used for testing are capitalized at cost. Repairs and maintenance costs
are expensed as incurred. Leasehold improvements are amortized over the shorter of the useful life or the life of the related lease. Depreciation is provided using the straight-line method
over the estimated useful lives as follows:

Estimated Life or
Number of YearsLeasehold improvements

2 to 15Office furniture, computer and other equipment

2 to 10


Prepaid license fees.Prepaid license fees are amortized over the term of the related contract (Note 9).

Goodwill, Acquired Intangible Assets and Long-Lived Assets.Goodwill is the amount by which the cost of acquired net assets in a business acquisition
exceeded the fair values of net identifiable assets on the date of our purchase.

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Intangible
assets with indefinite useful lives, including goodwill, are evaluated for impairment annually or more frequently if events or changes in circumstances indicate that the asset
might be impaired. Factors we consider important, on an overall Company basis, that could trigger an impairment review include significant underperformance relative to historical or projected future
operating results, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock
price for a sustained period, or a reduction of our market capitalization relative to net book value. To conduct these tests of goodwill and indefinite-lived intangible assets, the fair value of the
reporting unit is compared to its carrying value. If the reporting unit's carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds
its implied fair value. We estimate the fair values of our reporting units using discounted cash flow valuation models.

Long-lived
assets primarily include property and equipment and intangible assets with finite lives. In accordance with SFAS 144,Accounting for
the Impairment or Disposal of Long-Lived Assets, we periodically review long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a
comparison of the undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow
analysis.

Revenue Recognition.

Product salesThe Company generally recognizes revenue upon shipment of product to customers and the fulfillment of all contractual terms and conditions, pursuant
to the guidance provided by Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 104,Revenue Recognition("SAB 104").
SAB 104 requires that at the time revenue is recognized persuasive evidence of an arrangement exists; delivery has occurred or services rendered; the fee is fixed and determinable; and
collectibility is reasonably assured. Circumstances which generally preclude the immediate recognition of revenue include shipping terms of FOB destination. In these instances, revenue is deferred
until adequate documentation is obtained to ensure that the delivery criteria have been fulfilled. The Company provides for the estimated cost to repair or replace products under warranty at the time
of sale. Unearned revenue is reported on the balance sheet as deferred income.

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 the Company that is not covered by a service contract is recognized as the services are provided.

Multiple-element arrangementsIn certain instances, the Company may sell products together with extended warranties or maintenance contracts. The revenue recognized
per element is determined by allocating the total sales price to each element, based on the relative fair values in accordance with Emerging Issues Task Force (EITF) 00-21, "Revenue
Arrangements with Multiple Deliverables." Revenue for extended warranty and maintenance contracts are recognized on a straight line basis over the life of the contract. Unearned revenues are reported
on the balance sheet as deferred revenue.

Product Warranty Costs.The Company's products generally carry a standard warranty. The Company maintains a reserve based on anticipated warranty claims at the
time product revenue is recognized. Factors that affect the Company's product warranty liability include the number of installed units, the anticipated cost of warranty repairs and historical and
anticipated rates of warranty claims.

Research and Development Costs.Research and development costs are expensed as incurred.

Advertising Costs.Advertising costs are expensed as incurred and are included as a component of selling, general and administrative expenses in the accompanying
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). Advertising costs were approximately $0.7 million for each

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of
the fiscal year ended 2008 and 2007, respectively, and approximately $0.9 million for the fiscal year ended 2006.

Shipping and handling costs.The Company reports shipping and handling costs in both sales and the related costs as cost of sales to the extent they are billed to
customers. In all other instances they are reflected as a component of cost of sales.

Stock-based compensation.Effective July 3, 2005, the Company implemented the fair value recognition provisions of SFAS 123 revised
("SFAS 123R") and Staff Accounting Bulletin 107 ("SAB 107") for all share-based compensation. The Company adopted SFAS 123R using a modified prospective application, as permitted
under SFAS 123R. Accordingly, prior period amounts have not been restated. Under this application, the Company is required to record compensation expense for all awards granted after the date
of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Compensation cost will be recognized over the period that an employee provides
service in exchange for the award.

The
application of SFAS 123R and SAB 107 during the years ended June 28, 2008, June 30, 2007 and July 1, 2006 resulted in the recognition of
share-based compensation expense of approximately $3.5 million, $4.1 million and $1.3 million, respectively, attributable to stock options/Stock appreciation rights ("SARs")
inclusive of approximately $22,000, $35,000, and $56,000, respectively, attributable to the employee stock purchase plan.

This
expense was divided between operating expense cost centers based upon the functional responsibilities of the individual holding the respective options as follows:

(in thousands)

For the year
ended
June 28, 2008

For the year
ended
June 30, 2007

For the year
ended
July 1, 2006Selling, general and administrative

$
3,191

$
3,154

$
1,016Research and development


(14
)

640


258Cost of sales


325


330


11$
3,502

$
4,124

$
1,285


The
fair value of each option/SARs award is estimated on the date of grant using the Black-Scholes option-pricing model incorporating the assumptions noted in the following table.
Expected volatility is determined using both current and historical implied volatilities of the underlying stock which is obtained from public data sources. The expected term of the options is based
on historical observations adjusted for the estimated exercise dates of unexercised options/SARs. Additionally, separate groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The average risk-free interest rate is based on the U.S. treasury security rate with a term-to-maturity that
approximates the option's expected life as of the grant date. The forfeiture rate is based on historical experience as well as future expectations.
Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

As
of June 28, 2008, there was approximately $3.9 million of total unrecognized compensation cost related to non-vested stock options/SARs granted under the
Company's incentive plans. This cost is expected to be recognized over a weighted-average period of 1.68 years.

The
amount of cash received from the exercise of stock options for the fiscal year ended June 28, 2008, June 30, 2007 and July 1, 2006 was approximately
$0.1 million, $0.5 million and $7.8 million for stock options/SARs, respectively, and approximately $0.1 million, $0.3 million and $0.3 million for the
employee stock purchase plan, respectively. The actual tax benefit realized from the tax deductions

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resulting
from option exercises totaled approximately $21,000 for the fiscal year ended 2008, and approximately $0.3 million and $0.8 million for the fiscal years ended 2007 and 2006,
respectively.

For the year
ended
June 28, 2008

For the year
ended
June 30, 2007

For the year
ended
July 1, 2006Risk-free interest rate

2.24% to 4.59%

4.59% to 5.125%

5.125%Estimated volatility

53% to 62%

63% to 73%

72%Expected life for SARs (years)

2.5 to 5.0

2.5 to 5.0

3.39Expected dividend yield








The
weighted average grant-date fair value per share of SARs granted, calculated using the Black-Scholes option-pricing model, was $4.90 in fiscal year 2008. No options were
granted in fiscal year 2008.

The
weighted average grant-date fair value per share of SARs granted, calculated using the Black-Scholes option-pricing model, was $6.77 in fiscal year 2007. No options were
granted in fiscal year 2007.

The
weighted average grant-date fair value per share of SARs granted, calculated using the Black-Scholes option-pricing model, was $7.97 in fiscal year 2006. No options were
granted in fiscal year 2006.

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 (see Note 11).

On
July 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, ("FIN 48"), "Accounting for Uncertainty in Income Taxes", as discussed more
fully below.

FIN
48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.
FIN 48 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

FIN
48 prescribes a two-step process to determine the amount of tax benefit to be recognized. The first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The
second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective
to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation
is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition
or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period (see Note 11).

Foreign Currency Translation.The local currency is the functional currency of the Company's subsidiaries. The activity of the Company's foreign subsidiaries is
translated into United States dollars in accordance with SFAS No. 52, "Foreign Currency Translation". Assets and liabilities are translated into
United States 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 subsidiary balance sheets are accumulated as a separate component of stockholders' equity. Net exchange-related gains resulting from foreign currency transactions were approximately
$0.2 million for the year ended June 28, 2008 and approximately $0.1 million for the years ended June 30, 2007 and July 1, 2006, respectively. The aforementioned net
gains are included in other income (expense) in the respective fiscal years.

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Earnings Per Share ("EPS").Basic EPS is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted
EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, warrants, restricted shares, and SARs
using the treasury stock method.

The
following table provides share information used in the calculation of the Company's basic and diluted earnings per share:

(in thousands, except per share data)

June 28,
2008

June 30,
2007

July 1,
2006Shares used in the calculation of Basic earnings per share


22,725


23,086


23,017Effect of dilutive securities:Stock options/SAR's





439


931Diluted shares used in the calculation of earnings per share


22,725


23,525


23,948


During
the fiscal year ended June 28, 2008, potential common shares consisting of all shares issuable upon exercise of stock options/SARs have been excluded from the computation
of diluted loss per share as their effect would have been anti-dilutive.

During
the years ended June 30, 2007 and July 1, 2006, options/SARs to purchase 1.1 million and 0.1 million shares of common stock, respectively, were not
included in the computation of diluted earnings per share because they would have had an anti-dilutive effect.

Comprehensive Income (Loss).The Company computes comprehensive income (loss) in accordance with SFAS 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other
comprehensive income (loss), as defined, includes all changes in equity during a period from non-owner sources. For the periods presented, other comprehensive income (loss) includes the
effect of foreign currency translation and the unrealized gain (loss), net of taxes, on its marketable securities.

For
purposes of comprehensive income (loss) disclosures, we do not record tax provisions or benefits for the net changes in foreign currency translation adjustment as we intend to
permanently reinvest undistributed earnings of our foreign subsidiaries.

The
following table summarizes the components of accumulated other comprehensive income:

(in thousands)

June 28,
2008

June 30,
2007Foreign currency translation adjustment

$
5,621

$
482Unrealized loss on available-for-sale securities, net of income taxes





(777
)Accumulated other comprehensive income (loss)

$
5,621

$
(295
)


Concentration of Risk.Financial instruments that are subject to credit risk primarily consist of cash and cash equivalents, marketable securities, commercial
paper and accounts receivable. The Company places its cash and cash equivalents and held-to-maturity marketable securities in established financial institutions. Deposits in
the financial institutions may exceed the amount of insurance provided on such deposits. The Company believes the financial institutions are financially sound and, accordingly, minimal credit risk
exists. The Company invests in high quality debt securities.

The
Company's sales are to end users, leasing companies, and distributors servicing the medical device 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. The

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Company
maintains an allowance for potential losses. No single customer accounted for 10% of the Company's total net sales or accounts and notes receivable.

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® and AlexTriVantage systems. These products accounts for a
significant portion of total revenues.

Recent Accounting Pronouncements.

In April 2008, the FASB finalized Staff Position ("FSP") No. 142-3,Determination of the
Useful Life of Intangible Assets. The position amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement of Financial Accounting Standard ("SFAS") No. 142, Goodwill and Other Intangible Assets. The position applies to intangible assets that are
acquired individually or with a group of other assets and both intangible assets acquired in business combinations and asset acquisitions. FSP 142-3 is effective for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. We are currently evaluating the impact of the pending adoption of FSP 142-3 on our consolidated financial
statements.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement
No. 133. SFAS No. 161 requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted
for and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning
after November 15, 2008, with early adoption permitted. We are currently evaluating the impact of the pending adoption of SFAS No. 161 on our consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 141 (revised "R"),Business Combinations. This standard changes the accounting for
business combinations by requiring that an acquiring entity measures and recognizes identifiable assets acquired and liabilities assumed at the acquisition date fair value with limited exceptions. The
changes include the treatment of acquisition related transaction costs, the valuation of any non-controlling interest at acquisition date fair value, the recording of acquired contingent
liabilities at acquisition date fair value and the subsequent re-measurement of such liabilities after acquisition date, the recognition of capitalized in-process research and
development, the accounting for acquisition-related restructuring cost accruals subsequent to acquisition date, and the recognition of changes in the acquirer's income tax valuation allowance. SFAS
No. 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. We are currently evaluating the impact of the pending adoption of SFAS
No. 141(R) on our consolidated financial statements. The accounting treatment related to pre-acquisition uncertain tax positions will change when SFAS No. 141(R) becomes
effective, which will be in first quarter of our fiscal year 2010. At such time, any changes to the recognition or measurement of uncertain tax positions related to

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pre-acquisition
periods will be recorded through income tax expense, where currently the accounting treatment would require any adjustment to be recognized through the purchase price.

In
February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of SFAS No. 115. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value
and requires unrealized gains and losses on items for which the fair value option has been elected to be reported in earnings. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. We are currently in the process of evaluating the impact of SFAS No. 159 on our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 establishes a framework for measuring
the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which
permit, or in some cases require, estimates of fair market value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years. In February 2008, the FASB issued FSP No. FAS 157-1,Application of SFAS No. 157 to SFAS No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or Measurement under SFAS No. 13,and FSP No. FAS 157-2, Effective Date of SFAS No. 157.
Collectively, the FSPs defer the effective date of SFAS No. 157 to fiscal years beginning after
December 15, 2008, for non-financial assets and non-financial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least
annually, and amend the scope of SFAS 157. We are currently evaluating the impact of the pending adoption of SFAS 157 on our consolidated financial statements.

2.     Marketable Securities

Marketable securities consist of the following:

June 28, 2008

June 30, 2007(in thousands)

Net Carrying
Amount

Fair
Value

Unrealized
gain (loss)

Net Carrying
Amount

Fair
Value

Unrealized
lossShort-term (Held-to-maturity):Government-backed securities

$
9,000

$
9,055

$
55

$
6,999

$
6,988

$
(11
)Certificates of deposit


3,131


3,134


3


3,476


3,459


(17
)12,131


12,189


58


10,475


10,447


(28
)Short-term (Available-for-sale):Equity investments, original cost of $2,546 (Note 16)











1,298


1,298


Total marketable securities, short-term

$
12,131

$
12,189

$
58

$
11,773

$
11,745

$
(28
)Long-term (Held-to-maturity):Government-backed securities

$
2,000

$
2,014

$
14

$
9,993

$
9,974

$
(19
)Certificates of deposit


1,512


1,502


(10
)

2,267


2,247


(20
)Total marketable securities, long-term

$
3,512

$
3,516

$
4

$
12,260

$
12,221

$
(39
)


Held-to-maturity investments at June 28, 2008 reach maturity as follows:

Fiscal Year Ended(in thousands)

2009

2010

TotalGovernment-backed securities

$
9,000

$
2,000

$
11,000Certificates of deposit


3,131


1,512


4,643$
12,131

$
3,512

$
15,643


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Table of Contents

3.     Inventories

Inventories consist of the following:

(in thousands)

June 28,
2008

June 30,
2007Raw materials

$
13,720

$
8,377Work in process


1,635


2,657Finished goods


17,786


10,334$
33,141

$
21,368


4.     Property and Equipment

Property and equipment consist of the following:

(in thousands)

June 28,
2008

June 30,
2007Leasehold improvements

$
1,014

$
1,014Office furniture


718


662Computers, software, and other equipment


11,845


10,044$
13,577

$
11,720Less: accumulated depreciation and amortization


(9,550
)

(8,241
)Property and equipment, net

$
4,027

$
3,479


Depreciation
expense was approximately $1.3 million, $1.0 million, and $0.6 million for the fiscal years ended 2008, 2007, and 2006, respectively.

5.     Intangible Assets

Goodwill and acquired intangible assets consist of the following:

(in thousands)

June 28,
2008

June 30,
2007Goodwill

$
13,225

$
10,997Intangible assets with finite lives:Patents

$
3,128

$
2,804Developed technology


6,009


6,0099,137


8,813Accumulated amortization:Patents


(886
)

(328
)Developed technology


(1,335
)

(334
)(2,221
)

(662
)Intangible assets with finite lives, net

$
6,916

$
8,151


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The
changes in the carrying amount of goodwill for the fiscal year ended 2008 are as follows:

(in thousands)Balance as of June 30, 2007

$
10,997Purchase accounting adjustments


(401
)Effect of foreign currency adjustments


2,629Balance at June 28, 2008

$
13,225


Patents
are being amortized over periods ranging from five to six years. Developed technologies are being amortized over 6 years.

Amortization
expense on acquired intangible assets was approximately $1.6 million and $0.7 million for the fiscal years ended 2008 and 2007, respectively. There was no
amortization expense associated with acquired intangible assets for the fiscal year ended 2006.

Amortization
expense associated with acquired intangibles is expected to be approximately $1.6 million for each of the fiscal years ended 2009 through 2012, inclusive, and
approximately $0.8 million for the fiscal year ended 2013.

6.     Acquisitions

On March 6, 2007, we acquired Inolase (2002) Ltd. ("Inolase") a non-public company engaged in the development and manufacture of
proprietary devices for the aesthetic light-based treatment industry as well as the development of intellectual property related to medical devices and light sources. The aggregate purchase price was
approximately $16.8 million in cash, including $0.3 million of acquisition-related transaction costs. No Candela common stock was issued in the acquisition. The acquisition-related
transactions costs included legal, accounting, and other external costs directly related to the acquisition. Results of operations for Inolase have been included in the accompanying consolidated
statement of operations since the date of acquisition.

This
acquisition was accounted for as a business combination. Assets acquired and liabilities assumed were recorded at their fair values as of March 6, 2007.
Fair-value of the intangible assets were based on valuations using an income approach with estimates and assumption provided by the management of Inolase and Candela. The excess of the
purchase price over the fair value of tangible assets, identified intangible assets, and liabilities assumed was recorded as goodwill.

Based
upon the valuations, the final purchase price was allocated as follows:

(in thousands)Goodwill

$
10,596Identifiable intangible assets


7,433Inventory


214Accounts receivable & other assets


390Accounts payable and accrued expenses


(248
)Deferred tax liability


(1,375
)Other liabilities


(201
)Total purchase price allocation

$
16,809


None
of the goodwill or intangible assets acquired in the acquisition is deductible for income tax purposes. As a result, and in accordance with SFAS 109, Income Taxes, we recorded in the purchase
accounting a deferred tax liability of approximately $1.4 million, equal to the tax effect of the
amount of the acquired intangible assets other than goodwill.

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This transaction resulted in $10.6 million of purchase price that exceeded the estimated fair values of tangible and intangible assets and liabilities, all
of which was allocated to goodwill. We believe that such excess in purchase price for accounting purposes was warranted by certain factors, including: 1) the potential to facilitate
up-sell and cross-sell opportunities for our products with that of Inolase; 2) the potential to exploit reduced pain applications across our existing and future
products; and 3) the potential to leverage Inolase intellectual property into home use applications.

7.     Warranty Reserve

The following table reflects changes in the Company's accrued warranty account during the fiscal years ended June 28, 2008, June 30, 2007, and
July 1, 2006:

(in thousands)

2008

2007

2006Beginning balance

$
7,613

$
9,629

$
8,645Incremental accruals on current sales


6,764


5,722


8,323Amortization of prior-period accruals


(8,279
)

(7,738
)

(7,339
)Ending balance

$
6,098

$
7,613

$
9,629


8.     Deferred Revenue

The Company offers extended service contracts that may be purchased after a standard warranty has expired. Service contracts may be purchased for periods from one
to five years. The Company recognizes service contract revenue ratably over the life of the contract. Actual service contract
expenses incurred and charged to costs of sales during an interim period may be more or less than the amount of amortized service contract revenue recognized in that period.

The
following table reflects changes in the Company's deferred revenue during the fiscal years ended June 28, 2008 and June 30, 2007:

(in thousands)

2008

2007Beginning balance

$
13,751

$
10,329Deferral of new sales


19,552


13,918Recognition of previously deferred revenue


(15,167
)

(10,496
)Ending balance

$
18,136

$
13,751


The
following table reflects the Company's current and long-term portions of deferred revenues for the fiscal years ended June 28, 2008 and June 30, 2007:

(in thousands)

2008

2007Total service contract revenue

$
18,136

$
13,751Less: current portion


(13,614
)

(10,000
)Long-term pertion of deferred revenue

$
4,522

$
3,751


9.     Debt, Lease and Other Obligations

Line of Credit.The Company has a renewable $10,000,000 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 28, 2008 or June 30, 2007.

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Restricted Cash.A financing company used by customers has limited recourse with the Company on a small number of product leases. As such, the Company has placed
approximately $29,000 and $48,000 in restricted funds at this institution as collateral as of June 28, 2008 and June 30, 2007, respectively. This restricted cash represents the entire
exposure under these agreements.

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 inflationary indices. These
operating leases expire in various years through fiscal year 2016. These leases may be renewed for periods ranging from one to five years.

Total
outstanding lease commitments are reflected in the following table as of June 28, 2008:

(in thousands)

Amount2009

$
1,8172010


1,0432011


5782012


2452013


101Thereafter


137Total minimum lease payments

$
3,921


Total
facilities-related rent expense was approximately $1.5 million, $1.2 million and $0.9 million in fiscal years 2008, 2007, and 2006, respectively.

Royalty.In August 2000, the Company obtained through an amended license agreement the with Regents of the University of California ("Regents"), the exclusive
license rights to the Dynamic Cooling Device 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, a subsidiary of New Star Technology, Inc. obtained a license to the DCD on a co-exclusive
basis with the Company in certain narrower fields of use. Cool Touch is restricted in its ability to assign its license rights to certain existing competitors of the Company. The Company is entitled
to one-half of all royalty income payable to the Regents from Cool Touch. Under the amended agreement, the Company no longer is required by the Regents to negotiate sublicenses to third
parties. However, the Company 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.

Effective
July 3, 2005, the Company amended certain portions of their agreement with the Regents whereby for the annual license fee of $0.3 million, the Company's royalty
obligation was reduced to 3% from its prior level of 6%. The annual fee of $0.3 million was paid by a lump sum of $3.0 million and is being amortized over the remaining life of the
patent agreement, which as of June 28, 2008 was approximately seven years. This reduced royalty rate and the amortization of the annual license fee payment is reflected in the Company's
financial statements for fiscal years 2008, 2007 and 2006,
respectively. The unamortized portion of the license fee payment is reflected in both other current assets and in other assets in the June 28, 2008 and June 30, 2007 balance sheets,
respectively. The Company recognized royalty expense of $3.4 million, $3.3 million and $3.6 million for the fiscal years ended 2008, 2007 and 2006, respectively.

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Table of Contents

The
outstanding contractual obligations relating to future minimum royalties payable to the Regents are reflected in the following table as of June 28, 2008:

(in thousands)2009

$
1,0002010


1,0002011


2502012


2502013


250Thereafter


500Total minimum royalty payments

$
3,250


10.   Stockholders' Equity



The 1990 Employee Stock Purchase Plan (the "Purchase Plan") provides for the sale of up to 1.5 million shares of common stock to
eligible employees. The shares are issued at 85% of the market price on the last day of semi-annual periods. Substantially all full-time employees are eligible to participate
in the Purchase Plan. At June 28, 2008 there were approximately 640,000 shares available for sale.

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

Fiscal Year

Number
of Shares

Per-share
Price Range2006


25,001

$
12.50 to $13.252007


33,978

$
10.00 to $10.752008


21,142

$
4.75




Effective October 5, 2005, the Second Amended and Restated 1998 Stock Plan (the "1998 Stock Plan") was amended to clarify the
granting of incentive stock options, non-qualified stock options, and SARs.

Stock
options provide the holder with the right to purchase common stock. The exercise price per share of "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, granted under the 1998 Stock Plan may not be less than the fair market value per share of common stock on the date of grant. In the case of an incentive
stock option granted to an employee possessing more than 10% of the total combined voting power of all classes of stock of the Company, the exercise price per share may not be less than 110% of the
fair market value per share of common stock on the date of grant.

SARs
provide the holder the right to receive an amount, payable in stock, cash or in any combination of these, as specified by a Committee established by the Board of Directors, equal to
the excess of the market value of our common shares on the date of exercise over the grant price at the time of the grant. The grant price of a SAR may not be less than the fair market value per share
of common stock on the date of grant, provided that the grant price of SARs granted in tandem with stock options shall equal the exercise price of the related stock option.

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Options
and rights granted under the 1998 Stock 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 and rights may be granted under the 1998 Stock Plan was increased by 2.5 million shares to
7.8 million by affirmative vote at the Company's Annual Meeting of Shareholders held December 12, 2006. Upon exercise of a SAR, only the net number of shares of common stock issued in
connection with such exercise shall be deemed "issued" for this purpose. The Company may satisfy the awards upon exercise with either newly-issued or treasury shares.

There
were approximately 1.5 million stock-based SARs granted during the fiscal year ended June 28, 2008. The SARs granted to employees become exercisable ratably over one
to four years, while the SARs granted to directors become exercisable over two years.

There
were approximately 3.7 million outstanding options/SARs at June 28, 2008 with a weighted-average exercise price of $8.97 per share, an aggregate intrinsic value of
less than $1,000, and a weighted-average remaining contractual term of 7.95 years. None of the options/SARs outstanding at June 28, 2008 had cash settlement features.

There
were approximately 1.7 million of exercisable options/SARs at June 28, 2008 with a weighted-average exercise price of $10.61 per share, an aggregate intrinsic value
of less than $1,000, and a weighted-average remaining contractual term of 6.54 years.

The
total intrinsic value of options exercised during the fiscal years ended 2008 and 2007 was approximately $0.2 million and $0.6 million, respectively.

There
were approximately 1.0 million SARs available to grant at June 28, 2008.

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

Number of
Shares

Option Prices

Weighted Exercise
Price per ShareBalance at July 2, 2005


2,484,560




$
7.48Granted


550,000

$
15.33 to $22.00

$
15.69Exercised


(1,061,557
)
$
1.95 to $11.98

$
6.97Forfeited and expired


(8,015
)
$
5.59 to $10.93

$
10.33Balance at July 1, 2006


1,964,988Granted


1,115,000

$
11.53 to $15.95

$
12.15Exercised


(133,238
)
$
1.56 to $10.93

$
3.68Forfeited and expired


(71,467
)
$
9.90 to $15.95

$
15.18Balance at June 30, 2007


2,875,283Granted


1,455,930

$
2.92 to $7.45

$
4.90Exercised


(20,180
)
$
4.67 to $5.59

$
4.68Forfeited and expired


(511,351
)
$
2.75 to $15.95

$
11.92Balance at June 28, 2008


3,799,682


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Table of Contents

11.   Income Taxes

The components of our (benefit from) provision for income before income taxes consist of the following:

For the Year EndedJune 28,
2008

June 30,
2007

July 1,
2006(Loss) income before income taxes:Domestic

$
(16,266
)
$
7,684

$
20,645Foreign


706


2,115


1,757$
(15,560
)
$
9,799

$
22,402Provision for (benefit from) income taxes:Current provision:Federal

$
(4,077
)
$
2,488

$
8,173State


(200
)

244


735Foreign


948


766


952Total current (benefit from) provision for income taxes


(3,329
)

3,498


9,860Deferred provision (benefit)Federal


(2,565
)

319


(1,409
)State


(95
)

28


(173
)Foreign


(500
)

(302
)

(810
)Total deferred (benefit from) provision for income taxes


(3,160
)

45


(2,392
)Total (benefit from) provision for income taxes

$
(6,489
)
$
3,543

$
7,468


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Table of Contents

The
components of the Company's deferred tax assets and liabilities consist of the following:

(in thousands)

June 28,
2008

June 30,
2007Deferred Tax AssetCurrentBad debt reserve

$
771

$
489Inventory valuation reserves


1,389


978Deferred revenue


404


990Total Deferred Tax AssetCurrent

$
2,564

$
2,457Deferred Tax AssetNoncurrentAccrued warranty reserve

$
2,079

$
2,381Restructuring reserve


131


165Share-based compensation


3,447


2,214Depreciation & amortization


180


198State tax credit carryforwards


549


524State net operating losses


182


Foreign net operating losses


943


708Other


554


488,065


6,238Less: Valuation reserve


0


(92
)Total Deferred Tax AssetNoncurrent

$
8,065

$
6,146Deferred Tax LiabilityNoncurrentDepreciation & amortization

$
2,099

$
2,178Deferred gain





481Total Deferred Tax LiabilityNoncurrent

$
2,099

$
2,659


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

June 28,
2008

June 30,
2007

July 1,
2006Statutory rate


(35
)%

35
%

35
%State income taxes


(1
)%

2
%

2
%Difference between foreign and US tax rates


1
%

(1
)%

(2
)%Resolution of income tax audits and other adjustments for uncertain tax positions


(3
)%

0
%

0
%Benefit from foreign sales credits


0
%

0
%

(2
)%Other reconciling items


(4
)%

0
%

0
%Effective tax rate


(42
)%

36
%

33
%


As
of June 28, 2008, the Company has no valuation allowance against deferred tax assets. As of June 30, 2007, the Company had no valuation allowance against deferred tax
asset in the United States, but had a valuation allowance of approximately $0.1 million in Israel. In accounting for the deferred tax asset, the Company has relied on historical data to
determine the necessity of providing a valuation allowance. Under the requirements of SFAS No. 109,"Accounting for Income Taxes,"the Company
believes it is more likely than not that the deferred tax assets, unless otherwise noted, will be fully utilized against future income taxes.

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At June 28, 2008, the Company had available research and development tax credits of approximately $0.5 million for state income tax purposes:

(in thousands)

Available

ExpiresFiscal 2000

$
249

June 2015Fiscal 2002


109

June 2017Fiscal 2003


17

June 2018Fiscal 2005


25

June 2020Various


149

No expirationTotal

$
549


At
June 28, 2008, the Company had the following foreign net operating losses available to it:

(in thousands)

Available

ExpiresGermany

$
821

No ExpirationIsrael


2,153

No ExpirationUnited Kingdom


121

No ExpirationTotal

$
3,095


No
amount for U.S. income tax has been provided on undistributed earnings of the Company's foreign subsidiaries because the Company considers the approximately $8.1 million of
accumulated foreign earnings to be indefinitely reinvested. In the event of distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income
taxes, subject to an adjustment, if any, for foreign tax credits and foreign withholding taxes payable to certain foreign tax authorities. Determination of the amount of U.S income tax liability that
would be incurred is not practicable because of the complexities associated with this hypothetical calculation; however, unrecognized foreign tax credit carry forwards may be available to reduce some
portion of the U.S. tax liability, if any.

The
Company adopted the provisions of FIN 48 effective July 1, 2007. FIN 48 addresses the accounting for and disclosure of uncertainty in income tax positions by
prescribing a minimum recognition threshold that a tax position is required to satisfy before being recognized in the financial statements. FIN 48 also provides guidance on
de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The
cumulative effect of adopting FIN 48 was a decrease in tax reserves of approximately $0.1 million, resulting in an offsetting increase to the July 1, 2007
Retained Earnings balance.

Upon
adoption, the gross liability for unrecognized tax benefits at July 1, 2007 was approximately $1.9 million, inclusive of interest and penalties and, if recognized,
would favorably affect the Company's effective tax rate. In addition, consistent with the provisions of FIN 48, certain reclassifications were made to the balance sheet, including the
reclassification of $0.4 million of income tax liabilities from current to non-current liabilities because payment of cash is not anticipated within one year of the balance sheet
date.

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Table of Contents

The
reconciliation of the total amounts of unrecognized tax benefits at June 30, 2007 and June 28, 2008 is as follows:

AmountBalance at July 1, 2007

$
1,853Additions based on tax positions related to the current year


116Additions for tax positions of prior years


10Reductions for positions of prior years


(554
)Settlements


(25
)Balance at June 30, 2008

$
1,400


The
Company's policy to include interest and penalties related to gross unrecognized tax benefits within its provision for income taxes did not change upon the adoption of FIN 48.
To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced in the period that such determination is made and reflected as a reduction of the overall
income tax provision. As of June 28, 2008 and June 30, 2007, the Company had approximately $0.1 million of accrued interest and penalties related to uncertain tax positions,
respectively. In each of the fiscal years ended June 28, 2008 and June 30, 2007, the Company recognized approximately $0.1 million in interest and penalties, respectively.

The
Company files income tax returns in the United States on a federal basis, in many U.S. state jurisdictions, and in certain foreign jurisdictions. The three most significant tax
jurisdictions are the U.S., Spain, and Japan. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those
filings relate. The 2006 and 2007 fiscal tax years remain subject to examination by the IRS for U.S. federal tax purposes, and the 2004 through 2007 fiscal tax years remain subject to examination by
the appropriate governmental agencies for Spanish and Japanese tax purposes, respectively.

We
do not anticipate experiencing any significant increases or decreases in our unrecognized tax benefits within the fiscal year ended 2009.

12.   Segment, Geographic and Major Customer Information

The Company operates principally in one industry segment: the design, manufacture, sale, and service of medical devices and related equipment. The results in this
segment have been presented in the Consolidated Statements of Operations for the appropriate periods. The Company has no single customer that represents a significant portion of revenue and accounts
receivable during the periods presented.

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Table of Contents

Geographic data

Geographic information for fiscal 2008, 2007 and 2006 is as follows (in thousands):

2008

2007

2006Revenue:United States

$
87,490

$
96,214

$
105,273Intercompany


32,873


27,039


21,612120,363


123,253


126,885Japan


17,598


20,333


20,586Spain


25,665


21,322


15,913Germany


3,915


3,162


3,088France


6,633


4,502


3,404Italy


1,691


2,033


1,202UK


1,658Israel


337


858


Australia


3,231


133


181,091


175,596


171,078Elimination


(32,873
)

(27,039
)

(21,612
)Consolidated total

$
148,218

$
148,557

$
149,466Income (loss) from operations:United States

$
(15,355
)
$
3,321

$
20,057Europe


1,396


996


861Japan


1,085


1,260


906All others


(2,215
)

(354
)Elimination


(454
)

(1,868
)

(1,151
)Consolidated total

$
(15,543
)
$
3,355

$
20,673Geographic identification of property and equipment:United States

$
3,322

$
3,002

$
2,979All others


705


477


323Consolidated total

$
4,027

$
3,479

$
3,302


United
States revenue includes export sales to unaffiliated companies located principally in Europe, the Asia-Pacific region and Latin America, which approximated
$31.3 million, $31.9 million, and $35.9 million in fiscal years 2008, 2007, and 2006, respectively.

13.   Employee Benefit Plans

The Company offers a 401(k) Plan which allows eligible United States employees to make tax-deferred contributions, a portion of which are matched by
the Company. The Company may make discretionary matching contributions to the Plan in an amount determined by its Board of Directors. Company contributions vest ratably with three years of employment
and amounted to $0.4 million, $0.5 million, and $0.4 million for the fiscal years ended 2008, 2007, and 2006, respectively.

14.   Discontinued Operations

At June 28, 2008, the discontinued skin care segment had a net liability of approximately $1.2 million consisting primarily of the reserve for
future occupancy costs on the Boston facility of

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Table of Contents

approximately
$0.4 million and deferred gift certificate revenue of approximately $0.8 million. There were no revenues or expenses from discontinued operations in fiscal 2008, fiscal
2007, or fiscal 2006.

15.   Legal Proceedings

The Company is currently involved in three litigation matters with Palomar Medical Technologies, Inc. ("Palomar").



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While
the Company intends to vigorously contest Palomar's allegations, and to pursue its own claims against Palomar, each lawsuit is inherently uncertain and unpredictable as to its
ultimate outcome. An adverse outcome in Palomar's suit against the Company would materially hurt the Company's business, financial condition, results of operations and cash flows. In contrast, an
adverse outcome in either of the two lawsuits which the Company has initiated against Palomar would not likely have a material adverse effect on the business or financial condition of the Company.

On
April 2 and April 22, 2008, respectively, two substantially similar putative class action lawsuits, entitled Western Pa. Elec. Employees Pension Fund, et al.,
1:08-cv-10551-DPW ("Western Pa.") and Caballero v. Candela Corp., et al., Civ. No. 1:08-cv-10673-DPW ("Caballero"), were
filed against Candela and two of its officers in the United States District Court for the District of Massachusetts purporting to assert claims for violations of §§10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeking, among other things, compensatory damages and reasonable costs and expenses. On
June 2, 2008, plaintiffs in the Western Pa. case formally moved for consolidation and the appointment of lead plaintiff and lead counsel. On July 10, 2008, that
motion was granted, the cases were consolidated, and a lead plaintiff and lead counsel were appointed. On August 25, 2008, lead plaintiff filed a consolidated amended complaint. The
consolidated and amended complaint purports to be brought on behalf of all open-market purchasers of Candela common stock from November 1, 2005 through August 21, 2006 and
alleges that Candela made certain false and misleading statements to investors expressing optimism regarding its financial condition and failed to disclose (i) the possibility that Palomar, one
of Candela's leading competitors, would initiate patent enforcement litigation against Candela and (ii) that Candela was purportedly losing market share to its competitors. The Company believes
the case is without merit and intends to defend against it vigorously.

On
February 19, 2008, Cardiofocus, Inc. ("Cardiofocus") filed suit against the Company and eight other companies in the United States District Court for the District of
Massachusetts, asserting willful infringement by the Company of U.S. Patent 6,547,780, 6,159,203 and 5,843,073. Cardiofocus seeks compensatory and treble damages, as well as attorneys' fees and
injunctive relief. On April 21, 2008, the Company answered Cardiofocus' complaint and asserted a variety of counterclaims against Cardiofocus.

On
April 16, 2008, a shareholder derivative action entitled Forlenzo v. Puorro, et al., Civ. No. 08-1532, was filed in Middlesex County, Massachusetts Superior
Court against the individual members of Candela's board of directors and certain of its current and former officers purporting to assert claims for breach of fiduciary duty and related claims arising
out of allegations similar to those asserted in the class action litigation discussed above. The complaint seeks on behalf of Candela, among other things, damages, restitution, and injunctive relief.
The Company is considering what action to take in response.

16.   Other Income

During the fiscal year ended June 30, 2007, the Company recognized a $3.5 million gain on the exchange of common stock of Solx Inc. for cash
and common stock of OccuLogix, Inc. (NasdaqGM: OCCX). The gain was a result of the acquisition of Solx Inc., a privately-held company, by

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OccuLogix, Inc.,
a publicly traded company. The Company held 19.99% of the outstanding common stock of Solx Inc. on an as-converted basis, prior to the merger with an
associated book value of $0.

As
a result of the acquisition of Solx, Inc., Candela received approximately $1.0 million in cash at the time of closing, future cash consideration of approximately
$2.5 million, and approximately 1.3 million shares of common stock in OccuLogix, Inc.

The
value of the shares of OccuLogix, Inc. was included in Candela's marketable securities at June 30, 2007 as they were considered
available-for-sale securities in accordance with SFAS 115. The temporary differences between cost and fair value were presented in the consolidated financial statements
in accumulated other comprehensive income within stockholders' equity, net of any related tax effect. At December 29, 2007, in the opinion of management, the value of the investment in the
common shares of OccuLogix sustained an other-than-temporary impairment due to its consistent decline in value and public notification that the security was at risk of being
delisted from the NASDQ exchange. As such, the Company recognized an associated $2.5 million loss.

17.   Quarterly Results of Operations (unaudited)

Quarter Ended2008 (in thousands, except per-share data)

First

Second(1)

Third

FourthRevenue

$
35,473

$
36,081

$
38,891

$
37,773Gross Profit


17,276


16,716


17,459


15,347Net income (loss)


187


(4,550
)

(2,056
)

(2,652
)Earnings (loss) per common share:Basic

$
0.01

$
(0.20
)
$
(0.09
)
$
(0.12
)Diluted

$
0.01

$
(0.20
)
$
(0.09
)
$
(0.12
)




Quarter Ended2007 (in thousands, except per-share data)

First(2)

Second

Third

FourthRevenue

$
33,474

$
37,406

$
38,690

$
38,987Gross profit


17,425


17,778


19,740


20,120Net income (loss)


4,419


1,024


1,540


(727
)Earnings (loss) per common share:Basic

$
0.19

$
0.04

$
0.07

$
(0.03
)Diluted

$
0.18

$
0.04

$
0.07

$
(0.03
)


---

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Table of Contents

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Not Applicable

Item 9A.    Controls and Procedures.



We
have established disclosure controls and procedures ("Disclosure Controls") to ensure that information required to be disclosed in the Company's reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms. Disclosure
Controls are also designed to ensure that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure. Our Disclosure Controls were designed to provide reasonable assurance that the controls and procedures would meet their objectives. Our management, including the Chief Executive Officer
and Principal Financial Officer, realizes that no control system can prevent all possibilities of error or fraud. A control system, no matter how well designed and operated, can provide only
reasonable assurance of achieving the designed control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusions of two or more people, or by management override of the control. Because of the inherent limitations in
a cost-effective, maturing control system, misstatements due to error or fraud may occur and not be detected.

As
of the end of the period covered by this Form 10-K, management, with the participation of the Chief Executive Officer and Principal Financial Officer, has performed
an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). This evaluation included
consideration of the controls, processes and procedures that comprise our internal control over financial reporting. Based on such evaluation, our Chief Executive Officer and Principal Financial
Officer concluded that, as of June 28, 2008, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports
that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is
accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.



Management
is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).
Under the
supervision and with the participation of management, including our Chief Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting as of June 28, 2008, based on the framework in "Internal ControlIntegrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO").

Based
on our assessment, management determined that the Company's internal controls over financial reporting as of June 28, 2008 were effective.

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Table of Contents

The
Company's external auditors, BDO Seidman, LLP, an independent registered public accounting firm, have issued an audit report on their assessment of the Company's internal
control over financial reporting.



There
was no change in our internal control over financial reporting (as defined under Rule 13a-15(f) under the Exchange Act) during our fourth quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

/s/GERARD PUORROGerard Puorro President and Chief Executive

/s/ROBERT E. QUINNRobert E. Quinn Vice President of Finance, Treasurer, Corporate Controller and Principal Financial OfficerSeptember 11, 2008


Item 9B.    Other Information

None.

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Table of Contents

Part III

Notwithstanding anything to the contrary contained herein, in no event are the sections "Audit Committee Report" to be incorporated by
reference herein from the Company's definitive proxy statement for the Company's 2008 annual meeting of stockholders.

Item 10.    Directors, Executive Officers and Corporate Governance.

The information required by this item concerning the directors and executive officers of the Company is incorporated by reference
herein from the information contained in the sections entitled "Election of Directors", "Occupations of Directors" and "Executive Officers" in our definitive proxy statement (the "Definitive Proxy
Statement") for the 2008 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of Candela's fiscal year ended June 28,
2008.

The
information required by this item concerning compliance with Section 16(a) of the Exchange Act required under this item is incorporated herein by reference from the
information contained in the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Definitive Proxy Statement.

The
information required by this item concerning the Company's Code of Ethics that applies to all directors, officers, and employees of the Company is incorporated by reference from the
information contained in the section entitled "Code of Business Conduct and Ethics" in the Definitive Proxy Statement.

The
information required by this item concerning the Company's audit committee is incorporated by reference from the information contained in the section entitled "Meetings of the Board
of Directors and Committees Thereof" in the Definitive Proxy Statement.

Item 11.    Executive Compensation.

The information required by this item concerning executive compensation is incorporated herein by reference from the information
contained in the section entitled "Compensation and Other Information Concerning Directors and Officers" in the Definitive Proxy Statement.

The
information required by this item concerning securities authorized for issuance under the equity compensation plans is incorporated by reference from the information contained in the
section entitled "Equity Compensation Plan Information" in the definitive Proxy Statement.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item concerning security ownership of certain beneficial owners and management is incorporated herein
by reference from the information
contained in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Definitive Proxy Statement.

Item 13.    Certain Relationships and Related Transactions, and Director Independence.

The information required by this item concerning certain relationships and related transactions is incorporated herein by reference
from the information contained in the section entitled "Certain Relationships and Related Transactions" in the Definitive Proxy Statement.

The
information required concerning director independence is incorporated by reference from the information contained in the section entitled "Meetings of the Board of Directors and
Committees Thereof" in the Definitive Proxy Statement.

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Table of Contents

Item 14.    Principal Accountant Fees and Services.

The information required by this item concerning principal accountant fees and services is incorporated herein by reference from the
information contained in the section entitled "Accounting Fees" in the Definitive Proxy Statement.

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Table of Contents

SCHEDULE II        CANDELA CORPORATION        Valuation and Qualifying Accounts        For the years ended June 28, 2008, June 30, 2007, and July 1, 2006

(In thousands)

Balance at
Beginning
of Period

Additions
Charged to
Income

Deductions
from
Reserves

Balance at
End of
PeriodReserves deducted from assets to which they apply:Allowance for doubtful accounts:Year ended June 28, 2008

$
1,412

$
3,053

$
2,143

$
2,322Year ended June 30, 2007


1,830


989


1,407


1,412Year ended July 1, 2006


2,065


1,241


1,475


1,831Reserve for inventoryYear ended June 28, 2008

$
2,088

$
3,225

$
2,911

$
2,402Year ended June 30, 2007


2,487


2,602


3,001


2,088Year ended July 1, 2006


1,920


2,340


1,773


2,487Reserve for discontinued operationsYear ended June 28, 2008

$
447

$


$
86

$
361Year ended June 30, 2007


447








447Year ended July 1, 2006


995





548


447


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Table of Contents

Part IV

Item 15.    Exhibits and Financial Statement Schedules.

Report of Registered Independent Public Accounting Firm


40Consolidated Balance SheetsJune 28, 2008 and June 30, 2007


43Consolidated Statements of Income (loss) and Comprehensive Income (loss) Years ended June 28, 2008, June 30, 2007 and July 1, 2006


44Consolidated Statements of Stockholders' EquityYears ended June 28, 2008, June 30, 2007 and July 1, 2006


45Consolidated Statements of Cash FlowsYears ended June 28, 2008, June 30, 2007 and July 1, 2006


46Notes to Consolidated Financial Statements


47




Schedule IIValuation and Qualifying Accounts


74


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:

3.1

Certificate of Incorporation, as amended3.2(9)

By-laws of the Company, as amended and restated10.1(1)

1985 Incentive Stock Option Plan10.2(2)

1987 Stock Option Plan10.2.1(2)

1989 Stock Plan10.2.2(3)

1990 Employee Stock Purchase Plan10.2.3(3)

1990 Non-Employee Director Stock Option Plan10.2.4(7)

1993 Non-Employee Director Stock Option Plan10.2.5(13)

1998 Amended and Restated Stock Plan10.2.6(18)

1998 Second Amended and Restated Stock Plan10.2.7**

1998 Third Amended and Restated Stock Plan10.3(7)

Lease for premises at 526 Boston Post Road, Wayland, Massachusetts.10.4(7)

Lease for premises at 530 Boston Post Road, Wayland, Massachusetts.10.5(7)

Patent License Agreement between the Company and Patlex Corporation effective as of July 1, 1988.10.6(4)

License Agreement among the Company, Technomed International, Inc. and Technomed International S.A. dated as of December 20, 1990.10.7(5)

License Agreement between the Company and Pillco Limited Partnership effective as of October 1, 1991.10.8(8)

Distribution Agreement between the Company and Cryogenic Technology Limited, dated October 15, 1993.10.9(10)

Asset Purchase Agreement between the Company and Derma-Laser, Limited and Derma-Lase, Inc. dated June 23, 1994.


75

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Table of Contents

10.10(11)

Letter Agreement between the Company and Fleet Bank dated February 13, 1997.10.10.1(11)

Amendment to Letter Agreement between the Company and Fleet Bank dated December 15, 1998.10.12*(14)

Amended and Restated License Agreement between the Company and The Regents of the University of California for Dynamic Skin Cooling Method and Apparatus effective as of August 11, 2000.10.12.1*(15)

Settlement Agreement dated August 11, 2000 by and among the Company, the Regents of the University of California, and Cool Touch, Inc.10.13(12)

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(12)

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(12)

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.10.14

Amended and Restated Employment Agreement dated as of April 5, 2007, between Candela Corporation and Gerard E. Puorro10.14.1(19)

Executive Employment, Non-competition and Non-disclosure Agreement10.15(19)

Senior Officer Executive Retention Agreement10.16(19)

Amended and Restated Employment Agreement between Candela Corporation and Gerard E. Puorro10.17(19)

Executive Retention Agreement with Gerard E. Puorro21.1**

Subsidiaries of the Company23.1**

Consent of BDO Seidman, LLP (Independent Registered Public Accounting Firm)31.1**

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2**

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1**

Section 1350 Certification of Chief Executive Officer32.2**

Section 1350 Certification of Chief Financial Officer99.1(16)

McKesson Medical-Surgical Inc. Distribution Agreement99.2(17)

First Amendment to the Amended and Restated License Agreement by and between The Regents of the University of California and Candela Corporation


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Table of Contents

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.

CANDELA CORPORATIONBy:

/s/GERARD E. PUORROGerard E. Puorro, President,Chief Executive Officer and DirectorSeptember 11, 2008


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

Signature

Title

Date/s/GERARD E. PUORROGerard E. Puorro

President, Chief Executive
Officer, and Director
(Principal Executive Officer)

September 11, 2008/s/ROBERT E. QUINNRobert E. Quinn

Vice President of Finance,
Treasurer, Corporate Controller
and Principal Financial Officer

September 11, 2008/s/KENNETH D. ROBERTSKenneth D. Roberts

Chairman of the Board of Directors

September 11, 2008/s/NANCY NAGERNancy Nager

Director

September 11, 2008/s/DOUGLAS W. SCOTTDouglas W. Scott

Director

September 11, 2008/s/BEN BAILEY, IIIBen Bailey, III

Director

September 11, 2008/s/GEORGE ABEGeorge Abe

Director

September 11, 2008


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Table of Contents

EXHIBIT INDEX

10.2.7

1998 Third Amended and Restated Stock Plan21.1

Subsidiaries of the Company23.1

Consent of BDO Seidman, LLP, (Independent Registered Public Accounting Firm)31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification pursuant to 18 U.S.C. Section 135032.2

Certification pursuant to 18 U.S.C. Section 1350


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