**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

| **For the fiscal year ended June 30, 2007** | **Commission  file number 000-14742** |
|--------------------------------------------------|---------------------------------------|

 

**CANDELA CORPORATION**

(Exact name of registrantas specified in its charter)

| **Delaware**                                     | ** ** | **04-2477008**       |
|--------------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of                 |       | (I.R.S. Employer     |
| incorporation or  organization)                  |       | Identification  No.) |
| **530 Boston Post Road, Wayland, Massachusetts** | ** ** | **01778**            |
| (Address of  principal executive offices)        |       | (Zip Code)           |

 

Registrant’s telephonenumber, including area code **508-358-7400**

Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant 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 awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x   No  o

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes  o   No  x

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is anlarge accelerated filer, an accelerated filer, or a non-accelerated filer  (as defined in Rule12b-2 of theExchange Act)

| Large accelerated filer o | Accelerated filer x | Non-accelerated  filer o |
|--------------------------------|--------------------------|-------------------------------|

 

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

The aggregate market value of the registrant’s votingand non-voting stock, held by non-affiliates of the registrant as of December 30,2006, based upon the closing price of such stock on the NASDAQ Stock Market onthat date, was $285,570,603. As of September 11, 2007, 23,138,771 sharesof the registrant’s common stock, $.01 par value, were issued and outstanding.

**DOCUMENTS INCORPORATED BYREFERENCE**

Part IIIincorporates by reference certain information from the 2007 definitive ProxyStatement.

 

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**CANDELA CORPORATION2007 Form 10-K Annual ReportTable of Contents**
|            | ** **                                                                                                                                | ** ** | **Begins on  Page** |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|
| ** ** | PART I                                                                                                                               |       |                |   |   |
| Item 1.    | BUSINESS                                                                                                                                  |       |                | 3 |   |
| Item 1A.   | Risk Factors                                                                                                                              |       |                | 21 |   |
| Item 1B.   | Unresolved Staff Comments                                                                                                                 |       |                | 26 |   |
| Item 2.    | Properties                                                                                                                                |       |                | 26 |   |
| Item 3.    | Legal Proceedings                                                                                                                         |       |                | 26 |   |
| Item 4.    | Submission of Matters to a  Vote of Security Holders                                                                                      |       |                | 27 |   |
| ** ** | PART II                                                                                                                              |       |                |   |   |
| Item 5.    | Market for the Registrant’s  Common Equity and Related Shareholders’ Matters and Issuer Purchases of  Equity Services |       |                | 27 |   |
| Item 6.    | Selected  Consolidated Financial Data                                                                                                     |       |                | 31 |   |
| Item 7.    | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                          |       |                | 32 |   |
| Item 7A.   | Quantitative and Qualitative  Disclosures About Market Risk                                                                          |       |                | 41 |   |
| Item 8.    | Financial Statements and  Supplementary Data                                                                                              |       |                | 42 |   |
| Item 9.    | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure                                                |       |                | 71 |   |
| Item 9A.   | Controls and Procedures                                                                                                                   |       |                | 71 |   |
| Item 9B.   | Other Information                                                                                                                         |       |                | 72 |   |
| ** ** | PART III                                                                                                                             |       |                |   |   |
| Item 10.   | Directors and Executive  Officers of the Registrant                                                                                       |       |                | 73 |   |
| Item 11.   | Executive Compensation                                                                                                                    |       |                | 73 |   |
| Item 12.   | Security Ownership of  Certain Beneficial Owners and Management and Related Shareholder Matters                                           |       |                | 73 |   |
| Item 13.   | Certain Relationships and  Related Transactions                                                                                           |       |                | 73 |   |
| Item 14.   | Principal Accountant Fees  and Services                                                                                                   |       |                | 73 |   |
| ** ** | PART IV                                                                                                                              |       |                |   |   |
| Item 15.   | Exhibits, Financial Statement Schedules, AND REPORTS  ON FORM 8-K                                                                         |       |                | 75 |   |

 

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**Part I**

**Item1.**                        Business.

**Introduction**

CandelaCorporation (“Candela” or the “Company”) is a pioneer in the development andcommercialization of advanced aesthetic laser and light-based systems thatallow physicians and personal care practitioners to treat a wide variety ofcosmetic and medical conditions including:

·       permanenthair reduction on all skin types;

·       skinrejuvenation, skin tightening and wrinkle reduction;

·       vascularlesions such as rosacea, facial spider veins, leg veins, port wine stains, angiomasand hemangiomas;

·       all-colortattoo removal;skin resurfacingscars, stretch marks and warts;

·       removalof benign pigmented lesions such as sun spots, age spots, freckles, and Nevusof Ota/Ito;

·       acneand acne scars;

·       sebaceoushyperplasia;

·       beardbumps (PFB);

·       psoriasis;and,

·       othercosmetic skin treatments.

Sinceour founding 37 years ago, we have continuously developed and enhancedapplications for laser and light-based technology. In the mid-1980’s webegan developing laser technology for medical applications, and since that timehave shipped approximately 12,000 systems to over 70 countries. Since the early1990’s we have focused our organizational resources on developing laser andlight-based technology for use solely in cosmetic and aesthetic applications.Below is a sampling of Candela’s innovations in the laser and light-basedtechnologies market:

·       firstlaser system based on selective photothermolysis to treat cutaneous vascularlesions with minimal skin injury;

·       firstlaser system to treat vascular lesions approved by the FDA for use on children;

·       firstQ-switched alexandrite laser for pigmented lesions and tattoos;

·       firsteffective pulsed dye laser treatment of hemangiomas, scars and warts;

·       firstmulti-wavelength long-pulse dye laser for treatment of leg telangiectasia(spider veins);

·       firstlaser with a clearance for non-invasive treatment of acne and acne scars;

·       firsthair removal laser with integrated Dynamic Cooling Device (“DCD”);

·       firstpulsed dye laser with DCD for wrinkles;

·       firstDCD for epidermal protection in vascular lesion treatment;

·       firstto introduce “laser-pumped-laser” hand-piece technology for expended pigmentedlesion and tattoo removal treatments (for which we have applied for a patent);and,

·       firstpain reduction device for aesthetic lasers and intense pulse light (“IPL”)systems.

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

·       GentleMaxTM—Multi-wavelengthtechnology integrated aesthetic treatment workstation.

·       AlexTriVantageTM—Thetotal tattoo and pigmented lesion solution using multi-wavelength technology inconjunction with our “laser-pumped-laser” hand piece technology.

·       SmoothPeelTM—Erbium:YAG laser—The simple choice for superior skin resurfacing.

·       SerenityTM—RevolutionaryPneumatic Skin FlatteningTM (PSFTM) technology that improves efficacy and safetywhile significantly reducing the pain associated with laser and IPL treatments.

·       GentleLASE®family of lasers provides the highest power, speed, efficacy and ease-of-use inpermanent hair reduction, vascular lesions, wrinkle reduction and the treatmentof pigmented lesions.

·       TheGentleYAG® family of lasers provides fast, effective permanent hair reductionfor every skin type including tanned or dark skin, treatment ofpseudofolliculitis barbae (“PFB”), leg and facial veins, and skin tightening.

·       TheVbeam® Perfecta, Platinum and Aesthetica family of lasers—Gold standard pulseddye technology eliminates pigmentation, vascular lesions including port winestain birthmarks, rosacea, leg and facial veins, skin rejuvenation by wrinklereduction, scars, warts, psoriasis and hemangiomas.

·       TheSmoothbeam® diode laser, for treatment of acne and acne scars, sebaceoushyperplasia and non-ablative dermal remodeling of wrinkles.

The growth in the market for using aesthetic laser andlight-based products is currently a worldwide phenomenon being driven by anincrease in discretionary income of aging baby-boomers, which continues tocreate new opportunities for Candela. This market demographic places a premiumon good health and personal appearance, and has demonstrated a willingness topay for health and cosmetic products and services. In addition, continuousgrowth in the popularity of laser and light-based treatments among the generalpopulation is also spurring demand for Candela’s products. Last year, accordingto The American Society for Aesthetic Plastic Surgery, Americans spent anestimated $12.2 billion on approximately 11.5 million cosmetic procedures. Inparticular, lasers and light-based systems are proving an attractivealternative for eliminating unwanted hair. Laser hair-removal procedures werethe second most frequent cosmetic procedure performed last year, second only toBotox injections.

Candela is dedicated to developing safe and effectiveproducts. Our aesthetic laser and light-based systems are further distinguishedby being among the fastest, smallest and most affordable in their respectivemarkets. We believe that we have the largest market share because of theseproduct attributes and we are committed to continual innovation as we meet theneeds of our markets.

Candela was incorporatedin Massachusetts on October 22, 1970 and subsequently reincorporated inDelaware on July 1, 1985.

**Industry Overview**

Lasers andlight-based devices use the unique characteristics of light to achieve preciseand efficacious therapeutic effects, often in a non-invasive manner. Theprecise color, concentration, and controllability of different types of lightprovide for the delivery of a wide range of specialized treatments. Firstintroduced in the 1960’s, the use of lasers for medical applications grewrapidly in the 1990’s as technical advances 

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mademedical lasers more effective and reliable. Medical lasers and light-baseddevices are today used for numerous types of procedures falling into four broadcategories: ophthalmic surgery, aesthetic and cosmetic procedures, generalsurgery, and dental procedures. Candela competes solely within the growingmarket for lasers and light-based devices for performing aesthetic and cosmeticprocedures including:

·       removalof unwanted hair;

·       treatmentof rosacea, facial veins and leg veins, red birthmarks, scars, stretch marks,and warts;

·       facialrejuvenation and skin tightening to reduce the appearance of fine lines andwrinkles;

·       removalof pigmented lesions such as sun spots, age spots, and freckles;

·       treatmentof acne and acne scars;

·       treatmentof psoriasis;

·       treatmentof Nevus of Ota and melasma;

·       tattooremoval; and,

·       skinresurfacing.

Lasers produce intense bursts of highly focused lightto treat skin tissues. A laser’s wavelength (color), energy level, spot sizeand pulse width (exposure time) are optimized for the specific treatment.Light-based devices commonly referred to as intense pulsed light, feature a broadrange of wavelength of light designed to target vascular and pigmentary targetsfor facial rejuvenation procedures. Hair removal and the treatment of variousleg vein malformations require the deepest laser penetration for successfultreatment while scars and red birthmarks (port wine stains and hemangiomas)require less laser penetration. Pigmented lesions such as sun spots, age spotsand tattoos are typically surface conditions that require the least amount ofpenetration. Different conditions may require the use of different types oflasers or light-based devices with specific power requirements and optimizedoperating parameters. An active aesthetic practice addressing a broad range ofcosmetic procedures may need multiple lasers and light-based devices.

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

·       medicalpractitioners desire to drive additional revenue into their practices due tothe increasing reduction in insurance reimbursement;

·       thediscretionary income of aging baby boomers;

·       theincreased general acceptance of aesthetic and cosmetic laser treatments; and,

·       thedevelopment of technology that allows for new, effective, pain free andeconomic procedures for conditions with large patient populations.

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

Managed care and reimbursement restrictions in theUnited States, and similar constraints outside the United States, such associalized medicine, are motivating practitioners to emphasize aesthetic andcosmetic procedures that are delivered on a private, fee-for-service basis.While cosmetic procedures were once the domain of plastic surgeons anddermatologists, reimbursement reductions coupled with the reliable revenuestream from private-pay procedures have piqued the interest of otherspecialties, 

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including generalpractitioners, family care practitioners, obstetricians and gynecologists, andgeneral and vascular surgeons.

Key technical developmentsrequired for the broader cosmetic laser and light-based treatment marketsrelate to ease-of-use, speed, lower costs, safety, and effective elimination ofundesirable side effects. These factors are critical for broader segments ofpractitioners who wish to build aesthetic and cosmetic laser and light-basedtreatment practices. These factors are also important for minimizing thedisruption of a patient’s normal routine and for building demand for proceduresaddressing very large patient populations.

**Business Strategy**

Candela believesthat a convergence of price, performance and technology is occurring in theaesthetic and cosmetic laser industry, driving market expansion. We believe wehave the necessary infrastructure in place to capitalize on this expansion.Candela’s objective is to continue to be the leading provider of aesthetic andcosmetic lasers and light-based devices by using its proprietary technology andexpertise in light and tissue interaction, as well as by developingmarket-oriented products that utilize related technologies. Our businessstrategy is focused on the following goals:

·       increasepenetration of our traditional customer base;

·       expandbeyond our traditional customer base;

·       reduceproduct costs;

·       expandour direct domestic distribution channels;

·       expandour international distribution channels;

·       introducenew technologies that improve current treatment procedures and outcomes andprovide our customers with unique differentiation;

·       develophome use products that enable consumers to leverage the advantages of lightbased technologies at home; and,

·       continueinvesting in research and development to develop new applications that areefficacious, cost-effective, reliable and easy to use and have a high return oninvestment for our customers.

***IncreasePenetration of Our Traditional Customer Base.******  ***Our traditional customer baseconsists of dermatologists and plastic and cosmetic surgeons. We believe thatthe affordability of our products will enable us to penetrate further into thedermatologist, plastic and cosmetic surgeon markets. We believe that affordabilityhas been a major obstacle preventing non-traditional practitioners frompurchasing a laser or light-based system. As competition for patients amongpractitioner’s increases, those practitioners with aesthetic and cosmetic laserand light-based systems will be able to differentiate themselves.

***Expand beyond ourtraditional customer base.******  ***Asreimbursement rates dropped over the past several years, many primary carephysicians (family and general practice, and obstetrics and gynecologyphysicians) have begun to seek new services to offer to their patients.Cosmetic laser and light-based procedures represent an ideal new service thatis appealing to their patients, and adds a new “cash-pay” revenue stream totheir practice. Cosmetic laser and light-based procedures are safe and easy toperform. As more primary care physicians realize that these procedures are safeand easy to perform, awareness of cosmetic laser and light-based procedureswill continue to grow.

***Reduce ProductCosts.******  ***Weapply bottom-up engineering, focusing on each component to improve theperformance of each device while reducing its size, complexity, and cost. Webelieve our approach leads to 

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devices with fewer partsand greater manufacturing efficiency, resulting in lower production costs. Thisenables us to offer more reliable products at more affordable prices.

***Expand Our DirectDomestic Distribution Channels.******  ***North America presently isthe largest single geographic market for our products. We continue to upgrade ourUnited States direct and indirect sales forces to better address the needs ofour traditional core markets.

***Expand OurInternational Distribution Channels.******  ***Outside of the Unites States,we continue to strengthen our long-standing positions in Europe and Japan andare seeking to expand our markets in Asia-Pacific and Latin America. Wecurrently have direct sales offices in Madrid, Lisbon, Rome, Frankfurt, Paris,Osaka, Fukuoka, Nagoya, Tokyo and direct representation in China. Over the pastyear we increased the number and improved the quality of our internationalindependent distributor channel.

***Introduce NewTechnologies that Improve Current Treatment Procedures.******  ***As the marketfor non-invasive cosmetic procedures continues to expand Candela has a strongfocus on how to improve existing treatments to enable our customers to improveresults and the overall experience for their customers. For example, reducingthe pain associated with many procedures while maintaining or improvingefficacy is an area where Candela is committed to delivering new solutions. Therecent introduction of the SerenityTM device, utilizing PSFTM technology for thereduction of pain during laser and light based procedures continues to bedeveloped to expand the application range as well as the number of machineswith which it can be adapted to work with. This offers our customers a keydifferentiator in their market.

***Develop Home UseProducts.******  ***Candelahas recently formed a dedicated Home Use product division to leverageinitiatives that have been underway for medical office use within our researchand development organization. We are currently expanding our efforts in anumber of aesthetic and medical aesthetic application areas.

***Continue Investing in Research & Development.******  ***We believe that continuedinvestment in research and development is necessary to maintain our position asleader in the aesthetic laser and light-based device market. Our research anddevelopment approach is to develop high quality, reliable, and affordableproducts that address our existing markets and also allow us to expand intolarger, growing markets. In support of this approach, our research anddevelopment staff works closely with our marketing and operations teams toidentify new clinical applications that serve our markets. We have numerousresearch and development arrangements with leading physicians, hospitals andacademic laboratories in the United States and throughout the world. In aparallel effort, our research and development and engineering teams continue tooptimize our existing products by adding new technologies, increasing the speedof treatment and ease of use for our customers as well as reduce the overallsize of our products.

**The Market forAesthetic and Cosmetic Laser and Light-Based Systems**

Our traditional customer base for aesthetic andcosmetic 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, andgeneral and vascular surgeons. In the United States, according to the AmericanMedical Association and various professional societies, there are approximately12,000 dermatologists, 8,000 plastic and cosmetic surgeons and 11,000 ear, noseand throat specialists. Practitioners in other specialties that are beginningto buy aesthetic and cosmetic laser and light-based systems include 70,000general and family practitioners, 35,000 obstetricians and gynecologists, and28,000 general and vascular surgeons. In addition, the aesthetic and cosmeticlaser and light-based system market includes non-medical practitioners, notablyelectrologists, of which there are an estimated 6,000 in the United States andapproximately 4,000 med spa owners in the United States.

The end markets for cosmetic procedures encompassbroad and growing patient groups, including aging “baby boomers” as well asyounger age groups. Baby boomers were approximately 80 million, 

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representing approximately29% of the total United States population. This large population group hasexhibited a strong demand for aesthetic and cosmetic procedures. We believethat as the cost of treatments decreases and the popularity of cosmeticprocedures such as hair removal increases, the target market for theseprocedures will expand beyond the baby boomers to include a broad range ofwomen and men aged 17 to 65. Demographic factors similar to the United Statesunderlie the growth of the aesthetic and cosmetic market outside of the UnitedStates as well.

***Hair Removal.******  ***We believe that the greatmajority of the 108 million women over the age of 16 in the United Statesemploy one or more techniques for temporary hair removal from various parts ofthe body. Also, a growing number of men are removing hair by means other thantheir daily shaving routine. A number of techniques are used to pull hair fromthe follicle including waxing, depilatories, and tweezing. In the waxingprocess, a lotion, generally beeswax-based, is spread on the area to be treatedand is then rapidly peeled off, pulling out the entrapped hairs. Depilatoriesemploy rotating spring coils or slotted rubber rolls to trap and pull out thehairs. Tweezing involves removing individual hairs with a pair of tweezers.Pulling hair from the follicle produces temporary results, but is often painfuland may cause skin irritation. Depilatory creams, which contain chemicals todissolve hair, frequently leave a temporary unpleasant odor and may also causeskin irritation. Shaving is the most widely used method of hair removal,especially for legs and underarms but produces the shortest-term results. Hairbleaches do not remove hair, but instead lighten the color of hair so that itis less visible. A principal drawback of all of these methods is that theyrequire frequent treatment.

Before the advent of laser and light-based hairremoval, electrolysis was the only method available for the long-term removalof body hair. The success rate for electrolysis is variable depending upon theskill of the electrologist and always requires a series of treatments.Electrolysis is time-consuming, expensive and sometimes painful. There is alsosome risk of skin blemishes and a rising concern relating to needle infection.Because electrolysis requires that each hair follicle be treated separately andcan only treat visible hair follicles, the treatment of an area as small as anupper lip may require numerous visits at an aggregate cost of up to $1,000. TheAmerican Electrology Association estimates that approximately one millionpeople per year undergo electrology procedures. Although we believe the largemajority of all electrolysis treatments are for facial hair, the neck, breastsand bikini line are also treated. Because hair follicles are disabled one at atime, electrolysis is rarely used to remove hair from large areas such as theback, chest, abdomen, and legs. We believe laser and light-based systems enablethe practitioner to address a potentially larger market than electrolysis bytreating a larger area of the body more quickly and with improved results.

We believe themarket for laser and light-based hair removal is growing as the customercompares laser and light-based treatments to other hair removal methods thatare currently available. The benefits of a laser and light-based systemtreatment include:

·       significantlyreduced procedure time and number of treatments;

·       significantlylonger-term cosmetic improvement;

·       treatmentof larger areas in each treatment session;

·       lessdiscomfort during and immediately following procedures;

·       reducedrisk of scarring and infection; and,

·       non-invasiveprocedures.

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***Vascular Lesions.******  ***Benign vascular lesions areabnormal, generally enlarged and sometimes proliferating blood vessels thatappear on the surface of the skin as splotches, dots, bulges, and spider shapesin a variety of colors ranging from red to purple. Different types of benignvascular lesions include the following:

·       stretchmarks and scars;

·       varicoseveins, which are large veins greater than 1mm in diameter and often bulge abovethe skin surface;

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

·       telangiectasias,more commonly referred to as spider veins, appearing on the face and otherparts of the body;

·       legtelangiectasias, which are smaller spider veins up to 1mm in diameter appearingas single strands;

·       portwine stains, which are vascular birthmarks characterized by a red or purplediscoloration of the skin; and,

·       hemangiomas,which are protuberances that consist of dilated vessels, which often appear onnewborns within one month of birth.

***PigmentedLesions/Tattoos.******  ***Benignpigmented lesions can be both epidermal, on the outer layer of skin, anddermal, on the innermost layer of skin, natural or man-made (tattoos) and canconstitute a significant cosmetic problem to those who have them. There hasbeen significant increase in recent years in the number of people gettingtattoos. This growth is expected to result in a compounded annual growth rateof 16.8% for the Tattoo Removal Laser market between 2006 and 2010.

***Skin Rejuvenation.******  ***Skin rejuvenation is one ofthe fastest growing segments of the aesthetic laser and light-based systemmarket. A significant percentage of the population suffers from fine lines andwrinkles or older looking skin as a result of the normal aging process. This isthe primary group of candidates for non-ablative laser and skin tighteningtreatments. While the market for skin rejuvenation is greatest in the UnitedStates, significant opportunities abound in international markets where thereis an aging demographic, such as Japan, or a high prevalence of photo-damagedskin, such as Australia and Latin America.

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

***Acne Scars.***   Themajority of existing acne scar patients that initially seek traditionaltreatments decide not to undertake a procedure due to the side-effects andsocial down-time. A more acceptable alternative for acne scar treatment islaser therapy. In the treatment of acne scars, the laser initiates depositionof new collagen to raise depressions in the skin, reducing the appearance ofacne scars. Over a series of treatments, new collagen can fill in and softenthe appearance of acne scars.

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

***Skin Resurfacing.*****  **In calendar 2006, there wereapproximately 575,000 skin resurfacing procedures performed in the U.S., mostusing non-ablative skin resurfacing technologies. In addition to these 

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procedures therewere also approximately 560,000 chemical peels and 995,000 microdermabrasionprocedures conducted in the U.S, respectively.

**Candela’s Products**

We research,develop, manufacture, market, sell, distribute, and service laser andlight-based systems used to perform procedures addressing patients’ aesthetic,medical and cosmetic concerns. We offer a comprehensive range of products basedon proprietary technologies. Our products focus on the major aesthetic andcosmetic laser and light-based applications including:

·       hairremoval;

·       non-invasivetreatment of facial and leg veins and other benign vascular lesions;

·       treatmentof rosacea;

·       removalof benign pigmented lesions such as age spots and sun spots;

·       treatmentof scars and stretch marks;

·       wrinklereduction;

·       treatmentof acne and acne scars;

·       treatmentof psoriasis;

·       all-colortattoo removal;

·       skinresurfacing; and, and,

·       otherskin treatments.

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

***Dynamic Cooling Device.***   TheDCD cools the top layer of the skin, while leaving the targeted underlying hairfollicle, vein or other structure at normal temperature. As a result, higherlevels of laser energy can be delivered during treatment, while minimizingthermal injury, pain, and the inconvenience associated with anesthetics. Thedesign of the hand-held DCD enables the practitioner to clearly see the areabeing treated, and the combined efficiency of the lasers and DCD reduces therisks of over treatment. The DCD delivers just the right amount of coolingquickly and consistently. Currently, DCD is available as an option on severalCandela laser systems.

***GentleMaxTM***

·       Integratedaesthetic treatment workstation with multiple wavelength capability;

·       Thefastest and most powerful Nd:YAG 1064 laser and 755 nm laser in one;

·       Superiorresults in less time and in fewer treatments;

·       Touch-screentechnology for user-friendly interface;

·       Unlimitedpotential with complete treatment versatility offering unmatched permanent hairreduction to skin tightening and skin rejuvenation to treating leg and facialveins- as many as 36 different applications;

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·       Offers a choice of skin coolingoptions—from chilled air technology to Candela’s integrated and patentedDynamic Cooling Device (DCD) that utilizes bursts of cryogen before and afterthe laser pulse to offer unparalleled patient comfort.

***SmoothPeelTM***

·       Erbium:YAGlaser for precise and predictable peels without the chemicals;

·       Superiorablative characteristics for skin;

·       Offering patients multipletreatment options from simple freshening to a peel comparable to a glycolicacid peel with just a few days of downtime.

***AlexTriVantageTM***

·       Thetotal all-color tattoo and pigmented lesion solution;

·       Newlaser-pumped laser hand pieces (patent pending) offer a unique and elegantdesign;

·       Effectiveremoval of even the most difficult tattoo colors;

·       Newlong pulse mode offers advanced rejuvenation treatments for a wider variety ofpigmented lesions;

·       Candela’sfastest, gentlest, most powerful q-switched alexandrite laser;

·       Touch-screen technology foruser friendly interface.

***SerenityTM***

·       RevolutionaryPSFTM technology for pain reduction in laser and IPL treatments;

·       Improves efficacy and safety during laser andlight-based hair removal treatments;

·       Works with all laser and light based devices.

***GentleLASE® Family.***   TheGentleLASE® system is a high-energy, long-pulse solid-state laser thatgenerates laser light in the near infrared wavelength range. It is used forboth hair removal, pigmented lesions, and large (1mm or larger) leg and facialveins. The technology incorporated in the GentleLASE® uses intense pulsed lightenergy directed through an Alexandrite rod, which achieves selective heatingwhile keeping the temperature of the skin below its damage threshold. Thelonger Alexandrite laser wavelength gives the GentleLASE a higher melaninabsorption coefficient and enables the GentleLASE® to penetrate skin surfacesdeeper than most other hair removal lasers. The GentleLASE continues to featurean (18mm) spot size, the industry’s largest. The GentleLASE® was recentlyredesigned into a smaller, more transportable configuration and re-introducedwith new advanced features including additional spot sizes, longer deliverysystems and faster repetition rates (Hz rates).

The other system comprising the GentleLASE® family oflasers is the GentleLASE Limited EditionTM, our most affordable hair removallaser. The GentleLASE LETM features fewer options than its namesake, includingfewer spot sizes and reduced fluences, but GentleLASE® performance advantages:speed, efficacy and ease-of-use, remain the same regardless of theconfiguration.

***GentleYAG® Family.***   TheGentleYAG® system is a high-energy, long-pulse Nd:YAG laser that is used toremove unwanted hair in all skin types, eliminate leg and facial veins andprovide for skin rejuvenation, including wrinkle reduction and skin tightening.The technology incorporated in the GentleYAG® uses intense pulsed light energydirected through an Nd:YAG (Neodymium: Yttrium Aluminum Garnet) rod, whichtargets selected chromospheres to achieve localized heating while 

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maintaining skin temperaturebelow its damage threshold in conjunction with DCD epidermal cooling. Like theGentleLASE® laser, the GentleYAG® also supports an 18mm spot size, theindustries largest.

Other members of the GentleYAG® family of lasersinclude the GentleYAG® HR (for hair removal only), the GentleYAG® VR (forleg & facial veins) and the GentleYAG® SRT (for skin rejuvenation andtightening). All of these models are upgradeable to provide additionaltreatment options.

***GentleMAX.******  ***The GentleMAXis Candela’s newest product offering and combines the treatment capabilities ofboth the GentleLASE and GentleYAG lasers described above. The GentleMAX notonly incorporates 755 nm and 1064 nm treatment options into a singleworkstation, it does so without loss of any specifications found on the singlewavelength GentleLASE & GentleYAG lasers. The GentleMAX can also actas a platform for current and future component upgrades, including theSmoothPeel skin resurfacing laser, further expanding the GentleMAX’s range of applications.

The GentleMAX can be configured with delivery systemsincorporating DCD or air cooling and is also available in upgradeable, singlewavelength and Limited Edition models, giving the GentleMAX an almost unlimitednumber of configurations in which it can be purchased.

***PneumaticSkin Flattening (PSFTM).*****  **PSFTM technology, which provides pain reduction onalmost any laser or light-based hair removal system, and also eliminates theneed for other epidermal protection technologies, has been introduced initiallyas the **SerenityTM**. The SerenityTMdevice offers several different configurations of hand pieces and adaptors thatallow PSFTM to be used with, again, almost any laser or IPL device on the markettoday.

***Vbeam® Family.***   TheVbeam® system delivers the safety and efficacy of the clinically proven pulseddye laser (PDL) while minimizing the problematic side effects of postoperativebruising, commonly referred to as purpura. Each member of the Vbeam® familyfeatures Candela’s patented Dynamic Cooling Device that increases patient comfortwhile providing epidermal protection.

The Vbeam® Family has recently been upgraded tofeature a smaller, more streamlined design as well as an improved userinterface designed to accommodate the wide range of users in today’s market.The new design also features three individual, upgradeable models designed tomeet the needs of almost any growing practice. The Aesthetica is specificallydesigned for skin rejuvenation, the Platinum for vascular lesions, and thePerfecta, which treats a wide range of vascular lesions, as well as providingcomprehensive skin rejuvenation treatments. Additional indications treated bythe Vbeam® family include: facial spider veins, leg telangiectasias,hemangiomas, poikiloderma, rosacea, scars, warts, stretch marks, vulvodynia,acne, port wine stains and other vascular abnormalities present in adults toinfants.

***ALEXLAZRTMsystem.***   The****ALEXLAZRTM** is ashort-pulse solid-state laser, which emits near-infrared, 755 nm light for thenon-invasive removal of epidermal pigmentation such as sun spots, tattoopigments and dermal pigmented lesions such as Nevus of Ota, a bluish colored,non-vascular, pigmented lesion, generally found among persons of Asian descent.The ALEXLAZRTM has a fiber optic delivery system that produces an even beamdistribution without hot spots. Its wavelength maximizes beam penetration,providing gentle treatments with effective results on deeper pigments and iseffective in the removal of tattoo pigments, optimally targeting the green,blue and black pigmented inks.

The **AlexTriVantage**introduces and incorporates “laser-pumped-laser” technology to further expandits pigmented lesion and tattoo removal treatment capabilities. This newtechnology allows for 532 and 1064 nm q-switched energies to also be generatedfrom the 755 nm laser devices through additional hand pieces containing theNd:YAG and KTP crystals capable of emitting these wavelengths. These newwavelengths allow for the treatment of all tattoo colors, tattoo removal ondarker skin types and the expanded removal of epidermal and dermal pigmentedlesions.

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***Smoothbeam® system.*****  **Introduced in March 2001, the Smoothbeam® diodelaser heats collagen in the upper dermis, stimulating new collagen depositionfor the improvement of wrinkles, sebaceous hyperplasia and acne scars. Thesystem is small, easily portable and available in two unique colors to ideallycomplement the practice environment. The Smoothbeam® laser employs laser lightat 1450 nm to heat the dermis, sebaceous glands, and associated structureswithin the dermis in combination with Candela’s patented DCD cooling to cool andprotect the epidermis. The thermal injury alters the structure of the sebaceousglands, the root cause of acne lesions, resulting in more effective andlonger-lasting acne clearance.

***SmoothPeel.***   TheSmoothPeel laser is an Erbium:YAG laser offering skin resurfacing treatmentsmore precise than chemical peels and offering superior results compared to themore commonly delivered microdermabrasion treatment.

**Sales andDistribution**

We market and sell our products worldwide. Executivesin North America, Latin America, Japan, Asia-Pacific, Europe and the MiddleEast manage our marketing, selling and service activities through a combinationof direct personnel and a network of independent distributors.

The mix of direct sales and distributor sales variesby region. Generally, our distributors enter into 2-3 year exclusiveagreements during which they typically agree not to sell our competitors’products. Our sales strategy is to choose the most productive and practicabledistribution channel within each of our geographic markets.

We sell products in the United States primarilythrough our direct sales force to our traditional customer base ofdermatologists and plastic and cosmetic surgeons. Candela’s products aredistributed to our non-traditional markets through an exclusive arrangementwith McKesson’s Medical Surgical Division. McKesson has 450 dedicated salesrepresentatives that showcase a wide range of products to family and generalpractice, and obstetrics and gynecology, physicians.

Outside the United States, we sell our products inEurope, Japan, Latin America, the Middle East, and Asia-Pacific through directsales offices and distribution relationships. We have a total of 131 employeesin our direct sales offices in Madrid, Lisbon, Rome, Frankfurt, Paris, Tokyo,Nagoya, Fukuoka, Osaka, and Netanya. We also have established distributionrelationships in China, Europe, Japan, Africa, Latin America, and the MiddleEast. Outside the United States, we are utilizing 59 distributors. Refer toNote 11 of our Consolidated Financial Statements for additional financialinformation about segments and geographical areas.

Thefollowing chart shows data relating to Candela’s international activities duringeach of the last three fiscal years by geographic region. Revenue generatedfrom regions other than the United States includes sales from our German,Spanish, Italian, French, Japanese, Israeli, and Australian subsidiaries, aswell as sales shipped directly to international locations from the UnitedStates.

| ** **                           | ** ** | **June 30,**       | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|
| **Revenues: **                  | ** ** | ** **              | ** ** | **2007**         | ** ** | **2006**         | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in thousands)** | ** ** |
| United States and  Canada            |       | $                       | 64,885     |             | $          | 69,330           |       | $ | 57,517 |   |
| Japan and  Asia-Pacific              |       | 29,950                  |       | 30,175           |       | 29,229           |       |
| Europe                               |       | 42,356                  |       | 34,618           |       | 30,659           |       |
| Latin  America & all others |       | 11,366                  |       | 15,343           |       | 6,496            |       |
|                                 |       | $                       | 148,557    |             | $          | 149,466          |       | $ | 123,901 |   |
|                                      |            |                         |            |                  |            |                  |            |  |  |  |  |  |

 

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**Service and Support**

Candela believes that quick and effective delivery ofservice is important to our customers. Our principal service center and partsdepot is located at our Wayland, Massachusetts headquarters. Parts depots arealso located at our sales offices in Japan, Spain, Portugal, Italy, Germany,and France. Independent distributors also maintain parts depots.

We also believe a highly trained and qualified servicestaff is important to product reliability. Distributors and subsidiaries havethe primary responsibility of servicing systems within their territories. Theirservice 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 providesan additional recurring source of revenue. Customers may elect to purchase aservice contract or purchase service on a time-and-materials basis. Candela’sservice contracts offer a range of service levels and options, includingadditional clinical support. The contract terms generally run in 12 or 24-monthintervals (See Item 8).

Candela emphasizeseducation and support of its customers. Periodic devicecalibration/verification, coupled with the continuous training of our serviceproviders, helps to ensure product reliability. We extend prompt and courteoustechnical and clinical support to our customers when needed.

**Manufacturing andRaw Materials**

We design,assemble, and test our branded products at our Wayland, Massachusetts andNetanya, Israel facilities. Ensuring adequate and flexible production capacity,applying lean manufacturing techniques, continually reducing costs, andmaintaining superior product quality are top priorities of our manufacturingorganization. We achieve our goals by:

·       workingclosely with the research and development organization, including significantearly involvement in product design;

·       continuallyimproving our just-in-time manufacturing and inventory processes;

·       effectivelymanaging and working closely with a limited number of the most qualifiedsuppliers; and,

·       applyingthe latest cell manufacturing techniques.

Our facility has ISO 13485 certification and hasestablished and is maintaining a quality system that meets the requirements ofISO 13485:2003 and CAN/CSA-ISO 13485. The ISO 13485 certification providesguidelines for the quality of company systems associated with the design,development, production, servicing and distribution of medical lasers andaccessories. ISO 13485 standards are European quality requirements andCAN/CSA-ISO 13485 is a Canadian quality requirement, all specifically relatingto the design of medical devices.

Our products are manufactured with standard componentsand subassemblies supplied by third party manufacturers to our specifications.We purchase certain components and subassemblies from a limited number ofsuppliers.

If our suppliers areunable to meet our requirements on a timely basis, our production could beinterrupted until we obtain an alternative source of supply. To date, we havenot experienced significant delays in obtaining dyes, optical andelectro-optical components, electronic components, Alexandrite rods and otherraw materials for our products. We believe that over time alternative componentand subassembly manufacturers and suppliers can be identified if our currentthird party manufacturers and suppliers fail to fulfill our requirements.

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**Research andDevelopment**

We believe that ouradvanced research and engineering activities are crucial to maintaining andenhancing our business, and we are currently conducting research on a number ofapplications. We believe that our in-house research and development (R&D)staff has demonstrated its ability to develop innovative new products that meetevolving market needs. Our core competencies include:

·       appliedlaser physics and technology;

·       tissueoptics;

·       photochemistry;

·       light-tissueinteraction;

·       clinicalresearch;

·       aestheticlaser applications;

·       engineeringand design of medical laser devices; and,

·       collaborativeresearch with leading academic and medical institutions.

As we discover new technologies or applications withcommercial potential, we assemble a team to develop the new product orapplication in cooperation with leading physicians and medical and researchinstitutions. In the United States in particular, we must receive United StatesFederal Drug Administration (“FDA”) clearance before marketing new products orapplications.

Our research and development team works with ouroperations group to design our products for ease of manufacturing and assemblyand with our marketing group to create and respond to market opportunities. Webelieve this interaction between functional groups facilitates the introductionof new products with the right balance of features, clinical benefits,performance, quality, and cost. Historically, our research and developmenteffort has relied primarily on internal development building on our coretechnologies. In addition to our acquisition of Inolase during fiscal 2007,which has permitted us to expand our internal R&D capabilities, we haveengaged the services of several independent engineering and development firmsto assist in the acceleration of new product development.

In addition, Candela conducts joint research withphysicians affiliated with various medical and research institutions. Oneexample of technology developed through joint research is our Dynamic CoolingDevice which was developed in conjunction with the Beckman Laser Institute atthe University of California, Irvine. We anticipate continuing joint researchand licensing arrangements with reputable medical research institutions infuture periods.

Our expenditures onresearch and development are set forth in Item 7.

**Backlog**

While we did maintain asignificant backlog of recently introduced products at June 30, 2007, wetypically have not had, and do not anticipate having, significant backlog inthe future. Accordingly, we do not believe that our backlog at any particulardate is necessarily an accurate predictor of revenue for any succeeding period.

**Customers**

Our sales are notdependent on any single customer or distributor, and we continue to expand ourdistribution channel worldwide through direct and indirect sales forces. Weexperience some seasonal 

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reductionof our product sales in our first fiscal quarter due to the summer holidayschedule of physicians and their patients.

**Competition**

Competition in theaesthetic and cosmetic laser industry is intense and technological developmentsare expected to continue at a rapid pace. Although there are severalmanufacturers of aesthetic and cosmetic lasers, we believe Candela is one ofonly a few companies that offer a broad range of technologies and products ableto address multiple clinical applications. Unlike Candela, few of ourcompetitors focus exclusively on the cosmetic and aesthetic laser market andseveral rely on a single technology which can be limiting. We compete on thebasis of proprietary technology, product features, performance, service, price,and reputation. Some of our competitors have greater financial, marketing, andtechnical resources than we do. Moreover, some competitors have developed, andothers may attempt to develop, products with applications similar to ours. Webelieve that many factors will affect our competitive position in the future,including our ability to:

·       developand manufacture new products that meet the needs of our markets;

·       respondto competitive developments and technological changes;

·       manufactureour products at lower cost;

·       retaina highly qualified research and engineering staff;

·       providesales and service to a worldwide customer base;

·       maintain and improveproduct reliability.

**Proprietary Rights**

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

In addition to our portfolio of issued patents andpatent applications, we license patented technology from third parties. We useour patented Dynamic Cooling Device (“DCD”) under a license agreement to patentrights owned by the Regents of the University of California (“Regents”).

InAugust 2000, we obtained exclusive license rights to the DCD (subject tocertain limited license rights of Cool Touch, Inc. [“Cool Touch”]) in thefollowing fields of use:

·       proceduresthat involve skin resurfacing and rejuvenation,

·       vascularskin lesions, and,

·       laserhair removal.

Cool Touch obtained a license to the DCD on aco-exclusive basis with Candela, in certain narrower fields of use. Cool Touchis restricted in its ability to assign its license rights to certain existingcompetitors of Candela. Candela is entitled to one-half of all royalty incomepayable to the Regents from Cool Touch. Under the agreement, Candela no longeris 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 thatlicenses 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 licensingarrangements to establish and protect our technology rights. In addition, weseek to protect our 

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proprietary rights byusing confidentiality agreements with employees, consultants, advisors, andothers. We cannot be certain that these agreements will adequately protect ourproprietary rights in the event of any unauthorized use or disclosure, that ouremployees, consultants, advisors, or others will maintain the confidentialityof such proprietary information, or that our competitors will not otherwiselearn about or independently develop such proprietary information.

Despite our efforts to protect our intellectualproperty, unauthorized third parties may attempt to copy aspects of ourproducts, to violate our patents, or to obtain and use our proprietaryinformation. In addition, the laws of some foreign countries do not protect ourintellectual property to the same extent as do the laws of the United StatesThe loss of any material patent, trademark, trade name, trade secret, orcopyright could hurt our business, results of operations, and financialcondition.

We believe that ourproducts do not infringe the rights of third parties, although one party ispresently asserting that our products infringe its patents (see Item 3). Wecannot be certain that third parties will not assert infringement claimsagainst us in the future or that any such assertion will not result in costlylitigation or require us to obtain a license to third party intellectualproperty. In addition, we cannot be certain that such licenses will beavailable on reasonable terms or at all, which could hurt our business, resultsof operations, and financial condition.

**GovernmentRegulation**

***FDA’s PremarketClearance 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 FederalFood, Drug, and Cosmetic Act. The FDA’s 510(k) clearance process usuallytakes from three to twelve months, but it can last longer. The process ofobtaining PMA approval is much more costly, lengthy, and uncertain andgenerally takes from one to three years or even longer. We cannot be sure that510(k) clearance or PMA approval will ever be obtained for any product wepropose to market.

The FDA decides whether a device must undergo eitherthe 510(k) clearance or PMA approval process based upon statutorycriteria. These criteria include the level of risk that the agency perceives isassociated with the device and a determination whether the product is a type ofdevice that is similar to devices that are already legally marketed. Devicesdeemed to pose relatively less risk are placed in either class I or II, whichrequires the manufacturer to submit a pre-market notification requesting510(k) clearance, unless an exemption applies. The pre-market notificationmust demonstrate that the proposed device is “substantially equivalent” inintended use and in safety and effectiveness to a legally marketed “predicatedevice” that is either in class I, class II, or is a “pre-amendment” class IIIdevice (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, anymodification that could significantly affect its safety or effectiveness, orthat would constitute a major change in its intended use, requires a new510(k) clearance. The FDA requires each manufacturer to make thisdetermination 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 new510(k) clearance, the agency may retroactively require the manufacturer tosubmit a pre-market notification requiring 510(k) clearance. The FDA alsocan require the manufacturer to cease marketing and/or recall the modifieddevice until 510(k) clearance is obtained. We have modified some of our510(k) cleared devices but have determined that, in our view, new510(k) clearances are not required. We cannot be certain that the FDAwould agree with any of our decisions not to seek 510(k) clearance. If theFDA requires us to seek 510(k) clearance for any modification, we also maybe required to cease marketing and/or recall the modified device until weobtain a new 510(k) clearance.

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Devices deemed by the FDA to pose the greatest risksuch as life-sustaining, life-supporting, or implantable devices, or deemed notsubstantially equivalent to a legally marketed predicate device, are placed inclass III. Such devices are required to undergo the PMA approval process inwhich the manufacturer must prove the safety and effectiveness of the device tothe FDA’s satisfaction. A PMA application must provide extensive pre-clinicaland clinical trial data and also information about the device and itscomponents regarding, among other things, manufacturing, labeling, andpromotion. After approval of a PMA, a new PMA or PMA supplement is required inthe event of a modification to the device, it’s labeling, or its manufacturingprocess.

A clinical trial may be required in support of a510(k) submission or PMA application. Such trials generally require anInvestigational Device Exemption (“IDE”) application approved in advance by theFDA for a limited number of patients, unless the product is deemed anon-significant risk device eligible for more abbreviated IDE requirements. TheIDE application must be supported by appropriate data, such as animal andlaboratory testing results. Clinical trials may begin once the IDE applicationis approved by the FDA and the appropriate institutional review boards are atthe clinical trial sites.

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

***Pervasive andContinuing FDA Regulation.******  ***Ahost of regulatory requirements apply to marketed devices such as our laser andlight-based products, including labeling regulations, the Quality SystemRegulation (which requires manufacturers to follow design, testing, control,documentation, and other quality assurance procedures), the Medical DeviceReporting regulation (which requires that manufacturers report to the FDAcertain types of adverse events involving their products), and the FDA’sgeneral prohibition against promoting products for unapproved or “off label”uses. Our Class II devices can have special controls such as performancestandards, post-market surveillance, patient registries, and FDA guidelinesthat do not apply to class I devices. Unanticipated changes in existingregulatory requirements or adoption of new requirements could hurt ourbusiness, financial condition, and results of operations.

We are subject to inspection and market surveillanceby the FDA for compliance with regulatory requirements. If the FDA finds thatwe have failed to comply with applicable requirements, the agency can institutea wide variety of enforcement actions. The FDA sometimes issues a publicwarning letter but also may pursue more drastic remedies, such as refusing ourrequests for 510(k) clearance or PMA approval of new products, withdrawingproduct approvals already granted to us, requiring us to recall products, orasking a court to require us to pay civil penalties or criminal fines, adhereto operating restrictions, or close down our operations. Ultimately, criminalprosecution is available to the FDA as punishment for egregious offenses. AnyFDA enforcement action against us could hurt our business, financial condition,and results of operation.

***Other United StatesRegulation.******  ***Wealso must comply with numerous federal, state, and local laws relating to suchmatters as safe working conditions, manufacturing practices, environmentalprotection, fire hazard control, and hazardous substance disposal. We cannot besure that we will not be required to incur significant costs to comply withsuch laws and regulations in the future or that such laws or regulations willnot hurt our business, financial condition, and results of operations.

***Foreign Regulation.******  ***International sales aresubject to foreign government regulation, the requirements of which varysubstantially from country to country. The time required to obtain approval bya 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 CEMark prior to sale of certain medical devices 

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within the European Union.During this process, the sponsor must demonstrate compliance with ISOmanufacturing and quality requirements.

Candela and its productsmay also be subject to other federal, state, local, or foreign regulationsrelating to health and safety, environmental matters, quality assurance, andthe like. To date, Candela’s compliance with laws that regulate the dischargeof materials into the environment or otherwise relate to the protection of theenvironment has not had a material effect on its ongoing operations. Candelahas not made any material expenditure for environmental control facilities.However, we cannot be certain that we will not be required to incur significantcosts to comply with such laws and regulations in the future.

**Product Liabilityand Warranties**

Our products are generally covered by a standardwarranty, with an option to purchase extended warranty contracts at the time ofproduct sale or service contracts after the time of sale. We maintain a reservebased on anticipated standard warranty claims. We believe such reserves to beadequate, but in the event of a major product problem or recall, such reservesmay be inadequate to cover all costs, and such an event could have a materialadverse effect on our business, financial condition, and results of operations.

Our business involves theinherent risk of product liability claims. We believe that we maintainappropriate product liability insurance with respect to our products. We cannotbe certain that with respect to our current or future products, such insurancecoverage will continue to be available on terms acceptable to us or that suchcoverage will be adequate for liabilities that may actually be incurred.

**The Skin CareCenters**

In 1996, we began aneffort to own and operate skin care centers offering cosmetic laser treatmentsutilizing our equipment along with other cosmetic services traditionallyoffered by high-end spas. We pursued this strategy by purchasing a spa inBoston, Massachusetts in 1996, and opening a new facility in Scottsdale,Arizona in 1997. We subsequently decided to discontinue our skin care centerefforts. We closed our Scottsdale facility in 1997 and the Boston facility in2003.

**Applied Optronics**

In 2003, Candela acquiredsubstantially all of the assets of Applied Optronics, the diode division ofSchwartz Electro-Optics, Inc. Applied Optronics was a leading manufacturerof high-powered, pulsed and CW diode lasers, and was a component supplier tothe OEM market that serves a variety of industries including the military,medical, industrial, research and robotics fields. Applied Optronics was thelead supplier of the diodes for our Smoothbeam**®**diode laser system. The Applied Optronics division of Candela, located in SouthPlainfield, New Jersey, generates revenue from diode sales to third-partycustomers.

**Inolase**

On March 6, 2007, weacquired Inolase (2002) Ltd. (“Inolase”) a non-public company engaged in thedevelopment and manufacture of proprietary pneumatic skin flattening PSFdevices for the aesthetic light-based treatment industry as well as thedevelopment of intellectual property related to medical devices and lightsources. It is now a wholly owned subsidiary of Candela which continues toengage in commerce under the name Inolase. This operation which includesresearch and development, sales and marketing, and manufacturing (including ISO13485 certification) is located in Netanya, Israel.

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**Employees**

As of June 30, 2007,we employed 386 employees, 255 in the United States and 131 internationally.None of our employees are subject to collective bargaining agreements.

**AvailableInformation**

Access to our AnnualReport on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K and amendments to these reports filedwith or furnished to the Securities and Exchange Commission may be obtainedthrough the Investor Relations section of our website atwww.candelalaser.com/ir_corp.asp as soon as reasonably practical after weelectronically file or furnish these reports. We do not charge for access toand viewing of these reports. Information on our Investor Relationspage and on our website is not part of this Annual Report on Form 10-Kor any of our other securities filings unless specifically incorporated hereinby reference. In addition, our filings with the Securities and ExchangeCommission may be accessed through the Securities and Exchange Commission’sElectronic Data Gathering, Analysis and Retrieval system at www.sec.gov. Allstatements made in any of our securities filings, including all forward-lookingstatements or information, are made as of the date of the document in which thestatement is included, and we do not assume or undertake any obligation toupdate any of those statements or documents unless we are required to do so bylaw.

**Forward-looking andCautionary Statements**

Certain statements contained in this Annual Report mayconstitute “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995 (“Reform Act”). We may also makeforward-looking statements in other reports filed with the Securities andExchange Commission, in materials delivered to stockholders and in pressreleases. In addition, Candela’s representatives may from time to time makeoral forward-looking statements. Forward-looking statements provide currentexpectations of future events based on certain assumptions and include anystatement 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-lookingstatements. 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 lowerproduction costs; or that the market will expand beyond baby boomers. Candelaassumes no obligation to update or revise any forward-looking statements. Inaccordance 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 identifycertain important factors that could cause actual results to differ materiallyfrom those in the forward-looking statements and from historical trends. Thosecautionary statements are not exclusive and are in addition to other factorsdiscussed elsewhere in this Annual Report, in Candela’s filings with theSecurities and Exchange Commission, or in materials incorporated therein byreference.

Candela GentleLASE, Vbeam, GentleYAG and Smoothbeamare registered trademarks and GentleMax, AlexTriVantage, SmoothPeel, and theCandela flame are trademarks of Candela Corporation. Dynamic Cooling Device,DCD, Serenity, Pneumatic Skin Flattening, and PSF are trademarks.

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**Item 1A.**                RiskFactors.

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

***Unfavorable results in our intellectual propertylitigation with Palomar Medical Technologies may result in significant declineto our stock price.***

On August 9, 2006, one of our competitors,Palomar Medical Technologies (“Palomar”), alleged that the manufacture, use andsale of our products for laser hair removal infringe a certain United Statespatent. Public announcements concerning this litigation that are unfavorable tous may result in significant declines in our stock price. An adverse ruling orjudgment in this matter could cause our stock price to decline significantly.

Litigation with Palomar will be expensive andprotracted, and our intellectual property position may be weakened as a resultof an adverse ruling or judgment. Whether or not we are successful in thepending lawsuits, litigation consumes substantial amounts of our financialresources and diverts management’s attention away from our core business. SeeItem 3—“Legal Proceedings.”

***Because we derive more than half of our revenue frominternational sales, including approximately 20% of our revenue from Japan andthe Asia-Pacific marketplace in fiscal 2007, we are susceptible to currencyfluctuations, negative economic changes taking place in Japan and theAsia-Pacific marketplace, and other risks associated with conducting businessoverseas.***

We sell more thanhalf of our products and services outside the United States. Internationalsales, consisting of sales from our subsidiaries in Germany, Spain, Italy,France, Japan, Israel, and Australia, and sales shipped directly tointernational locations from the United States, accounted for approximately 56%of our revenue for fiscal year 2007, and we expect that they will continue tobe significant. As a result, a major part of our revenues and operating resultscould be adversely affected by risks associated with international sales. Inparticular, significant fluctuations in the exchange rates between the UnitedStates dollar and foreign currencies could cause us to lower our prices andthus reduce our profitability, or could cause prospective customers to push outorders to later dates because of the increased relative cost of our products inthe aftermath of a currency devaluation or currency fluctuation. Other risksassociated with international sales that we currently face or have faced in thepast include:

·       longerpayment cycles common in foreign markets;

·       failureto obtain or significant delays in obtaining necessary import or foreignregulatory approvals for our products; and,

·       difficultiesin staffing and managing our foreign operations.

***The failure to obtain Alexandrite rods for theGentleLASE® system from our sole supplier would impair our ability tomanufacture and sell the GentleLASE® system.***

We use Alexandrite rods to manufacture the GentleLASE***®*** system, whichaccounts for a significant portion of our total revenues. We depend exclusivelyon our contract manufacturer to supply these rods, for which no alternativesupplier meeting our quality standards exists. We cannot be certain that ourcontract manufacturer will be able to meet our future requirements at currentprices or at all. To date, we have been able to obtain adequate supplies ofAlexandrite rods in a timely manner, but any extended interruption in oursupplies could hurt our results.

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***Disappointing quarterly revenue or operating resultscould cause the price of our common stock to fall.***

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

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

***Market supply and demand***

·       potentialincreases in the level and intensity of price competition between ourcompetitors and us;

·       potentialdecrease in demand for our products; and,

·       possible delays in marketacceptance of our new products.

***Customer behavior***

·       changesin or extensions of our customers’ budgeting and purchasing cycles; and,

·       changes in the timing ofproduct sales in anticipation of new product introductions or enhancements byus or our competitors.

***Company operations***

·       absenceof significant product backlogs;

·       oureffectiveness in our manufacturing process;

·       unsatisfactoryperformance of our distribution channels, service providers, or customersupport organizations; and,

·       timingof any acquisitions and related costs.

***Our failure to respond to rapid changes in technologyand intense competition in the laser industry could make our lasers obsolete.***

The aesthetic and cosmetic laser equipment industry issubject to rapid and substantial technological development and productinnovations. To be successful, we must be responsive to new developments inlaser technology and new applications of existing technology. Our financialcondition and operating results could be hurt if our products fail to competefavorably in response to such technological developments, or we are not agilein responding to competitors’ new product introductions or product pricereductions. In addition, we compete against numerous companies offeringproducts similar to ours, some of which have greater financial, marketing, and technicalresources than we do. We cannot be sure that we will be able to competesuccessfully with these companies and our failure to do so could hurt ourbusiness, financial condition, and results of operations.

***Like other companies in our industry, we are subjectto a regulatory review process and our failure to receive necessary governmentclearances or approvals could affect our ability to sell our products andremain competitive.***

The types of medical devices that we seek to market inthe United States generally must receive either “510(k) clearance” or “PMAapproval” in advance from the United States Food and Drug Administration (FDA)pursuant to the Federal Food, Drug, and Cosmetic Act. The FDA’s510(k) clearance process usually takes from three to twelve months, but itcan last longer. The process of obtaining PMA approval is 

22

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much more costly anduncertain 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 similartreatment. However, we cannot be sure that the FDA will not impose the moreburdensome PMA approval process upon one or more of our future products, norcan we be sure that 510(k) clearance or PMA approval will ever be obtainedfor any product we propose to market.

Many foreign countries in which we market or maymarket our products have regulatory bodies and restrictions similar to those ofthe FDA. We cannot be certain that we will be able to obtain (or continue toobtain) any such government approvals or successfully comply with any suchforeign regulations in a timely and cost-effective manner, if at all, and ourfailure to do so could adversely affect our ability to sell our products.

***We have modified some of our products without FDAclearance. The FDA could retroactively decide the modifications were improperand require us to cease marketing and/or recall the modified products.***

Any modification to one of our 510(k) cleareddevices that could significantly affect its safety or effectiveness, or thatwould constitute a major change in its intended use, requires a new510(k) clearance. The FDA requires every manufacturer to make thisdetermination 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) clearancesare not required. We cannot be certain that the FDA would agree with any of ourdecisions not to seek 510(k) clearance. If the FDA requires us to seek510(k) clearance for any modification, we also may be required to ceasemarketing and/or recall the modified device until we obtain a new510(k) clearance.

***Achieving complete compliance with FDA regulations isdifficult, and if we fail to comply, we could be subject to FDA enforcementaction.***

We are subject toinspection and market surveillance by the FDA to determine compliance withregulatory requirements. The FDA’s regulatory scheme is complex, especially theQuality System Regulation (“QSR”), which requires manufacturers to followelaborate design, testing, control, documentation, and other quality assuranceprocedures. This complexity makes complete compliance difficult to achieve.Also, the determination as to whether a QSR violation has occurred is oftensubjective. If the FDA finds that we have failed to comply with the QSR orother applicable requirements, the agency can institute a wide variety ofenforcement actions, including a public warning letter or other strongerremedies, such as:

·       fines,injunctions, and civil penalties against us;

·       recallor seizure of our products;

·       operatingrestrictions, partial suspension, or total shutdown of our production;

·       refusingour requests for 510(k) clearance or PMA approval of new products;

·       withdrawingproduct approvals already granted; and,

·       criminalprosecution.

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

Our products may also be subject to state regulations.Federal regulation allows our products to be sold to and used by licensedpractitioners as determined on a state-by-state basis which complicatesmonitoring compliance. As a result, in some states non-physicians may purchaseand operate our products. 

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In most states, it iswithin a physician’s discretion to determine whom they can supervise in the operationof our products and the level of supervision. However, some states havespecific regulations as to appropriate supervision and who may be supervised. Astate could disagree with our decision to sell to a particular type of end useror change regulations to prevent sales to particular types of end users orchange regulations as to supervision requirements. In several states applicableregulations are in flux. Thus, state regulations and changes to stateregulations may decrease revenues or prevent growth of revenues.

***Claims by others that our products infringe theirpatents or other intellectual property rights could prevent us frommanufacturing and selling some of our products or require us to incursubstantial costs from litigation or development of non-infringing technology.***

Our industry hasbeen characterized by frequent litigation regarding patent and otherintellectual property rights. Patent applications are maintained in secrecy inthe United States until such patents are issued and are maintained in secrecyfor a period of time outside the United States. Accordingly, we can conductonly limited searches to determine whether our technology infringes any patentsor patent applications of others. Any claims of patent infringement would betime-consuming and could:

·       resultin costly litigation;

·       divertour technical and management personnel;

·       causeproduct shipment delays;

·       requireus to develop non-infringing technology; and,

·       requireus to enter into royalty or licensing agreements.

Although patent and intellectual property disputes inthe laser industry have often been settled through licensing or similararrangements, costs associated with such arrangements may be substantial andoften require the payment of ongoing royalties, which could hurt our grossmargins. In addition, we cannot be sure that the necessary licenses would beavailable to us on satisfactory terms, or that we could redesign our productsor processes to avoid infringement, if necessary. Accordingly, an adversedetermination in a judicial or administrative proceeding, or the failure toobtain necessary licenses, could prevent us from manufacturing and selling someof our products, which could hurt our business, results of operations, andfinancial condition. On the other hand, we may have to start costly and timeconsuming litigation in order to enforce our patents, to protect trade secrets,and know-how owned by us or to determine the enforceability, scope, andvalidity of the proprietary rights of others.

***We could incur substantial costs as a result ofproduct liability claims.***

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

***We may be unable to attract and retain management andother personnel we need to succeed.***

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

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***Our failure to manage future acquisitions and jointventures effectively may divert management attention from our core business andcause us to incur additional debt, liabilities or costs.***

We may acquirebusinesses, products, and technologies that complement or expand our business.We may also consider joint ventures and other collaborative projects. We maynot be able to:

·       identifyappropriate acquisition or joint venture candidates;

·       successfullynegotiate, finance, or integrate any businesses, products, or technologies thatwe acquire; and,

·       successfullymanage any joint ventures or collaborations.

Furthermore, the integration of any acquisition orjoint venture may divert management time and resources. If we fail to managethese acquisitions or joint ventures effectively, we may incur debts or otherliabilities or costs that could harm our operating results or financialcondition. While we from time to time evaluate potential acquisitions ofbusinesses, products, and technologies, consider joint ventures and othercollaborative projects, and anticipate continuing to make these evaluations, wehave no present understandings, commitments, or agreements with respect to anyacquisitions or joint ventures.

***We face risks associated with product warranties.***

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

***The expense and potential unavailability of insurancecoverage for our customers could adversely affect our ability to sell ourproducts and negatively impact our financial condition.***

Some of our customers and prospective customers havehad difficulty in procuring or maintaining liability insurance to cover theiroperation and use of our products. Medical malpractice carriers are withdrawingcoverage in certain states or substantially increasing premiums. If this trendcontinues or worsens, our customers may discontinue using our products and,industry-wide, potential customers may opt against purchasing laser and otherlight-based products due to the cost of or inability to procure insurancecoverage.

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

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

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

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Our efforts to comply withSection 404 have resulted in, and are likely to continue to result in,significant costs, the commitment of time and operational resources and thediversion of management’s attention.

**Item 1B.**               UnresolvedStaff Comments.

Not applicable.

**Item 2.**                        Properties.

We lease two facilities totaling approximately 38,000square feet for our operations in Wayland, Massachusetts, which is locatedapproximately 20 miles west of Boston. The leases on these facilities expireMarch 2008. We also lease a 12,000 square foot facility in SouthPlainfield, New Jersey for our diode operation. This lease ends onOctober 31, 2008. Candela’s management believes that its current facilitiesare suitable and adequate for our near-term needs.

Candela’ssubsidiaries currently lease the following facilities:

·       CandelaSkin Care Center of Boston, Inc., 20,728 square feet located in Boston,MA. The lease on this facility is for a period of 15 years, and commenced onJune 1, 1994. Future rent payments have been accounted for in ourrestructuring reserve.

·       CandelaKK.—We lease 4 offices in Japan in Tokyo, Osaka, Nagoya, and Fukuoka. Theseleases expire between September 30, 2007 and May 31, 2009.

·       CandelaIberica, S.A.. We lease two locations in Lisbon, Portugal and Madrid, Spain.These leases expire on September 29, 2008 and December 31, 2008,respectively.

·       CandelaDeutschland GmbH. The lease on this facility in Neu Isenberg, Germany expireson August 31, 2011.

·       CandelaFrance SARL. The lease on this facility in Villebou Sur Yvette, France expireson May 1, 2011.

·       CandelaItalia. The lease on this facility in Formello, Italy expires on March 31,2011.

·       Inolase. The lease on thisfacility in Netanya, Israel expires on April 30, 2010.

**Item 3.**                        LegalProceedings.

The Company iscurrently involved in three litigation matters with Palomar MedicalTechnologies, Inc. (“Palomar”).

·       OnAugust 9, 2006, Palomar filed suit against the Company in the UnitedStates District Court for the District of Massachusetts, asserting willfulinfringement by the Company of U.S. Patent No. 5,735,844. Palomar seekscompensatory and treble damages, as well as attorneys’ fees and injunctiverelief. In November, 2006, the Company answered the complaint by denyingPalomar’s allegations and asserting a variety of affirmative defenses andcounterclaims against Palomar. This response included a counterclaim by theCompany against Palomar seeking a declaratory judgment that United Statespatent No. 5,595,568 (“the ‘568 Patent”) is either invalid, or productsmanufactured by the Company do not infringe the ‘568 Patent, or both. InNovember, 2006, Palomar filed an answer denying the Company’s counterclaim. InFebruary, 2007, Palomar moved to amend its Complaint to add The GeneralHospital Corporation as a party, to add a claim for infringement by Candela ofthe ‘568 patent, and to allege that additional Candela products infringe the‘568 Patent. Palomar’s motion to amend its Complaint was granted inAugust of 2007. In February of 2007, Candela moved to amend itsAnswer and Counterclaims to add allegations of 

26

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inequitable conduct,double-patenting and violation of Mass. Gen. Laws Ch. 93A by Palomar. TheCompany’s motion to amend its complaint was granted in March of 2007.Palomar filed a general denial response to Candela’s Amended Answer andCounterclaim in March of 2007. In August of 2007, the parties had aMarkman hearing before the U.S. District Court Judge presiding over the above-describedlegal proceeding. In a Markman hearing, the Court interprets the definition ofthe disputed claim term of a patent. The parties are presently in the midst ofpre-trial fact discovery which shall end on December 31, 2007.

·       OnAugust 10, 2006, the Company filed suit against Palomar in the UnitedStates District Court for the District of Massachusetts, asserting willfulinfringement by Palomar of U.S. Patent Nos. 6,659,999, 5,312,395, and6,743,222. The Company seeks compensatory and treble damages for the patentinfringement, as well as attorneys’ fees and an injunction against Palomar toprevent Palomar’s continuing infringement. The Company served its complaint onPalomar in August, 2006. In October, 2006, the Company amended the Company’ssuit against Palomar by removing from the suit allegations that Palomarinfringes Patent 6,659,999. In October, 2006, Palomar answered the Company’samended complaint by denying the Company’s allegations and asserting anaffirmative defense of inequitable conduct with respect to the ‘395 patent. Inaddition, Palomar filed a demand for a declaratory judgment seeking a judicialdetermination that Palomar products either do not infringe the ‘395 and ‘222patents or that such patents are invalid. In November, 2006, the Companyanswered the counterclaim by denying Palomar’s allegations. The parties are inthe midst of pre-trial fact discovery.

·       InDecember, 2006, the Company filed suit against Palomar in the United StatesDistrict Court for the Eastern District of Texas, Lufkin Division, assertingthat Palomar infringes one or more claims of United States patents Nos:5,810,801, 6,659,999 and 6,120,497. The Company seeks compensatory and trebledamages for past infringement, as well as attorneys’ fees and an injunctionagainst Palomar from future infringement. In January, 2007, Palomar answeredthe complaint by denying the Company’s allegations and filing a declaratoryjudgment motion seeking a court ruling that it does not infringe such patentsand/or that such patents are invalid. In addition, Palomar filed a motion totransfer the case to the United States District Court for the District ofMassachusetts. In February, 2007, the Company added Massachusetts GeneralHospital as a party to its action. The Court denied Palomar’s motion totransfer the case to Massachusetts. The parties are in the midst of pre-trialfact discovery.

While the Company intendsto vigorously contest Palomar’s allegations, and to pursueits own claims against Palomar, each lawsuit is inherently uncertainand unpredictable as to its ultimate outcome. An adverse outcomein Palomar’s suit against the Company would materially hurt theCompany’s business, financial condition, results of operations and cash flows.In contrast, an adverse outcome in either of the two lawsuits which the Companyhas initiated against Palomar would not likely have a material adverse effecton the business or financial condition of the Company.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders.

Not applicable.

**Part II**

**Item 5.**                        Marketfor the Registrant’s Common Stock and Related Stockholder Matters and IssuerPurchases of Equity Securities.

Candela’s common stock trades on The NASDAQ NationalMarket under the symbol “CLZR.”

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At September 11, 2007,there were approximately 322 holders of record of our common stock and theclosing sale price of our common stock was $7.34.

**Market Price ofCommon Stock**

Thefollowing table sets forth quarterly high and low sales prices of the commonstock for the indicated fiscal periods:

| ** **       | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------|------------|----------|------------|---------|------------|
| **Fiscal 2006**  |       |     |       |    |       |
| First Quarter    |       | $        | 11.62      |    | $          | 9.50 |   |
| Second Quarter   |       | 15.47    |       | 8.99    |       |
| Third Quarter    |       | 22.81    |       | 14.35   |       |
| Fourth Quarter   |       | 24.08    |       | 14.10   |       |
| **Fiscal  2007** |       |     |       |    |       |
| First Quarter    |       | $        | 16.70      |    | $          | 9.91 |   |
| Second Quarter   |       | 14.67    |       | 10.37   |       |
| Third Quarter    |       | 12.86    |       | 9.38    |       |
| Fourth Quarter   |       | 12.82    |       | 10.34   |       |

 

**Repurchase of ourEquity Securities**

Stockrepurchases during the three-month period ended June 30, 2007 are asfollows:

| ** **                                 | ** ** | ** ** | ** ** | ** **                       | ** ** | **Announced Plan or Program** | ** ** |
|--------------------------------------------|------------|------------|------------|----------------------------------|------------|----------------------------------------------|------------|
| **Fiscal Period**                     | ** ** | ** ** | ** ** | **Total Shares  Purchased** | ** ** | **Average  Paid per  Share**            | ** ** | **Total Shares  Purchased** | ** ** | **Dollar Value of  Shares That  May Yet be  Purchased** | ** ** |
| ** **                                 | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **                                   | ** ** | **(in thousands)** | ** ** |
| April 1,  2007 to April 28, 2007 |       |       | —     |                             |       |                                         | —     |   |   |   | — |   |   |   |   |   |   |
| April 29,  2007 to May 26, 2007  |       |       | —     |                             |       |                                         | —     |   |   |   | — |   |   |   |   |   |   |
| May 27, 2007  to June 30, 2007   |       |       | 105,200    |                             |       |                                         | $          | 11.31 |   |   |   | 105,200 |   |   |   |   |   |   |
| Total                                      |       |       | 105,200    |                             |       |                                         |       |   |   |   | 105,200 |   |   |   | $ | 16,115 |   |   |
|                                            |            |            |            |                                  |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Dividend Policy**

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

**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

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

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**Stock PerformanceGraphs**

These performance graphs shall not be deemed “filed”for purposes of Section 18 of the Exchange Act or otherwise subject to theliabilities under that Section, and shall not be deemed to be incorporated byreference into any filing of Candela under the Securities Act or the ExchangeAct.

Thegraph below compares the cumulative total stockholder return on Candela commonstock from June 29, 2002 to June 30, 2007 with the cumulative totalreturn on the S&P 500 Index and the SIC Code 3845, for the 71 companieslisted in footnote (a) below, over the same period. An investment of $100(with reinvestment of all dividends) is assumed to have been made in the Company’scommon stock, in the SIC Code, and the index on 6/29/2002 and its relativeperformance is tracked through 6/30/2007. The comparisons in the graph beloware based on historical data and are not intended to forecast the possiblefuture performance of Candela common stock.

**COMPARISONOF 5 YEAR CUMULATIVE TOTAL RETURN***AmongCandela Corporation, The S&P 500 IndexAnd SIC Code 3845

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*                    $100 investedon 6/29/02 in stock or on 6/30/02 in Index-including reinvestment of dividends.Index calculated on month-end basis.

Copyright © 2007, Standard & Poor’s, a division ofThe McGraw-Hill Companies, Inc. All rights reserved.www.researchdatagroup.com/S&P.htm

| ** **           | ** ** | **    6/29/02    ** | ** ** | **    6/28/03    ** | ** ** | **    7/3/04    ** | ** ** | **    7/2/05    ** | ** ** | **    7/1/06    ** | ** ** | **    6/30/07    ** | ** ** |
|----------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| Candela  Corporation |       |                                                        | 100.00     |                                                        |       |                                                       | 203.27     |                                                       |       |                                                       | 367.64     |                                                        |       |   | 397.45 |   |   |   | 576.73 |   |   |   | 421.09 |   |   |
| S&P 500          |       |                                                        | 100.00     |                                                        |       |                                                       | 100.25     |                                                       |       |                                                       | 119.41     |                                                        |       |   | 126.96 |   |   |   | 137.92 |   |   |   | 166.32 |   |   |
| SIC Code 3845        |       |                                                        | 100.00     |                                                        |       |                                                       | 101.91     |                                                       |       |                                                       | 117.15     |                                                        |       |   | 126.42 |   |   |   | 120.80 |   |   |   | 145.54 |   |   |

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**(a)****         **The seventy-one companies included in theSIC Code are: 4-D Neuroimaging, Abiomed Inc, Applera Corp., Arrhythmia ResearchTechnology, Aspect Medical Systems Inc, Baxter International Inc, BiofieldCorp., BSD Medical Corp., Cambridge Heart Inc, Candela Corp., CardiodynamicsInternational, Cardiogenesis Corp., Celsion Corp., Clarient Inc, CriticareSystems Inc, Curon Medical Inc, Cutera Inc, Cyberonics Inc, Cybex InternationalInc, Cynosure Inc, Datascope Corp., Dexcom 

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Inc, Digirad Corp., DobiMedical International Inc, Dynatronics Corp., Edwards Lifesciences Corp.,Encision Inc, EP Medsystems Inc, Fischer Imaging Corp., Fonar Corp., HemosenseInc, Hypertension Diagnostics Inc, Imaging Diagnostic Systems, Immucor Inc,Ingen Technologies Inc, International Isotopes Inc, Iris International Inc,Jacobson Resonance Enterprises, Lectec Corp., Longport Inc, Magna-LAB Inc,Medtronic Inc, Millipore Corp., Misonix Inc, Nano Global Inc, NatusMedical Inc, Non Invasive Monitoring Systems Inc, Nxstage Medical Inc,Opthalmic Imaging Systems Inc, Orthometrix Inc, Palomar Medical TechnologiesInc, Paradigm Medical Industries Inc, PLC Systems Inc, Positron Corp.,Precision Optics Corp. Inc, Saint Jude Medical Income, Signalife Inc,Sirona Dental Systems Inc, Somanetics Corp., Spectrasource Corp., Spire Corp.,Stereotaxis Inc, Surgilight Inc, Trimedyne Inc, Varian Medical SystemsInc, Vasamed Inc, Vasomedical Inc, Viking System Inc, Vision-Sciences Inc, VnusMedical Technologies Inc and Zoll Medical Corp.

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**Item 6.**                        SelectedConsolidated Financial Data.

Thetable set forth below contains certain consolidated financial data for each ofthe last five fiscal years of Candela. This data should be read in conjunctionwith the detailed information, financial statements and related notes, as wellas Management’s Discussion and Analysis of Financial Condition and Results ofOperations included elsewhere herein.

| ** **                                                                                                                                                                                                                                     | ** ** | **For the Year Ended**                              | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Consolidated Statement of Operations Data:**                                                                                                                                                                             | ** ** | ** **                                                         | ** ** | **June 30,  2007** | ** ** | **July 1,  2006** | ** ** | **July 2,  2005** | ** ** | **July 3,  2004** | ** ** | **June 28,  2003** | ** ** |
| ** **                                                                                                                                                                                                                                     | ** ** | **(in thousands, except per share data)** | ** ** |
| **Revenue:**                                                                                                                                                                                                                                   | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Lasers and other products                                                                                                                                                                                                                      |       | $                                                                  | 113,225    |   | $ | 121,838 |   | $ | 102,323 |   | $ | 87,965 |   | $ | 68,072 |   |
| Product-related service                                                                                                                                                                                                                        |       | 35,332                                                             |       | 27,628 |   | 21,578 |   | 16,473 |   | 10,579 |   |
| Total revenue                                                                                                                                                                                                                                  |       | 148,557                                                            |       | 149,466 |   | 123,901 |   | 104,438 |   | 78,651 |   |
| **Cost of sales:**                                                                                                                                                                                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Lasers and other products                                                                                                                                                                                                                      |       | 49,303                                                             |       | 54,748 |   | 45,235 |   | 36,413 |   | 30,641 |   |
| Product related service                                                                                                                                                                                                                        |       | 24,191                                                             |       | 20,869 |   | 17,918 |   | 14,860 |   | 7,992 |   |
| Litigation related charges                                                                                                                                                                                                                     |       | —                                                             |       | — |   | 4,829 |   | — |   | — |   |
| Total cost of sales                                                                                                                                                                                                                            |       | 73,494                                                             |       | 75,617 |   | 67,982 |   | 51,273 |   | 38,633 |   |
| **Gross profit:**                                                                                                                                                                                                                              |       | 75,063                                                             |       | 73,849 |   | 55,919 |   | 53,165 |   | 40,018 |   |
| **Operating  expenses:**                                                                                                                                                                                                                       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative                                                                                                                                                                                                            |       | 53,562                                                             |       | 44,297 |   | 40,165 |   | 33,978 |   | 24,519 |   |
| Research and development                                                                                                                                                                                                                       |       | 18,146                                                             |       | 8,879 |   | 6,890 |   | 5,302 |   | 4,545 |   |
| Litigation related charges                                                                                                                                                                                                                     |       | —                                                             |       | — |   | 773 |   | — |   | — |   |
| Total operating expenses                                                                                                                                                                                                                       |       | 71,708                                                             |       | 53,176 |   | 47,828 |   | 39,280 |   | 29,064 |   |
| **Income from operations:**                                                                                                                                                                                                                    |       | 3,355                                                              |       | 20,673 |   | 8,091 |   | 13,885 |   | 10,954 |   |
| **Other income (expense):**                                                                                                                                                                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest income                                                                                                                                                                                                                                |       | 2,719                                                              |       | 1,748 |   | 640 |   | 308 |   | 651 |   |
| Other income (expense), net                                                                                                                                                                                                                    |       | 3,725                                                              |       | (19 | ) | (73 | ) | 905 |   | (262 | ) |
| Total other income                                                                                                                                                                                                                             |       | 6,444                                                              |       | 1,729 |   | 567 |   | 1,213 |   | 389 |   |
| **Income from continuing operations before income  tax:**                                                                                                                                                                                      |       | 9,799                                                              |       | 22,402 |   | 8,658 |   | 15,098 |   | 11,343 |   |
| **Provision for income taxes**                                                                                                                                                                                                                 |       | 3,543                                                              |       | 7,468 |   | 2,194 |   | 4,586 |   | 3,516 |   |
| **Income from continuing operations**                                                                                                                                                                                                          |       | 6,256                                                              |       | 14,934 |   | 6,464 |   | 10,512 |   | 7,827 |   |
| **Discontinued operations:**                                                                                                                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss from discontinued skin care center operations of  $473 and $1,468, net of income tax benefit of $175 and $455, in 2004  and 2003, respectively                                                                                            |       | —                                                             |       | — |   | — |   | (298 | ) | (1,013 | ) |
| 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 income**                                                                                                                                                                                                                                 |       | $                                                                  | 6,256      |   | $ | 14,934 |   | $ | 7,323 |   | $ | 8,119 |   | $ | 6,814 |   |
| **Net income per share of common  stock**                                                                                                                                                                                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| **Basic:**                                                                                                                                                                                                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income from continuing operations                                                                                                                                                                                                              |       | $                                                                  | 0.27       |   | $ | 0.65 |   | $ | 0.29 |   | $ | 0.48 |   | $ | 0.39 |   |
| Income (loss) from discontinued operations                                                                                                                                                                                                     |       | —                                                             |       | — |   | 0.04 |   | (0.11 | ) | (0.05 | ) |
| **Net income**                                                                                                                                                                                                                                 |       | $                                                                  | 0.27       |   | $ | 0.65 |   | $ | 0.33 |   | $ | 0.37 |   | $ | 0.34 |   |
| **Diluted:**                                                                                                                                                                                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income from continuing operations                                                                                                                                                                                                              |       | $                                                                  | 0.27       |   | $ | 0.62 |   | $ | 0.28 |   | $ | 0.46 |   | $ | 0.38 |   |
| Income (loss) from discontinued operations                                                                                                                                                                                                     |       | —                                                             |       | — |   | 0.04 |   | (0.10 | ) | (0.05 | ) |
| **Net income**                                                                                                                                                                                                                                 |       | $                                                                  | 0.27       |   | $ | 0.62 |   | $ | 0.32 |   | $ | 0.36 |   | $ | 0.33 |   |
| **Basic weighted average shares outstanding**                                                                                                                                                                                                  |       | 23,086                                                             |       | 23,017 |   | 22,388 |   | 21,902 |   | 20,083 |   |
| **Diluted  weighted average shares outstanding**                                                                                                                                                                                               |       | 23,525                                                             |       | 23,948 |   | 23,073 |   | 22,712 |   | 20,645 |   |
|                                                                                                                                                                                                                                                |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                                  | ** ** | **For the Year Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **Consolidated Balance Sheet Data, in thousands:** | ** ** | ** **                            | ** ** | **June 30,  2007** | ** ** | **July 1,  2006** | ** ** | **July 2,  2005** | ** ** | **July 3,  2004** | ** ** | **June 28,  2003** | ** ** |
| Cash, restricted  cash, and cash equivalents                                |       | $                                     | 27,200     |   | $ | 40,360 |   | $ | 56,383 |   | $ | 37,139 |   | $ | 31,813 |   |
| Marketable  securities                                                      |       | 11,773                                |       | 27,332 |   | — |   | — |   | — |   |
| Marketable  securities (long-term portion)                                  |       | 12,260                                |       | 11,953 |   | — |   | — |   | — |   |
| Working capital                                                             |       | 66,774                                |       | 81,910 |   | 70,378 |   | 61,387 |   | 47,307 |   |
| Total assets                                                                |       | 150,230                               |       | 149,656 |   | 116,816 |   | 100,479 |   | 80,501 |   |
| Long-term debt                                                              |       | —                                |       | — |   | — |   | — |   | — |   |
| Total stockholders’  equity                                            |       | 101,510                               |       | 100,012 |   | 74,339 |   | 66,769 |   | 53,348 |   |
|                                                                             |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

*All statements, trend analysis and other informationcontained in the following discussion relative to markets for our products andtrends in revenue, gross margins and anticipated expense levels, as well asother statements including words such as “anticipate”, “believe”, “plan”,“estimate”, “expect”, and “intend” and other similar expressions, constituteforward-looking statements. These forward-looking statements are subject tobusiness and economic risks and uncertainties, and our actual results ofoperations may differ materially from those contained in the forward-lookingstatements. Factors that could cause or contribute to such differences include,but are not limited to, those discussed in Item1A. “Risk Factors” as well asother risks and uncertainties referenced in this Annual Report on Form 10-K.*

**Critical AccountingPolicies**

The discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent liabilities in the consolidated financial statements andaccompanying notes. Estimates are used for, but not limited to, receivablesvaluation, valuation of investments, inventory valuation, depreciable lives offixed assets, valuation of goodwill and acquired intangibles, income taxes,stock-based compensation, and accrued warranties. We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting policies and the related judgments and estimates affect thepreparation of our consolidated financial statements.

***Revenue Recognition.***   Wegenerally recognize revenue upon shipment of product to customers and the fulfillmentof all contractual terms and conditions, pursuant to the guidance provided bySAB No. 104, “*Revenue Recognition*”. Credit isnot extended to customers and revenue is not recognized until collectibility isreasonably assured. Revenue from the sale of service contracts is deferred andrecognized on a straight-line basis over the contract period. Revenue fromservice administered by us that is not covered by a service contract isrecognized as the services are provided. In certain instances, we may sellproducts together with extended warranties or maintenance contracts. Therevenue recognized per element is determined by allocating the total salesprice to each element, based on the relative fair values in accordance withEmerging Issues Task Force (EITF) 00-21, “*Revenue Arrangements withMultiple Deliverables*”. Separately priced extended warranty and maintenance products areaccounted for over the life of the contract. Unearned revenue is reported onthe balance sheet as deferred revenue.

***Allowance forDoubtful Accounts.******  ***Our policy is to maintain allowancesfor estimated losses resulting from the inability of our customers to makerequired payments. Credit limits are established through a process of reviewingthe financial history and stability of each customer. Where appropriate, weobtain 

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credit rating reports andfinancial statements of customers when determining or modifying their creditlimits. We regularly evaluate the collectibility of our trade receivablebalances based on a combination of factors. When a customer’s account balancebecomes past due, we initiate dialogue with the customer to determine thecause. If it is determined that the customer will be unable to meet itsfinancial obligation to us, such as in the case of a bankruptcy filing,deterioration in the customer’s operating results or financial position orother material events impacting their business, we record a specific allowanceto reduce the related receivable to the amount we expect to recover given all informationpresently available. We will also provide a general reserve based on the agingof the accounts and notes receivable based on historical experiences ofwrite-offs.

As of June 30, 2007, our accounts receivablebalance of $38.5 million is reported net of allowances for doubtful accounts of$1.4 million. We believe our reported allowances at June 30, 2007, areadequate. If the financial conditions of those customers were to deteriorate,however, resulting in their inability to make payments, we may need to recordadditional allowances that would result in additional selling, general andadministrative expenses being recorded for the period in which suchdetermination is made.

***Inventory Reserves.******  ***As adesigner and manufacturer of high technology equipment, we are exposed to anumber of economic and industry factors that could result in portions of ourinventory becoming either obsolete or in excess of anticipated usage. Thesefactors include, but are not limited to, technological changes in our markets,our ability to meet changing customer requirements, competitive pressures inproducts and prices, and the availability of key components from our suppliers.Our policy is to establish inventory reserves when conditions exist thatsuggest that our inventory may be in excess of anticipated demand or isobsolete based upon our assumptions about future demand for our products andmarket conditions. We regularly evaluate the ability to realize the value ofour 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 theseprocesses to mitigate inventory exposure. When recorded, our reserves areintended to reduce the carrying value of our inventory to its net realizablevalue. As of June 30, 2007, our inventory of $21.4 million is stated netof inventory reserves of $2.1 million. If actual demand for our productsdeteriorates, or market conditions are less favorable than those that weproject, additional inventory reserves may be required.

***Fair Value of Financial Instruments.***   Carrying amounts of the financialinstruments, including cash and cash equivalents, accounts receivable, accountspayable and accrued liabilities approximate their fair values due to the shortterm nature of these instruments. Held-to-maturity marketable securities, whichare generally comprised of short-duration certificates of deposit orgovernment-backed bonds, are valued at amortized cost which approximates marketvalue. Available-for-sale securities are marked-to-market on a quarterly basisand the associated unrealized gain or loss is reflected as a component of othercomprehensive income (loss), net of tax.

***Product Warranties.******  ***Ourproducts are sold with warranty provisions that require us to remedydeficiencies in quality or performance of our products over a specified periodof time at no cost to our customers. Our policy is to establish warrantyreserves at levels that represent our estimate of the costs that will beincurred to fulfill those warranty requirements at the time that revenue isrecognized. We believe that our recorded liability at June 30, 2007, isadequate to cover our future cost of materials, labor and overhead for theservicing of our products sold through that date. If actual product failures ormaterial or service delivery costs differ from our estimates, our warrantyliability would need to be revised accordingly.

***Stock basedcompensation.******  ***EffectiveJuly 3, 2005, we implemented the fair value recognition provisions ofStatement of Financial Accounting Standards No. 123 revised (“SFASNo. 123R”) and Staff Accounting Bulletin 107 (“SAB 107”) for allshare-based compensation that was not vested as of July 2, 2005. Weadopted SFAS No. 123R using a modified prospective application, aspermitted under SFAS 

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No. 123R.Accordingly, prior period amounts have not been restated. Under thisapplication, we were required to record compensation expense for all awardsgranted after the date of adoption and for the unvested portion of previouslygranted awards that remain outstanding at the date of adoption. Compensationcost will be recognized over the period that an employee provides service inexchange for the award.

The fair value of each option/stock appreciationrights (“SARs”) award is estimated on the date of grant using the Black-Scholesoption-pricing model incorporating various assumptions. Expected volatility isdetermined using both current and historical implied volatilities of theunderlying stock which is obtained from public data sources. The expected lifeof the options is based on historical observations adjusted for the estimatedexercise dates of unexercised options/SARs. Additionally, separate groups ofemployees that have similar historical exercise behavior are consideredseparately for valuation purposes. The average risk-free interest rate is basedon the U.S. treasury security rate with a term to maturity that approximatesthe option’s expected life as of the grant date. The forfeiture rate is basedon historical experience as well as future expectations. Forfeitures arerequired to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.

Prior to July 3, 2005, we followed the provisionsof SFAS No. 123, “*Accounting for Stock-BasedCompensation*”. The provisions of SFAS No. 123 allowed companiesto either expense the estimated fair value of stock options or to continue tofollow the intrinsic value method set forth in Accounting Principles BoardOpinion No. 25, “*Accounting for StockIssued to Employees*” (“APB 25”), but disclose the pro forma effectson net income (loss) had the fair value of the options been expensed. Weelected to apply APB 25 in accounting for its stock option incentive plans.

In accordance with APB 25 and related interpretations,compensation expense for stock options is recognized in income based on theexcess, if any, of the quoted market price of the stock at the grant date ofthe award or other measurement date over the amount an employee must pay toacquire the stock. Generally, the exercise price for stock options granted toemployees equals or exceeds the fair market value of the common stock at thedate of grant, thereby resulting in no recognition of compensation expense. Forawards that generated compensation expense as defined under APB 25, the Companycalculated the amount of compensation expense and recognized the expense overthe vesting period of the award.

***Contingencies.******  ***We aresubject to proceedings, lawsuits and other claims. We assess the likelihood ofany adverse judgments or outcomes to these matters as well as potential rangesof probable losses. A determination of the amount of reserves required, if any,for these contingencies is made after careful analysis of each individualissue. The required reserves may change in the future due to new developmentsin each matter or changes in approach such as a change in settlement strategyin dealing with these matters. We record charges for the costs we anticipateincurring in connection with litigation and claims against us when we canreasonably estimate these costs.

***Restructuring.******  ***We recordrestructuring charges incurred in connection with consolidation or relocationof operations, exited business lines, or shutdowns of specific sites. Theserestructuring charges, which reflect our commitment to a termination or exitplan that will begin within twelve months, are based on estimates of theexpected costs associated with site closure, legal matters, contractterminations, or other costs directly related to the restructuring. If theactual cost incurred exceeds the estimated cost, an additional charge toearnings will result. If the actual cost is less than the estimated cost, acredit to earnings will be recognized.

***Taxes.******  ***Inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*,” we recognize deferred income taxes based on the expectedfuture tax consequences of differences between the financial statement basisand the tax basis of assets and liabilities, calculated using enacted tax ratesfor the year in which the differences are expected to be reflected in the taxreturn. Realization is dependent on the generation of 

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sufficient taxableincome in future years. Management continually evaluates the need for avaluation allowance for deferred tax assets based on the probability ofrealization determined by expectations for future taxable income and otherfactors. Although realization is not assured, based on available evidence,management believes it is more likely than not that the full amount of the netdeferred tax asset will be realized. However, the amount realizable could bereduced if estimates of future taxable income are reduced.

**Overview**

We research, develop, manufacture, market, sell,distribute, and service lasers and light-based products used to performaesthetic and cosmetic procedures. We sell our lasers and light-based productsprincipally to medical practitioners. Candela markets its products directly andthrough a network of distributors to end users. Our traditional customer baseincludes plastic and cosmetic surgeons and dermatologists. More recently, wehave expanded our sales to a broader group of practitioners consisting ofgeneral practitioners and certain specialists including obstetricians, gynecologists,and general and vascular surgeons. We derive our revenue from the sale oflasers, light-based devices, and other products, and product-related services.

We sell products worldwide through our direct salesforce and independent distributors.

We assemble substantially all of our products in ourWayland, Massachusetts and Netanya, Israel facilities in the quarter in whichthey are shipped, and backlog has not been significant. We experience someseasonal reduction of our product sales in our first fiscal quarter due to thesummer holiday schedule of physicians and their patients.

Our products are generally covered by a standardwarranty, with an option to purchase extended warranty contracts at the time ofproduct sale or service contracts after the time of sale.  Distributor sales generally include a partswarranty only. The anticipated cost associated with the standard warrantycoverage is accrued at the time of shipment as a cost of sales. Any costsassociated with product installation are also recognized as costs of sales.Both such anticipated and actual costs have no associated revenue and thereforereduce the gross profit from product-related service revenue.

Product-related service revenue consists of revenuefrom maintenance and repair services and the sale of spare parts andconsumables. We derive revenue from extended service contracts, which aretypically for a 12 or 24-month period, and the revenue is initiallydeferred and recognized over the life of the service contract. In addition, weprovide on-site service worldwide on a time-and-materials basis directly orthrough our distributors.

International revenue, consisting of sales from oursubsidiaries in Germany, France, Italy, Spain, Japan, Israel, and Australia,and sales consisting of products shipped from the United States directly tointernational locations from the United States during the fiscal years endedJune 30, 2007, July 1, 2006, and July 2, 2005 represented 56%,54%, and 54% of total sales, respectively.

Our fiscal year consistsof the 52 or 53-week period ending on the Saturday closest toJune 30 of each year. The years ended June 30, 2007, July 1,2006, and July 2, 2005 contained 52 weeks each, respectively.

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**Results ofOperations**

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

| ** **                                 | ** ** | **For the Year Ended** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                                 | ** ** | **June 30,**                     | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| ** **                                 | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue Mix:                               |       |                                  |       |   |   |   |   |   |   |
| Lasers and other products                  |       |                                  | 76.2       | % |   | 81.5 | % | 82.6 | % |
| Product-related services                   |       |                                  | 23.8       | % |   | 18.5 | % | 17.4 | % |
| Total revenue                              |       |                                  | 100.0      | % |   | 100.0 | % | 100.0 | % |
| Gross profit:                              |       |                                  |       |   |   |   |   |   |   |
| Lasers and other product                   |       |                                  | 43.0       | % |   | 44.9 | % | 46.1 | % |
| Product-related services                   |       |                                  | 7.5        | % |   | 4.5 | % | 2.9 | % |
| Litigation-related charges                 |       |                                  | 0.0        | % |   | 0.0 | % | -3.9 | % |
| Total gross profit                         |       |                                  | 50.5       | % |   | 49.4 | % | 45.1 | % |
| Operating expenses:                        |       |                                  |       |   |   |   |   |   |   |
| Research and development                   |       |                                  | 12.2       | % |   | 5.9 | % | 5.6 | % |
| Selling, general & administrative |       |                                  | 36.0       | % |   | 29.7 | % | 32.4 | % |
| Litigation-related charges                 |       |                                  | 0.0        | % |   | 0.0 | % | 0.6 | % |
| Total operating expenses                   |       |                                  | 48.2       | % |   | 35.6 | % | 38.6 | % |
| Income from operations                     |       |                                  | 2.3        | % |   | 13.8 | % | 6.5 | % |
| Other income, net                          |       |                                  | 4.3        | % |   | 1.2 | % | 0.5 | % |
| Income before  income taxes                |       |                                  | 6.6        | % |   | 15.0 | % | 7.0 | % |
| Provision for income taxes                 |       |                                  | 2.4        | % |   | 5.0 | % | 1.8 | % |
| Net income                                 |       |                                  | 4.2        | % |   | 10.0 | % | 5.2 | % |

 

**Fiscal Year EndedJune 30, 2007 Compared to Fiscal Year Ended July 1, 2006**

***Revenue.******  ***Revenue for the year endedJune 30, 2007 was $148.6 million as compared to $149.5 million in theprior fiscal year. The slight decrease is primarily related to a decrease involume of our legacy products and the inability to ship all the announced newproducts.

International revenue increased approximately $3.5million over the prior year and accounted for approximately 56% of totalrevenue 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 insales in Latin America, which represents approximately a 28% decrease in salesfor that region. Sales in Europe increased approximately 22%, representing a$7.7 million increase in Europe as compared to the fiscal 2006.

Product-related service revenue increasedapproximately 28% to $35.3 million in fiscal 2007 from $27.6 million in fiscal2006. This increase was consistent with the increase in systems sold over thepast few years and increase in renewal contracts.

***Gross Profit.******  ***Gross profit increasedapproximately $1.2 million to $75.1 million, or 50.5% of revenue, in fiscal2007 from $73.8 million, or 49.4% of revenue, in fiscal 2006. The increase ingross profit was primarily driven by improvements in the overall product-relatedservice area. These improvements were the result of the staffing efficienciesthat were achieved through the world-wide service organization and theincreased service contracts.

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***Research and Development Expense.******  ***Research and development spending increased approximately $9.2million to $18.1 million in fiscal 2007 as compared to $8.9 million for fiscal 2006.The increase was attributable primarilyto $6.3 million of higher outsourced project-related work utilized to expeditethe completion of the new product introduction cycle, $1.1 million ofincreased project materials expenditures related to the same, and $0.9 millionrelated to increased personnel expenses including share-based compensation. Asa percentage of revenue, research and development expenses were approximately12.2% and 5.9% for fiscal 2007 and 2006, respectively.

***Selling, General and Administrative Expense.******  ***Selling, general andadministrative expense increased to approximately $53.6 million or 36.0% ofrevenue during fiscal 2007 as compared to $44.3 million or 30% during fiscal2006. 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, andstock-based compensation. The increase is also attributable to a $0.8 millionincrease 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 legaland professional fees.

***Other Income/Expense.******  ***Total other income increasedapproximately $4.7 million for the fiscal 2007 to $6.4 million, fromapproximately $1.7 million for the fiscal 2006. This increase is primarilyattributable to the recognition of a $3.5 million gain on the exchange ofcommon 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., aprivately-held company, by Occulogix Inc., a publicly traded company. TheCompany held 19.99% of the outstanding common stock of Solx Inc. on anas-converted basis, prior to the merger. As a result of the acquisition ofSolx, Inc., the Company received approximately $1.0 million in cash plusapproximately 1.3 million shares of common stock in Occulogix Inc.

***Income Taxes.***   Theprovision for income taxes results from a combination of activities of both thedomestic and foreign subsidiaries. The Company recorded a 36.2% effective taxrate for the year ended June 30, 2007 compared to a 33% effective tax ratefor the year ended July 1, 2006. The provision for income taxes for theyear ended July 1, 2006, includes a tax provision calculated for taxableincome generated at the foreign subsidiaries at rates below that of the UnitedStates statutory tax rate.

**Fiscal Year Ended July 1, 2006 Compared to FiscalYear Ended July 2, 2005**

***Revenue.******  ***Total revenue increased $25.6million or 20.6% to $149.5 million in fiscal 2006 from $123.9 million in fiscal2005. Increases in unit sales accounted for the increase. The increase was dueprimarily to strong growth for the GentleLASE® systems, GentleYAG® systems andthe introduction of the newer Vbeam® models. The increase is also attributableto the exclusive arrangement with McKesson’s Medical Surgical Division in 2006.

International revenueincreased $13.8 million over the prior year and accounted for 56% of totalrevenue for fiscal 2006 in comparison to 54% for fiscal 2005. Of the $13.8million increase, approximately $8.8 million was related to increases in salesto Latin America, which represents a 136% increase in that region. Sales inEurope increased approximately 13%, representing a $4 million increase inEurope compared to 2005. The large growth internationally resulted from oursales force expansion and distributor networks and new product introductions.

Product-related servicerevenue increased 28% to $27.6 million in fiscal 2006 from $21.6 million infiscal 2005. This increase was consistent with the increase in systems soldover the past few years and increase in renewal contracts.

***Gross Profit.******  ***Gross profit increasedapproximately $17.9 million to $73.8 million or 49% of revenue in fiscal 2006from $55.9 million, or 45% of revenue in fiscal 2005, as a direct result of theincrease in revenue. Excluding the Regents litigation-related charges, grossprofit would have increased $13.1 million from $60.7 million, or 49% of revenuecompared to fiscal 2005. As a percentage of revenue, 2006 gross 

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profit iscomparable to prior year excluding the Regents litigation-related chargesincurred in 2005 which related to the proceeding against the Regents.

***Research and Development Expense.******  ***Research and development spending increased $2 million to $8.9 millioncompared to $6.9 million for fiscal year 2005. This increase was primarily attributable to $1.3 million of higherpersonnel expense due primarily to increased headcount, stock-based compensationand $0.7 million of other research and development related costs. As apercentage of revenue, research and development expenses were approximately 6%for 2006 and 2005.

***Selling, General and Administrative Expense.******  ***Selling, general andadministrative expense increased to $44.3 million or 30% of revenue duringfiscal 2006 compared to $40.2 million or 32% during fiscal 2005. Of the $4.1million increase, $2.3 million was dueto higher personnel expense for increased headcount, higher commission expensedue to increased revenue, and stock-based compensation. The increase is alsoattributable to a $1 million increase in marketing-related expenses such ascustomer-related work-shops, advertising, trade shows, and an increase of $1million due to an increase in legal and audit fees, excluding thelitigation related charges for 2005 offsetby a decrease in bad debt expense of approximately $0.4 million.

***Other Income/Expense.******  ***Total other income increased$1.2 million for the fiscal year 2006 to $1.7 million, from $0.6 millionfor the fiscal year 2005. This increase is related primarily to interest earnedfrom the increase in our cash and cash equivalents, marketable securities andlong-term investments and an increase in interest rates.

***Income Taxes.******  ***The provision for incometaxes results from a combination of activities of both the domestic and foreignsubsidiaries. We recorded a 33% effective tax rate for the year endedJuly 1, 2006 compared to a 25.3% effective tax rate for the year endedJuly 2, 2005. During the yearended July 2, 2005, the Company recorded a benefit for the utilization ofdeferred tax assets which was not applicable during the current fiscal yearended 2006.

**Discontinued Operations**

On September 27, 2003management initiated a plan to close its only remaining skin care center. Theclosure is accounted for as a discontinued operation in accordance withStatement of Financial Accounting Standards (“SFAS”) 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*” and SFAS 146, “*Accounting for Costs Associated with Exit or Disposal Activities*”.As a result, in fiscal year 2004, we recorded a $2.1 million charge for theaccrual of $3.0 million of future occupancy costs, primarily relating to futurelease payments for the Boston facility, and $0.4 million of severanceobligations and other related costs of closure, net of anticipated tax benefitsof $1.3 million.

During fiscal year 2005,the landlord for the Boston facility secured a sublease for that property. Thesub-lessee commenced making payments to the landlord during December of2004. As a result of these and future payments scheduled under the sublease, werevised the estimated future costs associated with the Boston facility and, inthe fiscal year 2005, reversed approximately $0.9 million of the restructuringreserve. This reversal represents the aforementioned anticipated economicbenefit due to sub-lessee payments of $1.7 million, net of legal and other feesof approximately $0.3 million and income taxes of approximately $0.5 million.

**Liquidity and Capital Resources**

Our cash and cashequivalents, and marketable securities at June 30, 2007 totaled approximately$51.2 million compared to approximately $79.6 million at July 1,2006. 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 futureoperations and amounts available under our line of credit, will be sufficientto meet our ongoing operating and capital expenditure requirements for theforeseeable 

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future.However, we cannot be sure that we will not require additional capital beyondthe amounts currently forecasted by us, nor that any such required additionalcapital will be available on reasonable terms, if at all, as it becomesrequired.

Cashused by operating activities amounted to $7.7 million for fiscal 2007 ascompared to cash provided by operations of $14.4 million for fiscal 2006.This decrease in cash provided by operating activities was due to: (a) adecrease in year-over-year net income of approximately $8.6 million;(b) a year-over-year increase in inventory of approximately $4.7 milliondue to the inability to ship new products at year end; and, (c) a year-over-yearincrease in accounts receivable of approximately $4.7 million dueprimarily to increases in international receivables that typically haveslightly longer payment terms.

Cash provided by investingactivities amounted to approximately $2.5 million for fiscal 2007 as comparedto cash used by investing activities of approximately $40.0 million for fiscal2006. This increase in cash provided by investing activities reflects the netmaturities of held-to-maturity investments offset by our cash acquisition ofInolase.

Cash used by financingactivities amounted to approximately $8.4 million for the fiscal year 2007 as comparedto cash provided by financing activities of approximately $8.9 million forfiscal 2006. The decrease is primarily the result of the Company repurchasingits own equity shares under the previously announced repurchase program.  

***Debt Instruments and Related Covenants***

We maintain a renewable$10,000,000 revolving credit agreement with a major bank with interest at thebank’s base rate of LIBOR plus 2.25%. Any borrowings outstanding under the lineof credit are due on demand or according to a payment schedule established atthe time funds are borrowed. The line of credit is unsecured. The agreementcontains restrictive covenants limiting the establishment of new liens, and thepurchase of margin stock. No amounts were outstanding under the line of creditas of June 30, 2007 or July 1, 2006.

***Off-Balance Sheet Arrangements***

Our only off-balance sheetarrangements consist of non-cancelable operating leases entered into in theordinary course of business and the license agreement with the Regents. Thetable below in the next section titled “Contractual Obligations” shows theamounts of our operating lease commitments and purchase commitments payable byyear. For liquidity purposes, we choose to lease our facilities and automobilesinstead of purchasing them.

***Contractual Obligations***

In August 2000Candela obtained exclusive license rights to the DCD, subject to certainlimited license rights of Cool Touch, Inc. (“Cool Touch”), in thefollowing fields of use:  procedures thatinvolve skin resurfacing and rejuvenation, vascular skin lesions, and laserhair removal. Cool Touch, a subsidiary of New Star Technology, Inc.obtained a license to the DCD on a co-exclusive basis with Candela, in certainnarrower fields of use. Cool Touch is restricted in its ability to assign itslicense rights to certain existing competitors of Candela. Candela is entitledto one-half of all royalty income payable to the Regents from Cool Touch. Underthe amended agreement, Candela no longer is required by the Regents tonegotiate sublicenses to third parties. However, Candela is entitled toone-half of all royalties due from any other entity that licenses the DCDtechnology from the Regents in other fields of use.

We recognized royaltyexpense of $9.2 million and $2.6 million for fiscal 2005 and 2004,respectively, based on the license agreement with the Regents. Included in thefiscal 2005 expense of $9.2 million is $4.8 million of expense for thethird quarter charge taken related to the Regents arbitration decision. Of 

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that$4.8 million, $1.3 million related to fiscal 2005, $3.0 million related tofiscal 2004 and 0.5 million related to prior years.

Effective July 3,2005, we amended certain portions of our agreement with the Regents whereby forthe annual license fee of $0.3 million, our royalty obligation will be reducedto 3% from its prior level of 6%. The annual fee of $0.3 million was paidby a lump sum of $3.0 million and is being amortized over the remaining life ofthe patent agreement, which as of June 30, 2007 was approximately fiveyears. This reduced royalty rate and the amortization of the annual license feepayment is reflected in our financial statements as of June 30, 2007. Theunamortized portion of the license fee payment is reflected in prepaid licensesin the June 30, 2007 balance sheet. We recognized royalty expenseassociated with this patent of approximately $3.4 million for fiscal year 2007.

Outstandingcontractual obligations are reflected in the following table:

| ** **                     | ** ** | **Total**               | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After  5 years** | ** ** |
|--------------------------------|------------|-------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Royalty  commitments           |       | $                       | 4,250      |                            |       | $                  | 1,000      |               |       |                    | $          | 2,000 |   |   |   | $ | 500 |   |   |   | $ | 750 |   |   |
| Operating leases               |       | 3,065                   |       |                            | 1,690      |               |       |               | 1,182      |                    |       |   | 193 |   |   |   | — |   |   |
| Total contractual  obligations |       | $                       | 7,315      |                            |       | $                  | 2,690      |               |       |                    | $          | 3,182 |   |   |   | $ | 693 |   |   |   | $ | 750 |   |   |

 

**Recent Accounting Pronouncements**

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 159, The Fair Value Option forFinancial Assets and Financial Liabilities, including an amendment ofSFAS No. 115. SFAS No. 159 permits companies to choose tomeasure certain financial instruments and certain other items at fair value andrequires unrealized gains and losses on items for which the fair value optionhas been elected to be reported in earnings. SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007. We arecurrently in the process of evaluating the impact of SFAS No. 159 onour consolidated financial statements.

In September 2006,the FASB issued SFAS No. 157, Fair Value Measurements, which defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements. SFASNo. 157 does not require any new fair value measurements, but providesguidance on how to measure fair value by providing a fair value hierarchy usedto classify the source of the information. This statement is effective for ourfiscal year 2008. We are currently assessing the potential impact that theadoption of SFAS No. 157 will have on our financial statements; the impactis not expected to be material.

In September 2006,the FASB issued Emerging Issues Task Force Issue (“EITF”), No. 06-1,Accounting for Consideration Given by a Service Provider to a Manufacturer orReseller of Equipment Necessary for an End-Customer to Receive Service from theService Provider. EITF No. 06-1 requires that we provide disclosuresregarding the nature of arrangements in which we provide consideration tomanufacturers or resellers of equipment necessary for an end-customer toreceive service from us, including the amounts recognized in the ConsolidatedStatements of Income. This EITF is effective for our fiscal year 2008. We do notexpect the adoption of EITF No. 06-1 to have a material impact onour consolidated financial statements.

In July 2006, theFASB issued Interpretation No. 48, Accounting for Uncertainty in IncomeTaxes-an interpretation of FASB Statement No. 109 (FIN No. 48). FINNo. 48 clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with FASB StatementNo. 109, Accounting for Income Taxes. FIN No. 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN No. 48 also provides guidance on derecognition,classification, 

40

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interestand penalties, accounting in interim periods and disclosure relative touncertain tax positions. FIN No. 48 is effective for fiscal yearsbeginning after December 15, 2006, with early adoption encouraged. We arecurrently assessing the potential impact that the adoption of FIN No. 48 willhave on our consolidated financial statements.

In February 2006, theFASB issued SFAS No. 155, Accounting for Certain Hybrid FinancialInstruments-an amendment of FASB Statements No. 133 and 140. This standardpermits fair value remeasurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation;clarifies which interest-only strips and principal-only strips are not subjectto the requirements of SFAS No. 133; requires evaluation of interests insecuritized financial assets; clarifies that concentrations of credit risk inthe form of subordination are not embedded derivatives; and eliminates theprohibition on a qualifying special-purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other than anotherderivative financial instrument. This standard is effective for all financialinstruments acquired or issued for fiscal years beginning afterSeptember 15, 2006. We do not believe that adoption of SFAS No. 155will have a material effect on our financial position or results of operations.

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”)No. 108, Considering the Effects of Prior Year Misstatements whenQuantifying Current Year Misstatements. SAB No. 108 requires analysis ofmisstatements using both an income statement (rollover) approach and a balancesheet (iron curtain) approach in assessing materiality and provides for aone-time cumulative effect transition adjustment. SAB No. 108 is effectivefor our fiscal year 2007 annual financial statements. The adoption of SABNo. 108 did not have a significant impact on our financial statements.

**Item7A.**                Quantitative andQualitative Disclosures about Market Risk.

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

We have internationalsubsidiaries that transact business in both local and foreign currencies andtherefore we are exposed to foreign currency exchange risk resulting fromfluctuations in foreign currencies. This risk could adversely impact ourresults and financial condition. From time to time, we may enter into foreigncurrency exchange and option contracts to reduce our exposure to foreigncurrency exchange risk and variability in operating results due to fluctuationin exchange rates underlying the value of current transactions and anticipatedtransactions denominated in foreign currencies. These contracts obligate us toexchange predetermined amounts of specified foreign currencies at specifiedexchange rates on specified dates. These contracts are denominated in the samecurrency in which the underlying transactions are denominated and bear acontract value and maturity date that approximate the value and expectedsettlement date, respectively, of the underlying transactions. Unrealized gainsand losses on open contracts at the end of each accounting period, resultingfrom changes in the fair value of these contracts, are recognized in earningsgenerally in the same period as exchange gains and losses on the underlyingforeign denominated receivables are recognized. We do not engage in foreigncurrency speculation.

We had three forwardexchange contracts outstanding serving as a hedge of our Euro-denominatedintercompany receivables in the notional amount of approximately3.1 million Euros at June 30, 2007. These contracts serve as hedgesof a substantial portion of our Euro-denominated intercompany balances. Thefair value of the foreign currency derivative contract outstanding atJune 30, 2007 was approximately $4.2 million resulting in anunrealized gain of approximately $9 thousand. Any gains and losses on the fairvalue of the derivative contract would be largely offset by losses and gains onthe underlying transaction.

41

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**Item 8.**                        FinancialStatements and Supplementary Data.

**CandelaCorporationIndex to Consolidated Financial Statements**
|                                                                                                                                                 | ** ** | **Page** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm on Internal Control over Financial Reporting                                           |       | 43       |       |   |
| Report on Independent Registered Public Accounting  Firm on Financial Statements                                                                |       | 45       |       |   |
| Financial  Statements:                                                                                                                          |       |     |       |   |
| Consolidated Balance  Sheets—June 30, 2007 and July 1, 2006                                                                      |       | 46       |       |   |
| Consolidated Statements of  Income and Comprehensive Income—Years ended June 30,  2007, July 1, 2006, and July 2, 2005 |       | 47       |       |   |
| Consolidated Statements of  Stockholders’ Equity—Years ended June 30, 2007, July 1, 2006, and July 2,  2005       |       | 48       |       |   |
| Consolidated Statements of  Cash Flows—Years ended June 30, 2007, July 1, 2006, and  July 2, 2005                      |       | 49       |       |   |
| Notes to Consolidated  Financial Statements                                                                                                     |       | 50       |       |   |
| Supporting  Financial Statement Schedule:                                                                                                       |       |     |       |   |
| Schedule II—Valuation  and Qualifying Accounts                                                                                             |       | 74       |       |   |

 

42

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**Reportof Independent Registered Public Accounting Firmon Internal Control over Financial Reporting**

Shareholders and Board ofDirectorsCandela CorporationWayland, Massachusetts

We have audited CandelaCorporation’s internal control over financial reporting as of June 30, 2007,based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (theCOSO criteria). Candela Corporation’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting, included in theaccompanying Item 9A, Management’s Report on Internal Control Over FinancialReporting. Our responsibility is to express an opinion on the Company’sinternal control over financial reporting based on our audit. 

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

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

As indicated in the accompanying “Item 9A,Management’s Report on Internal Control over Financial Reporting”, management’sassessment of and conclusion on the effectiveness of internal control overfinancial reporting did not include the internal controls of Inolase (2002),Ltd., which was acquired on March 6, 2007, and which is included in theconsolidated balance sheets of Candela Corporation as of June 30, 2007,and the related consolidated statements of income and comprehensive income,stockholders’ equity, and cash flows for the year then ended.  Inolase (2002), Ltd. constituted 11% totalassets as of June 30, 2007, and less than 1% of revenues for the year thenended. Management did not assess the effectiveness of internal control overfinancial reporting of Inolase (2002) Ltd. because of the timing of theacquisition which was completed on March 6, 2007. Our audit of internal controlover financial reporting of Candela Corporation also did not include anevaluation of the internal control over financial reporting of Inolase (2002),Ltd.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate. 

43

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In our opinion, CandelaCorporation maintained, in all material respects, effective internal controlover financial reporting as of June 30, 2007, based on the COSO criteria. 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofCandela Corporation as of June 30, 2007 and July 1, 2006, and the relatedconsolidated statements of income and comprehensive income, stockholders’equity, and cash flows for each of the three years in the period ended June 30,2007 and our report dated September 12, 2007 expressed an unqualifiedopinion thereon. 
| /s/ BDO SEIDMAN, LLP  |   |   |
|-----------------------|--------|--------|
| BDO Seidman, LLP      |   |
| Boston, Massachusetts |   |
| September 12, 2007    |   |

 

44

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**Report ofIndependent Registered Public Accounting Firm on Financial Statements**

Shareholders and Board of DirectorsCandela CorporationWayland, Massachusetts

We have audited the accompanying consolidated balancesheets of Candela Corporation as of June 30, 2007 and July 1, 2006 and therelated consolidated statements of income and comprehensive income,stockholders’ equity and cash flows for each of the three years in the periodended June 30, 2007. We have also audited the schedule listed in the accompanyingindex for the years ended June 30, 2007, July 1, 2006, and July 2, 2005.These financial statements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements and schedule are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements andschedule, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall presentation of thefinancial statements and schedule. We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Candela Corporation at June 30, 2007 and July 1, 2006 and theresults of their operations and their cash flows for each of the three years inthe period ended June 30, 2007, in conformity with accounting principlesgenerally accepted in the United States of America. 

Also, in our opinion, the schedule listed on theaccompanying index presents fairly, in all material respects, the informationset forth therein for the years ended June 30, 2007, July 1, 2006, andJuly 2, 2005.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of CandelaCorporation’s internal control over financial reporting as of June 30, 2007,based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (theCOSO criteria) and our report dated September 12, 2007 expressed an unqualifiedopinion thereon.
| /s/ BDO SEIDMAN, LLP  |   |   |
|-----------------------|--------|--------|
| BDO Seidman, LLP      |   |
| Boston, Massachusetts |   |
| September 12, 2007    |   |

 

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**CANDELA CORPORATIONConsolidated Balance Sheets(in thousands, except per share data)**

| ** **                                                                                                                              | ** ** | **June 30,** | ** ** | **July 1,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                              | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| **Assets**                                                                                                                              |       |              | ** ** | ** **       | ** ** |
| Current assets:                                                                                                                         |       |              |       |             |       |
| Cash and cash  equivalents                                                                                                              |       | $                 | 27,152     |             | $          | 40,194 |   |
| Restricted cash                                                                                                                         |       | 48                |       | 166              |       |
| Marketable securities                                                                                                                   |       | 11,773            |       | 27,332           |       |
| Accounts receivable, net  of allowance for doubtful accounts of $1,412 and $1,831 at June 30 and July 1,  respectively                  |       | 38,455            |       | 34,273           |       |
| Notes receivable                                                                                                                        |       | 1,025             |       | 1,611            |       |
| Inventories, net                                                                                                                        |       | 21,368            |       | 16,666           |       |
| Other current assets                                                                                                                    |       | 7,136             |       | 5,084            |       |
| Total current assets                                                                                                                    |       | 106,957           |       | 125,326          |       |
| Property and equipment,  net                                                                                                            |       | 3,479             |       | 3,302            |       |
| Deferred tax assets, long-term                                                                                                          |       | 6,146             |       | 5,294            |       |
| Goodwill                                                                                                                                |       | 10,997            |       | —           |       |
| Acquired intangible assets,  net of amortization of $662 at June 30                                                                     |       | 8,151             |       | —           |       |
| Marketable securities,  long-term                                                                                                       |       | 12,260            |       | 11,953           |       |
| Other assets                                                                                                                            |       | 2,240             |       | 3,781            |       |
| Total assets                                                                                                                            |       | $                 | 150,230    |             | $          | 149,656 |   |
| **Liabilities and Stockholders’ Equity**                                                                                           |       |              |       |             |       |
| Current liabilities:                                                                                                                    |       |              |       |             |       |
| Accounts payable                                                                                                                        |       | $                 | 6,922      |             | $          | 15,968 |   |
| Accrued payroll and  related expenses                                                                                                   |       | 5,344             |       | 5,728            |       |
| Accrued warranty costs,  current                                                                                                        |       | 5,486             |       | 5,868            |       |
| Income taxes payable                                                                                                                    |       | —            |       | 933              |       |
| Sales tax payable                                                                                                                       |       | 1,161             |       | 854              |       |
| Royalties payable                                                                                                                       |       | 459               |       | 764              |       |
| Other accrued  liabilities                                                                                                              |       | 9,554             |       | 3,672            |       |
| Deferred revenue,  current                                                                                                              |       | 10,000            |       | 8,342            |       |
| Current liabilities of  discontinued operations                                                                                         |       | 1,257             |       | 1,287            |       |
| Total current  liabilities                                                                                                              |       | 40,183            |       | 43,416           |       |
| Deferred tax liability,  long-term                                                                                                      |       | 2,659             |       | 480              |       |
| Accrued warranty costs,  long-term                                                                                                      |       | 2,127             |       | 3,761            |       |
| Deferred revenue,  long-term                                                                                                            |       | 3,751             |       | 1,987            |       |
| Total liabilities                                                                                                                       |       | 48,720            |       | 49,644           |       |
| Commitments and contingencies                                                                                                           |       |              |       |             |       |
| Stockholders’ equity:                                                                                                              |       |              |       |             |       |
| Common stock, $.01 par  value, 60,000,000 shares authorized; 26,082,000 and 25,914,000 issued at  June 30 and July 1, respectively |       | 261               |       | 259              |       |
| Treasury stock,  3,125,000 and 2,250,000 common shares at June 30 and July 1, respectively,  at cost                          |       | (22,458           | )          | (12,997          | )          |
| Additional paid-in  capital                                                                                                             |       | 69,466            |       | 64,234           |       |
| Accumulated earnings                                                                                                                    |       | 54,536            |       | 48,280           |       |
| Accumulated other  comprehensive (loss) income                                                                                          |       | (295              | )          | 236              |       |
| Total stockholders’  equity                                                                                                        |       | 101,510           |       | 100,012          |       |
| Total liabilities and stockholders’ equity                                                                                         |       | 150,230           |       | $                | 149,656    |   |

 

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

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**CANDELA CORPORATIONCONSOLIDATED STATEMENTSOF INCOME AND COMPREHENSIVE INCOMEFor the years ended June 30, 2007, July 1, 2006 and July 2, 2005**

| ** **                                                                                                                              | ** ** | **2007**                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                              | ** ** | **(in thousands, except per share data)** | ** ** |
| **Revenue**                                                                                                                             |       |                                                               |       |     |       |     |       |
| Lasers and other  products                                                                                                              |       | $                                                                  | 113,225    |     | $          | 121,838  |       | $ | 102,323 |   |
| Product-related  service                                                                                                                |       | 35,332                                                             |       | 27,628   |       | 21,578   |       |
| Total revenue                                                                                                                           |       | 148,557                                                            |       | 149,466  |       | 123,901  |       |
| **Cost of  sales**                                                                                                                      |       |                                                               |       |     |       |     |       |
| Lasers and other  products                                                                                                              |       | 49,303                                                             |       | 54,748   |       | 45,235   |       |
| Product-related  service                                                                                                                |       | 24,191                                                             |       | 20,869   |       | 17,918   |       |
| Litigation related  charges                                                                                                             |       | —                                                             |       | —   |       | 4,829    |       |
| Total cost of  sales                                                                                                                    |       | 73,494                                                             |       | 75,617   |       | 67,982   |       |
| **Gross  profit**                                                                                                                       |       | 75,063                                                             |       | 73,849   |       | 55,919   |       |
| **Operating  expenses:**                                                                                                                |       |                                                               |       |     |       |     |       |
| Selling, general  and administrative                                                                                                    |       | 53,562                                                             |       | 44,297   |       | 40,165   |       |
| Research and  development                                                                                                               |       | 18,146                                                             |       | 8,879    |       | 6,890    |       |
| Litigation related  charges                                                                                                             |       | —                                                             |       | —   |       | 773      |       |
| Total operating  expenses                                                                                                               |       | 71,708                                                             |       | 53,176   |       | 47,828   |       |
| **Income  from operations**                                                                                                             |       | 3,355                                                              |       | 20,673   |       | 8,091    |       |
| **Other  income (expense):**                                                                                                            |       |                                                               |       |     |       |     |       |
| Interest income                                                                                                                         |       | 2,719                                                              |       | 1,748    |       | 640      |       |
| Other income  (expense), net                                                                                                            |       | 3,725                                                              |       | (19      | )          | (73      | )          |
| Total other income                                                                                                                      |       | 6,444                                                              |       | 1,729    |       | 567      |       |
| **Income  from continuing operations before income taxes**                                                                              |       | 9,799                                                              |       | 22,402   |       | 8,658    |       |
| **Provision  for income taxes**                                                                                                         |       | 3,543                                                              |       | 7,468    |       | 2,194    |       |
| **Income  from continuing operations**                                                                                                  |       | 6,256                                                              |       | 14,934   |       | 6,464    |       |
| **Discontinued  operations:**                                                                                                           |       |                                                               |       |     |       |     |       |
| Gain on disposal  of skin care center, including revision of leasehold obligations, of $1,374  net of income tax expense of ($515) |       | —                                                             |       | —   |       | 859      |       |
| **Net income**                                                                                                                          |       | $                                                                  | 6,256      |     | $          | 14,934   |       | $ | 7,323 |   |
| **Net  income per share of common stock**                                                                                               |       |                                                               |       |     |       |     |       |
| **Basic:**                                                                                                                              |       |                                                               |       |     |       |     |       |
| Income from  continuing operations                                                                                                      |       | $                                                                  | 0.27       |     | $          | 0.65     |       | $ | 0.29 |   |
| Gain from  discontinued operations                                                                                                      |       | —                                                             |       | —   |       | 0.04     |       |
| Net income                                                                                                                              |       | $                                                                  | 0.27       |     | $          | 0.65     |       | $ | 0.33 |   |
| **Diluted:**                                                                                                                            |       |                                                               |       |     |       |     |       |
| Income from  continuing operations                                                                                                      |       | $                                                                  | 0.27       |     | $          | 0.62     |       | $ | 0.28 |   |
| Gain from  discontinued operations                                                                                                      |       | —                                                             |       | —   |       | 0.04     |       |
| Net income                                                                                                                              |       | $                                                                  | 0.27       |     | $          | 0.62     |       | $ | 0.32 |   |
| **Weighted  average shares outstanding:**                                                                                               |       |                                                               |       |     |       |     |       |
| Basic                                                                                                                                   |       | 23,086                                                             |       | 23,017   |       | 22,388   |       |
| Diluted                                                                                                                                 |       | 23,525                                                             |       | 23,948   |       | 23,073   |       |
| **Net  income**                                                                                                                         |       | $                                                                  | 6,256      |     | $          | 14,934   |       | $ | 7,323 |   |
| **Other  comprehensive income (loss), net of tax:**                                                                                     |       |                                                               |       |     |       |     |       |
| Foreign currency  translation adjustment                                                                                                |       | 246                                                                |       | 521      |       | (713     | )          |
| Unrealized loss on  available-for-sales securities, net of tax                                                                          |       | (777                                                               | )          | —   |       | —   |       |
| **Comprehensive  income**                                                                                                               |       | $                                                                  | 5,725      |     | $          | 15,455   |       | $ | 6,610 |   |

 

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

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**CANDELA CORPORATIONConsolidated Statements of Stockholders’EquityFor the years ended June 30, 2007, July 1, 2006, and July 2,2005**

| ** **                                                     | ** ** | ** **              | ** ** | ** **  | ** ** | ** **              | ** ** | ** **      | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-------------|------------|-------------------------|------------|-----------------|------------|-------------------|------------|--------------|------------|------------------------|------------|------------|------------|
| ** **                                                     | ** ** | ** **              | ** ** | ** **  | ** ** | **Additional**          | ** ** | ** **      | ** ** | ** **        | ** ** | ** **   | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Common Stock**   | ** ** | **Paid-in** | ** ** | **Treasury Stock** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** **   | ** ** |
| ** **                                                     | ** ** | **Shares**              | ** ** | **Amount**  | ** ** | **Capital**             | ** ** | **Shares**      | ** ** | **Amount**        | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| ** **                                                     | ** ** | **(In thousands)** | ** ** |
| **Balance July 3, 2004**                                  | ** ** |                    | **24,567** | ** **  |       |                    | **$**      | **246**         | ** ** |              |       | **$**        | **53,069** | ** **             |       |       | **(2,250** | **)** |   | **$** | **(12,997** | **)** |   | **$** | **26,023** | ** ** |   |   | **$** | **428** | ** ** |   | **$** | **66,769** | ** ** |
| Sale of common stock under stock plans                    |       |                    | 197        | ** **  |       |                    | 2          |            |       |              | 958        |         |       |                   |       |       |       |   |   |   |   | ** ** |   |   | ** ** | ** ** |   | 960 |   |
| Net income                                                     |       |                    |       | ** **  |       |                    |       |            |       |              |       |         |       |                   |       |       |       |   |   |   | 7,323 | ** ** |   |   | ** ** | ** ** |   | 7,323 |   |
| Currency translation adjustment                                |       |                    |       | ** **  |       |                    |       |            |       |              |       |         |       |                   |       |       |       |   |   |   |   | ** ** |   |   | (713 | ) |   | (713 | ) |
| **Balance July 2, 2005**                                  | ** ** |                    | **24,764** | ** **  |       |                    | **248**    | ** **      |       |              | **54,027** | ** **   |       |                   | **(2,250** | **)**      |       | **(12,997** | **)** |   | **33,346** | ** ** |   |   | **(285** | **)** |   | **74,339** | ** ** |
| Sale of common stock under stock plans                    |       |                    | 1,150      | ** **  |       |                    | 11         |            |       |              | 8,111      |         |       |                   |       |       |       |   |   |   |   | ** ** |   |   | ** ** | ** ** |   | 8,122 |   |
| Net income                                                     |       |                    |       | ** **  |       |                    |       |            |       |              |       |         |       |                   |       |       |       |   |   |   | 14,934 | ** ** |   |   | ** ** | ** ** |   | 14,934 |   |
| Stock-based compensation  expense                              |       |                    |       | ** **  |       |                    |       |            |       |              | 1,285      |         |       |                   |       |       |       |   |   |   |   | ** ** |   |   | ** ** | ** ** |   | 1,285 |   |
| Tax beneifit of stock exercise                                 |       |                    |       | ** **  |       |                    |       |            |       |              | 811        |         |       |                   |       |       |       |   |   |   |   | ** ** |   |   | ** ** | ** ** |   | 811 |   |
| Currency translation adjustment                                |       |                    |       | ** **  |       |                    |       |            |       |              |       |         |       |                   |       |       |       |   |   |   |   | ** ** |   |   | 521 | ** ** |   | 521 |   |
| **Balance July 1, 2006**                                  | ** ** |                    | **25,914** | ** **  |       |                    | **259**    | ** **      |       |              | **64,234** | ** **   |       |                   | **(2,250** | **)**      |       | **(12,997** | **)** |   | **48,280** | ** ** |   |   | **236** | ** ** |   | **100,012** | ** ** |
| Sale of common stock under stock plans                    |       |                    | 168        | ** **  |       |                    | 2          |            |       |              | 841        |         |       |                   |       |       |       |   |   |   |   | ** ** |   |   | ** ** | ** ** |   | 843 |   |
| Treasury stock activity—purchase of shares           |       |                    |       | ** **  |       |                    |       |            |       |              |       |         |       |                   | (875       | )          |       | (9,461 | ) |   |   | ** ** |   |   | ** ** | ** ** |   | (9,461 | ) |
| Net income                                                     |       |                    |       | ** **  |       |                    |       |            |       |              |       |         |       |                   |       |       |       |   |   |   | 6,256 | ** ** |   |   | ** ** | ** ** |   | 6,256 |   |
| Stock-based compensation  expense                              |       |                    |       | ** **  |       |                    |       |            |       |              | 4,125      |         |       |                   |       |       |       |   |   |   |   | ** ** |   |   | ** ** | ** ** |   | 4,125 |   |
| Tax beneifit of stock exercise                                 |       |                    |       | ** **  |       |                    |       |            |       |              | 266        |         |       |                   |       |       |       |   |   |   |   | ** ** |   |   | ** ** | ** ** |   | 266 |   |
| Unrealized loss on available-for-sales securities,  net of tax |       |                    |       | ** **  |       |                    |       |            |       |              |       |         |       |                   |       |       |       |   |   |   |   | ** ** |   |   | (777 | ) |   | (777 | ) |
| Currency translation adjustment                                |       |                    |       | ** **  |       |                    |       |            |       |              |       |         |       |                   |       |       |       |   |   |   |   | ** ** |   |   | 246 | ** ** |   | 246 |   |
| **Balance  June 30, 2007**                                | ** ** |                    | **26,082** | ** **  |       |                    | **$**      | **261**         | ** ** |              |       | **$**        | **69,466** | ** **             |       |       | **(3,125** | **)** |   | **$** | **(22,458** | **)** |   | **$** | **54,536** | ** ** |   |   | **$** | **(295** | **)** |   | **$** | **101,510** | ** ** |

 

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

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**CANDELA CORPORATIONConsolidated Statements of Cash FlowsFor the years ended June 30, 2007, July 1, 2006, and July 2,2005**
|                                                                                               | ** **   | **2007**     | ** **   | **2006**     | ** **   | **2005**     | ** **   |
|-----------------------------------------------------------------------------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| **Cash flows from operating  activities:**                                                    | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   | ** **   |
| Net income                                                                                    |         | $            | 6,256        |         | $            | 14,934       |         | $ | 7,323 |   |
| Adjustments  to reconcile net income to net cash (used by) provided by operating  activities: |         |         |         |         |         |         |         |
| (Gain) loss of disposal of discontinued operations                                            |         | —       |         | —       |         | (859         | )            |
| Gain on exchange of stock                                                                     |         | (3,540       | )            | —       |         | —       |         |
| Share-based compensation expense                                                              |         | 4,125        |         | 1,285        |         | —       |         |
| Depreciation and amortization                                                                 |         | 1,631        |         | 571          |         | 755          |         |
| Provision (benefit) for bad debts                                                             |         | 989          |         | 1,241        |         | 573          |         |
| Provision  for deferred taxes                                                                 |         | 45           |         | (2,399       | )            | 233          |         |
| Change in restricted cash                                                                     |         | 118          |         | 33           |         | 58           |         |
| Other non-cash items                                                                          |         | (144         | )            | 95           |         | (180         | )            |
| Increase  (decrease) in cash from working capital, net of acquisitions:                       |         | —       |         |         |         |         |         |
| Accounts receivable                                                                           |         | (4,943       | )            | (681         | )            | (1,801       | )            |
| Notes receivable                                                                              |         | 586          |         | (844         | )            | (19          | )            |
| Inventories                                                                                   |         | (4,702       | )            | (3,561       | )            | 719          |         |
| Other current assets                                                                          |         | (266         | )            | 75           |         | 1,335        |         |
| Other assets                                                                                  |         | (977         | )            | (2,684       | )            | 427          |         |
| Accounts payable                                                                              |         | (10,376      | )            | 3,593        |         | 4,760        |         |
| Accrued payroll and related expenses                                                          |         | (438         | )            | 882          |         | (567         | )            |
| Deferred revenue                                                                              |         | 3,422        |         | 2,243        |         | 2,731        |         |
| Accrued warranty costs                                                                        |         | (2,016       | )            | 620          |         | 2,091        |         |
| Income taxes payable                                                                          |         | (2,921       | )            | (779         | )            | (303         | )            |
| Other accrued liabilities                                                                     |         | 5,732        |         | (238         | )            | 1,698        |         |
| Net cash (used by) provided by operating  activities                                          |         | (7,419       | )            | 14,386       |         | 18,974       |         |
| **Cash flows from investing  activities:**                                                    |         |         |         |         |         |         |         |
| Purchases of property and equipment                                                           |         | (763         | )            | (715         | )            | (635         | )            |
| Maturities of held-to-maturity marketable  securities                                         |         | 37,014       |         | 4,369        |         | —       |         |
| Cash proceeds from exchange of stock                                                          |         | 994          |         | —       |         | —       |         |
| Purchases  of held-to-maturity marketable securities                                          |         | (17,706      | )            | (43,654      | )            | —       |         |
| Acquisition of business, net of cash acquired                                                 |         | (15,986      | )            | —       |         | —       |         |
| Acquisition  of intangible assets                                                             |         | (1,380       | )            | —       |         | —       |         |
| Net cash provided by (used by) investing  activities                                          |         | 2,173        |         | (40,000      | )            | (635         | )            |
| **Cash flows from financing activities:**                                                     |         |         |         |         |         |         |         |
| Proceeds from the issuance of common stock                                                    |         | 843          |         | 8,122        |         | 960          |         |
| Purchase of treasury stock                                                                    |         | (9,461       | )            | —       |         | —       |         |
| Benefits of tax effects from exercise of stock  options                                       |         | 266          |         | 811          |         |         |         |
| Net cash (used by) provided by financing  activities                                          |         | (8,352       | )            | 8,933        |         | 960          |         |
| Effect of exchange rates on cash and cash  equivalents                                        |         | 556          |         | 492          |         | (55          | )            |
| **Net (decrease) increase in cash and cash equivalents**                                      |         | (13,042      | )            | (16,189      | )            | 19,244       |         |
| **Cash and cash equivalents at beginning of period**                                          |         | 40,194       |         | 56,383       |         | 37,139       |         |
| **Cash and cash equivalents at end of period**                                                |         | $            | 27,152       |         | $            | 40,194       |         | $ | 56,383 |   |
| **Cash  paid during the year for:**                                                           | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Interest                                                                                      |         | $            | —       |         | $            | —       |         | $ | — |   |
| Income taxes                                                                                  |         | 5,451        |         | 9,834        |         | 2,269        |         |
| **Noncash  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.

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**Notes toConsolidated Financial Statements**

**1.   Descriptionof Business and Summary of Significant Accounting Policies**

***Description ofBusiness.***   Candela Corporation (“the Company”or “Candela”) is involved in the development and commercialization of advancedaesthetic laser systems that allow physicians and personal care practitionersto treat a wide variety of cosmetic and medical conditions.

***Basis ofConsolidations.******  ***The financial statements includethe accounts of the Company and its subsidiaries. Intercompany transactions andbalances have been eliminated. Investments in which we are not able to exercisesignificant influence over the investee are accounted for under the costmethod.

***Reclassifications.***   Certainprior period amounts have been reclassified to conform to the current periodpresentation. There was no impact on operating income.

The following tabledetails the affect of the reclassification on the July 1, 2006 balancesheet to conform to the June 30, 2007 presentation relative to deferredtax assets and liabilities. Due to the immaterial nature of the current portionof deferred tax assets, they are included as a component of “Other currentassets” on our consolidated balance sheets for June 30, 2007 andJuly 1, 2006, respectively.

| **(in thousands)**                | ** ** | ** ** | ** ** | **July 1, 2006  Originally  Reported** | ** ** | **Reclassification** | ** ** | **July 1, 2006  Reclassified** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------|------------|------------------------------------------|------------|
| Other current  assets                  |       |       | $          | 1,756                                            |       |                 |       | $                                        | 3,328      |   |   |   | $ | 5,084 |   |   |
| Deferred tax  assets, long-term        |       |       | 8,142      |                                             |       |                 | (2,848     | )                                        |       |   | 5,294 |   |   |
| Deferred tax  liability, long-term     |       |       | —     |                                             |       |                 | (480       | )                                        |       |   | (480 | ) |   |
| Net fiscal year 2006  reclassification |       |       |       |                                             |       |                 | $          | —                                   |       |   |   |   |   |   |

 

***Fiscal Years.***   TheCompany’s fiscal year ends on the Saturday nearest June 30. The yearsended June 30, 2007, July 1, 2006 and July 2, 2005 each contain52 weeks.

***Use of Estimates.***   Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States (GAAP) requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, revenues and expenses, and related disclosures of contingentliabilities in the consolidated financial statements and accompanying notes.Estimates are used for, but not limited to, receivables valuation, valuation ofinvestments, inventory valuation, depreciable lives of fixed assets, valuationof goodwill and acquired intangibles, income taxes, stock-based compensation,and accrued warranties. Actual results could differ materially from thoseestimates.

***Cash and CashEquivalents.***   The Company considers allhighly liquid instruments with original maturities of three months or less tobe cash equivalents. Substantially all cash and cash equivalents were investedin short duration certificates of deposit and overnight repurchase agreementswith major financial institutions. These are valued at amortized cost whichapproximates market value.

***MarketableSecurities.***   The Company accounts formarketable securities in accordance with Statement of Financial AccountingStandards No. 115, “Accounting for Certain Investments in Debt and EquitySecurities” (“SFAS 115”). SFAS 115 establishes the accounting and reportingrequirements for all debt securities and for investments in equity securitiesthat have readily determinable fair values. All marketable securities must beclassified as one of the following: held-to-maturity, available-for-sale, ortrading. The Company classifies substantially all of its marketable securitiesas held-to-maturity as the Company has the intent and ability to hold them tomaturity. Held-to-maturity debt securities are reported at amortized cost whichapproximates fair value. The Company classifies its investment in Occulogix,Inc, (Note 15) as available-for-sale. As such, this investment ismarked-to-market on a quarterly basis and the associated unrealized gain orloss is reflected as a component of other comprehensive income (loss), net oftax.

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Current held-to-maturity marketable securities includeinvestments that are expected to mature in more than three months and up totwelve months. Long-term investments have remaining maturities of one to threeyears. Unrealized gains and losses related to the marketable securities are notconsidered a permanent decline in the market value of such securities.

***Accounts Receivableand Notes Receivable.***   The Company’s tradeaccounts receivable and notes receivable are primarily from sales to end users,leasing companies, and distributors servicing the medical device market, andreflect a broad domestic and international customer base. The Company does notrequire collateral and has not historically experienced significant creditlosses related to receivables from individual customers or groups of customersin any particular industry or geographic area.

The Company’s policy is to maintain reserves forpotential losses resulting from the inability of our customers to make requiredpayments. These reserves are charged to bad debts expense. The Companydetermines the adequacy of this allowance by regularly reviewing the aging ofits accounts and notes receivable and evaluating the individual customer’sbalances considering the customer’s financial condition, historical experiencecredit history and current economic conditions. Credit assessments areestablished through a process of reviewing the financial history and stabilityof each customer prior to inception of the sale. Where appropriate, the Companywill obtain credit rating reports and financial statements of customers whendetermining or modifying their credit limits. When a customer’s account balancebecomes past due, the Company will initiate dialogue with the customer todetermine the cause. If it is determined that the customer will be unable tomeet its financial obligation, such as in the case of a bankruptcy filing,deterioration in the customer’s operating results or financial position orother material events impacting their business, the Company will record anallowance to reduce the related receivable to the amount the Company expects torecover given all information presently available. The Company will alsoprovide a general reserve based on the aging of the accounts and notesreceivable based on historical experiences of write-offs.

***FairValue of Financial Instruments.***   *Carrying amounts of the financialinstruments, including cash and cash equivalents, accounts receivable, accountspayable and accrued liabilities approximate their fair values due to the shortterm nature of these instruments. Held-to-maturity marketable securities, whichare generally comprised of short-duration certificates of deposit orgovernment-backed bonds, are valued at amortized cost which approximates marketvalue. Available-for-sale securities are marked-to-market on a quarterly basisand the associated unrealized gain or loss is reflected as a component of othercomprehensive income (loss), net of tax.*

***DerivativeInstruments and Hedging Activity.***   TheCompany enters into financial instruments to reduce its exposure tofluctuations in foreign exchange rates by creating offsetting positions throughthe use of foreign currency forward contracts. The Company recognizes all derivativeinstruments as either assets or liabilities in the statements of financialposition and measures those instruments at fair value. Changes to the fairvalue of derivative contracts that do not qualify for hedge accounting arereported in earnings in the period of the change. For derivatives that qualifyfor hedge accounting, changes in the fair value of the derivatives are eitherrecorded in shareholders’ equity as a component of other comprehensive incomeor are recognized currently in earnings, along with an offsetting adjustmentagainst the basis of the item being hedged.

The Company’s foreign currency forward contracts mayinvolve elements of credit and market risk in excess of the amounts recognizedin the financial statements. The Company monitors its positions and the creditquality of counter-parties, consisting primarily of major financialinstitutions, and does not anticipate nonperformance by any counter-party. TheCompany does not use derivative financial instruments for trading orspeculative purposes, nor is the Company a party to leveraged derivatives.

***Inventories.******  ***Inventories are stated at thelower of cost (first-in, first-out method) or market, using a standard costingsystem which includes material, labor and manufacturing overhead Standard costsare 

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monitored and updated asnecessary, to reflect the changes in raw material costs and labor and overheadrates.

As a designer and manufacturer of high technologyequipment, the Company is exposed to a number of economic and industry factorsthat could result in portions of inventory becoming either obsolete or in excessof anticipated usage. These factors include, but are not limited to,technological changes in markets, the Company’s ability to meet changingcustomer requirements, competitive pressures in products and prices, and theavailability of key components from suppliers. The Company’s policy is toestablish inventory reserves when conditions exist that suggest inventory maybe in excess of anticipated demand or is obsolete based upon assumptions aboutfuture demand for the Company’s products and market conditions. The Companyregularly evaluates the ability to realize the value of inventory based on acombination of factors including the following: historical usage rates,forecasted sales or usage, product end of life dates, estimated current andfuture market values and new product introductions. Purchasing requirements andalternative usage avenues are explored within these processes to mitigateinventory exposure. When recorded, the reserves are intended to reduce thecarrying value of inventory to its net realizable value. Inventory of $21.4million as of June 30, 2007 and $16.7 million as of July 1, 2006 isstated net of inventory reserves of $2.1 million and $0.6 million,respectively. If actual demand for the Company’s products deteriorates, ormarket conditions are less favorable than those projected, additional inventoryreserves may be required.

***Property and Equipment.***   Purchasedproperty and equipment is recorded at cost. Laser systems used for testing arecapitalized at cost. Repairs and maintenance costs are expensed as incurred. Leaseholdimprovements are amortized over the shorter of the useful life or the life ofthe related lease. Depreciation is provided using the straight-line method overthe estimated useful lives as follows:

| ** **                                      | ** ** | **Estimated Life or  Number of Years** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| Leasehold  improvements                         |       |                                             | 2 to 15    |   |   |
| Office furniture,  computer and other equipment |       |                                             | 2 to 10    |   |   |

*** ***

***Prepaid licensefees.***   Prepaid license fees are amortizedover the term of the related contract (see Note 8).

***Goodwill, AcquiredIntangible Assets and Long-Lived Assets.***   Goodwillis the amount by which the cost of acquired net assets in a businessacquisition exceeded the fair values of net identifiable assets on the date ofour purchase.

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

Long-lived assetsprimarily include property and equipment and intangible assets with finitelives. In accordance with SFAS 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, we periodicallyreview long-lived assets for impairment whenever events or changes in businesscircumstances indicate that the carrying amount of the assets may not be fullyrecoverable or that the useful lives of those assets are no 

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longerappropriate. Each impairment test is based on a comparison of the undiscountedcash flows to the recorded value of the asset. If impairment is indicated, theasset is written down to its estimated fair value based on a discounted cashflow analysis.

Goodwilland acquired intangible assets consist of the following:

| **(in thousands)**               | ** ** | ** ** | ** ** | **June 30, 2007** | ** ** | **July 1, 2006** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------------|------------|----------------------------|------------|
| Goodwill                              |       |       | $          | 10,997                      |       |                       |       | $ | — |   |   |
| Intangible assets with  finite lives: |       |       |       |                        |       |                       |       |   |   |
| Patents                               |       |       | $          | 2,804                       |       |                       |       | $ | — |   |   |
| Developed technology                  |       |       | 6,009      |                        |       |                       | —     |   |   |
|                                  |       |       | 8,813      |                        |       |                       | —     |   |   |
| Less: accumulated  amortization       |       |       | (662       | )                           |       |                       | —     |   |   |
|                                  |       |       | $          | 8,151                       |       |                       |       | $ | — |   |   |

 

Amortization expense on acquired intangible assets wasapproximately $0.7 million for the fiscal year ended 2007. There was noamortization expense associated with acquired intangible assets in the fiscalyear ended 2006 or 2005, respectively.

Amortization expense associated with acquiredintangibles is expected to be approximately $1.7 million for each of thefiscal years ended 2008 through 2012, inclusive.

***Revenue Recognition.***

*Product sales*—The Company generally recognizesrevenue upon shipment of product to customers and the fulfillment of allcontractual terms and conditions, pursuant to the guidance provided bySecurities and Exchange Commission (“SEC”) Staff Accounting BulletinNo. 104, *Revenue Recognition*(“SAB 104”). SAB 104 requires that at the time revenue is recognized persuasiveevidence 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 revenueinclude shipping terms of FOB destination. In these instances, revenue isdeferred until adequate documentation is obtained to ensure that the deliverycriteria have been fulfilled. The Company provides for the estimated cost torepair or replace products under warranty at the time of sale. Unearned revenueis reported on the balance sheet as deferred income.

*Service*—Revenue from the sale of servicecontracts is deferred and recognized on a straight-line basis over the contractperiod. Revenue from service administered by the Company that is not covered bya service contract is recognized as the services are provided.

***Multiple-element arrangements******—In certain instances, the Companymay sell products together with extended warranties or maintenance contracts.The revenue recognized per element is determined by allocating the total salesprice to each element, based on the relative fair values in accordance withEmerging Issues Task Force (EITF) 00-21, “Revenue Arrangements with MultipleDeliverables”. Revenue for extended warranty and maintenance contracts arerecognized on a straight line basis over the life of the contract. Unearnedrevenues are reported on the balance sheet as deferred revenue.***

***Product WarrantyCosts.******  ******The Company’s products generallycarry a standard warranty. The Company maintains a reserve based on anticipatedwarranty claims at the time product revenue is recognized. Factors that affectthe Company’s product warranty liability include the number of installed units,the anticipated cost of warranty repairs and historical and anticipated ratesof warranty claims.***

***Research andDevelopment Costs.***   Research and developmentcosts are expensed as incurred.

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***Advertising Costs.***   Advertisingcosts are expensed as incurred and are included as a component of selling,general and administrative expenses in the accompanying Consolidated Statementsof Income and Comprehensive Income. Advertising costs were approximately $0.7million for the fiscal year ended 2007 and $0.9 million for each of the fiscalyears 2006 and 2005, respectively.

***Shipping andhandling costs.******  ******The Company reports shipping andhandling costs in both sales and the related costs as cost of sales to theextent they are billed to customers. In all other instances they are reflectedas a component of cost of sales.***

***Stock-basedcompensation.******  ***Effective July 3, 2005, theCompany implemented the fair value recognition provisions of SFAS 123 revised(“SFAS 123R”) and Staff Accounting Bulletin 107 (“SAB 107”) for allshare-based compensation. The Company adopted SFAS 123R using a modifiedprospective application, as permitted under SFAS 123R. Accordingly, priorperiod amounts have not been restated. Under this application, the Company isrequired to record compensation expense for all awards granted after the dateof adoption and for the unvested portion of previously granted awards thatremain outstanding at the date of adoption. Compensation cost will berecognized over the period that an employee provides service in exchange forthe award.

The application of SFAS 123R and SAB 107 during theyears ended June 30, 2007 and July 1, 2006 resulted in therecognition of share-based compensation expense of $4.1 million and $1.2million, respectively, attributable to stock options/stock appreciation rights(“SARs”) and $35 thousand and $56 thousand, respectively, attributable tothe employee stock purchase plan. 

Thisexpense was divided between operating expense cost centers based upon thefunctional responsibilities of the individual holding the respective options,as follows:

| **(in thousands)**              | ** ** | ** ** | ** ** | **For the year  ended  June 30, 2007** | ** ** | **For the year  ended  July 1, 2006** | ** ** |
|--------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Selling, general  and administrative |       |       | $          | 3,154                                                      |       |                                                      |       | $ | 1,016 |   |   |
| Research and  development            |       |       | 640        |                                                       |       |                                                      | 258        |   |   |
| Cost of sales                        |       |       | 330        |                                                       |       |                                                      | 11         |   |   |
|                                 |       |       | $          | 4,124                                                      |       |                                                      |       | $ | 1,285 |   |   |

 

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

As of June 30, 2007, there was approximately $8.0million of total unrecognized compensation cost related to non-vested stockoptions/SARs granted under the Company’s incentive plans. This cost is expectedto be recognized over a weighted-average period of 1.81 years.

As of July 1, 2006, there was approximately $3.4million of total unrecognized compensation cost related to non-vested stockoptions/SARs granted under the Company’s incentive plans. This cost is expectedto be recognized over a weighted-average period of 1.5 years.

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Theamount of cash received from the exercise of stock options for the fiscal yearended June 30, 2007 and July 1, 2006 was approximately $0.8 millionand $7.8 million for stock options/SARs, respectively, and approximately $0.4million and $0.3 million for the employee stock purchase plan, respectively.The actual tax benefit realized from the tax deductions resulting from optionexercises totaled approximately $0.3 million and $0.8 million forfiscal year 2007 and fiscal year 2006, respectively.

| ** **                      | ** ** | **For the year ended  June 30, 2007** | ** **     | **For the year ended  July 1, 2006** | ** ** |
|---------------------------------|------------|----------------------------------------------------------------|----------------|---------------------------------------------------------------|------------|
| Risk-free  interest rate        |       |                                                           | 4.59% to 5.125 | %                                                             |       |   | 5.125 | % |   |
| Estimated  volatility           |       |                                                           | 63% to 73%     |                                                          |       |   | 72 | % |   |
| Expected life for  SARs (years) |       |                                                           | 2.5 to 5.0     |                                                          |       |   | 3.39 |   |   |
| Expected dividend yield         |       |                                                           | —         |                                                          |       |   | — |   |   |

 

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

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

Prior to July 3, 2005, the Company followed theprovisions of SFAS No. 123, “*Accountingfor Stock-Based Compensation*” (“SFAS 123”). The provisions of SFAS123 allowed companies to either expense the estimated fair value of stockoptions or to continue to follow the intrinsic value method set forth in AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB 25”), but disclose the pro forma effects on net income(loss) had the fair value of the options been expensed. The Companyelected to apply APB 25 in accounting for its stock option incentive plans.

In accordance with APB 25 and related interpretations,compensation expense for stock options was recognized in income based on theexcess, if any, of the quoted market price of the stock at the grant date ofthe award or other measurement date over the amount an employee must pay toacquire the stock. Generally, the exercise price for stock options granted toemployees equals or exceeds the fair market value of the Company’s common stockat the date of grant, thereby resulting in no recognition of compensationexpense for fixed term grants. For awards that generate compensation expense asdefined under APB 25, the Company calculated the amount of compensation expenseand recognized the expense over the vesting period of the award.

On May 2,2005, the Company’s Board of Directors approved accelerating the vestingof unvested, “out-of-the-money” options to purchase approximately 535 thousandshares of the Company’s common stock awarded to employees, officers andnon-employee directors under its stock option plans. The accelerated optionshad exercise prices ranging from $9.50 to $12.33 and a weighted averageexercise price of $11.52. The acceleration was unconditional to the employees,officers and non-employee directors and was applied to all outstanding,unvested options priced above the closing price of the Company’s common stockon Monday, May 2, 2005. Approximately $6.4 million of the FY 2005 proforma expense listed below relates to options included in this acceleration pool.

The primary purpose of the accelerated vesting was toenable the Company to avoid recognizing future compensation expense associatedwith the accelerated stock options upon the adoption of SFAS 123R by theCompany in fiscal 2006.

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Hadcompensation cost for the Company’s stock option plans been determined based onthe fair value method set forth in SFAS 123, Candela’s net income andbasic and diluted net income per common share would have been changed to thepro forma amounts indicated below:

| ** **                                                                                                                         | ** ** | **July 2, 2005**                                     | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **(in thousands, except  per-share data)** | ** ** |
| Net income as  reported                                                                                                            |       |                                                      | $          | 7,323 |   |   |
| Less: Total  stock-based employee compensation expense determined under fair-value-based  method for all awards, net of tax effect |       |                                                      | (6,609     | ) |   |
| Pro forma net  income                                                                                                              |       |                                                      | $          | 714 |   |   |
| Earnings per share                                                                                                                 |       |                                                      |       |   |   |
| Basic—as reported                                                                                                             |       |                                                      | $          | 0.33 |   |   |
| Basic—pro forma                                                                                                               |       |                                                      | $          | 0.03 |   |   |
| Diluted—as reported                                                                                                           |       |                                                      | $          | 0.32 |   |   |
| Diluted—pro forma                                                                                                             |       |                                                      | $          | 0.03 |   |   |

 

Incomputing this pro forma amount, the Company has used the Black-Scholes pricingmodel and the following assumptions for options granted in fiscal year 2005:

| ** **                              | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|
| Risk-free  interest rate                |       | 4.25     | %          |
| Estiamted  volatility                   |       | 76       | %          |
| Expected life for  options/SARs (years) |       | 2.87     |       |
| Expected dividends                      |       | None     |       |

 

The weighted average grant-date fair value per shareof options granted, calculated using the Black-Scholes option-pricing model,and was $7.77 in 2005. No SARs were issued in fiscal year 2005.

***Income Taxes.***   TheCompany accounts for income taxes using an asset and liability approach thatrequires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of events that have been recognized in thefinancial statements or tax returns. In estimating future tax consequences, allexpected future events are considered other than enactments of changes in taxlaws or rates. Valuation allowances are established as necessary to reducedeferred tax assets in the event that realization of the assets is consideredunlikely.

***Foreign CurrencyTranslation.******  ***Thelocal currency is the functional currency of the Company’s subsidiaries. Theactivity of the Company’s foreign subsidiaries is translated into United Statesdollars in accordance with SFAS No. 52, “*ForeignCurrency Translation*”. Assets and liabilities are translated intoUnited States dollars at current exchange rates, while income and expense itemsare translated at average rates of exchange prevailing during the year.Exchange gains and losses arising from translation of the subsidiary balancesheets are accumulated as a separate component of stockholders’ equity. Netexchange-related gains and losses resulting from foreign currency transactionsamounted to gains of approximately $0.1 million for the years endedJune 30, 2007 and July 1, 2006, respectively, and loss ofapproximately $0.2 million for the year ended July 2, 2005. Theaforementioned net gains and losses are included in other income (expense) inthe respective fiscal years.

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***Earnings Per Share(“EPS”).******  ***BasicEPS is calculated by dividing net income by the weighted average number ofshares outstanding during the period. Diluted EPS is calculated by dividing netincome by the weighted average number of shares outstanding plus the dilutiveeffect, if any, of outstanding stock options, warrants, restricted shares, andSARs using the treasury stock method.

Thefollowing table provides share information used in the calculation of theCompany’s basic and diluted earnings per share:

| ** **                                                    | ** ** | **For the years ended:**                            | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **  June 30,  **                          | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| ** **                                                    | ** ** | **2007**                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| Shares used in  the calculation of Basic earnings per share   |       |                                                               | 23,086     |   |   | 23,017 |   | 22,388 |   |
| Effect of dilutive  securities:                               |       |                                                               |       |   |   |   |   |   |   |
| Stock options/SAR’s                                      |       |                                                               | 439        |   |   | 931 |   | 685 |   |
| Diluted shares  used in the calculation of earnings per share |       |                                                               | 23,525     |   |   | 23,948 |   | 23,073 |   |

 

During the years ended June 30, 2007,July 1, 2006, and July 2, 2005, options/SARs to purchase 1.1 million,0.1 million, and 1.4 million shares of common stock, respectively, were notincluded in the computation of diluted earnings (loss) per share because theywould have had an anti-dilutive effect.

***ComprehensiveIncome (Loss).******  ***TheCompany computes comprehensive income in accordance with SFAS 130 “*Reporting Comprehensive Income*” (“SFAS130”). SFAS 130 establishes standards for the reporting and display ofcomprehensive income and its components in the financial statements. Othercomprehensive income (loss), as defined, includes all changes in equity duringa period from non-owner sources. For the periods presented, other comprehensiveincome (loss) includes the effect of foreign currency translation and theunrealized gain (loss), net of taxes, on its marketable securities.

The following table summarizes the components ofaccumulated other comprehensive income, net of income taxes:

| **(in thousands)**                          | ** ** | ** ** | ** ** | **June 30,  2007** | ** ** | **July 1,  2006** | ** ** |
|--------------------------------------------------|------------|------------|------------|-------------------------|------------|------------------------|------------|
| Foreign currency translation adjustment          |       |       | $          | 482                     |       |                   |       | $ | 236 |   |   |
| Unrealized loss on available-for-sale securities |       |       | (777       | )                       |       |                   | —     |   |   |
| Accumulated other  comprehensive (loss) income   |       |       | $          | (295                    | )          |                   |       | $ | 236 |   |   |

*** ***

***Concentration ofRisk.******  ***Financialinstruments that are subject to credit risk primarily consist of cash and cashequivalents, marketable securities, commercial paper and accounts receivable.The Company places its cash and cash equivalents and held-to-maturity marketablesecurities in established financial institutions. Deposits in the financialinstitutions may exceed the amount of insurance provided on such deposits. TheCompany believes the financial institutions are financially sound and,accordingly, minimal credit risk exists. The Company invests in high qualitydebt securities to minimize any adverse changes in interest rates.

The Company’s sales are to end users, leasingcompanies, and distributors servicing the medical device market, and reflect abroad domestic and international customer base. The Company does not requirecollateral and has not historically experienced significant credit lossesrelated to receivables from individual customers or groups of customers in anyparticular industry or geographic area. The Company maintains an allowance forpotential losses. No single customer accounted for 10% of the Company’s totalnet sales or accounts and notes receivable.

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The Company is subject torisks common to companies in the aesthetic laser industry, including(i) the Company’s ability to successfully complete preclinical andclinical development and obtain timely regulatory approval and adequate patentand other proprietary rights protection of its products and services,(ii) the content and timing of decisions made by the Food & DrugAdministration and other agencies regarding the procedures for which theCompany’s products may be approved, (iii) the ability of the Company tomanufacture adequate supplies of its products for development andcommercialization activities, (iv) the accuracy of the Company’s estimatesof the size and characteristics of markets to be addressed by the Company’sproducts and services, (v) market acceptance of the Company’s products andservices, (vi) the Company’s ability to obtain reimbursement for itsproducts from third-party payers, where appropriate, and (vii) theaccuracy of the Company’s information concerning the products and resources ofcompetitors and potential competitors.

The Company depends on asingle vendor for Alexandrite rods used to manufacture the GentleLASE® systems.This product accounts for a significant portion of total revenues.

***Recent AccountingPronouncements.***

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 159, The Fair Value Option forFinancial Assets and Financial Liabilities, including an amendment ofSFAS No. 115. SFAS No. 159 permits companies to choose tomeasure certain financial instruments and certain other items at fair value andrequires unrealized gains and losses on items for which the fair value optionhas been elected to be reported in earnings. SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007. We arecurrently in the process of evaluating the impact of SFAS No. 159 onour consolidated financial statements.

In September 2006,the FASB issued SFAS No. 157, Fair Value Measurements, which defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.SFAS No. 157 does not require any new fair value measurements, butprovides guidance on how to measure fair value by providing a fair valuehierarchy used to classify the source of the information. This statement iseffective for our fiscal year 2008. We are currently assessing the potentialimpact that the adoption of SFAS No. 157 will have on our financialstatements; the impact is not expected to be material.

In September 2006,the FASB issued Emerging Issues Task Force Issue (“EITF”), No. 06-1,Accounting for Consideration Given by a Service Provider to a Manufacturer orReseller of Equipment Necessary for an End-Customer to Receive Service from theService Provider. EITF No. 06-1 requires that we provide disclosuresregarding the nature of arrangements in which we provide consideration tomanufacturers or resellers of equipment necessary for an end-customer toreceive service from us, including the amounts recognized in the ConsolidatedStatements of Income. This EITF is effective for our fiscal year 2008. We donot expect the adoption of EITF No. 06-1 to have a material impacton our consolidated financial statements.

In July 2006, theFASB issued Interpretation No. 48, Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109 (FIN No. 48). FINNo. 48 clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with FASB StatementNo. 109, Accounting for Income Taxes. FIN No. 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN No. 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods and disclosure relativeto uncertain tax positions. FIN No. 48 is effective for fiscal yearsbeginning after December 15, 2006, with early adoption encouraged. We arecurrently assessing the potential impact that the adoption of FIN No. 48will have on our consolidated financial statements.

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In February 2006, theFASB issued SFAS No. 155, Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140. This standardpermits fair value remeasurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation;clarifies which interest-only strips and principal-only strips are not subjectto the requirements of SFAS No. 133; requires evaluation of interests insecuritized financial assets; clarifies that concentrations of credit risk inthe form of subordination are not embedded derivatives; and eliminates theprohibition on a qualifying special-purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other than anotherderivative financial instrument. This standard is effective for all financialinstruments acquired or issued for fiscal years beginning after September 15,2006. We do not believe that adoption of SFAS No. 155 will have a materialeffect on our financial position or results of operations.

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”)No. 108, Considering the Effects of Prior Year Misstatements whenQuantifying Current Year Misstatements. SAB No. 108 requires analysis ofmisstatements using both an income statement (rollover) approach and a balancesheet (iron curtain) approach in assessing materiality and provides for aone-time cumulative effect transition adjustment. SAB No. 108 waseffective for our fiscal year 2007 annual financial statements. The adoption ofSAB No. 108 did not have a significant impact on our financial statements.

**2.**                 MarketableSecurities

Marketable securitiesconsist of the following:

| ** **                                                         | ** ** | **June 30, 2007** | ** ** | **July 1, 2006** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                         | ** ** | **Net Carrying**       | ** ** | ** **                 | ** ** | **Unrealized** | ** ** | **Net Carrying** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                                                         | ** ** | **Amount**                  | ** ** | **Fair Value**        | ** ** | **loss** | ** ** | **Amount** | ** ** | **Fair Value** | ** ** | **loss** | ** ** |
| ** **                                                         | ** ** | **(in thousands)**     | ** ** |
| Short-term  (Held-to-maturity):                                    |       |                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Government-backed  securities                                      |       |                        | $          | 6,999                      |       |   |   | $ | 6,988 |   |   |   | $ | (11 | ) |   |   | $ | 17,997 |   |   |   | $ | 17,946 |   |   |   | $ | (51 | ) |   |
| Certificates of deposit                                            |       |                        | 3,476      |                       |       |   | 3,459 |   |   |   | (17 | ) |   |   | 2,368 |   |   |   | 2,356 |   |   |   | (12 | ) |   |
| Corporate bonds                                                    |       |                        | —     |                       |       |   | — |   |   |   | — |   |   |   | 3,005 |   |   |   | 2,996 |   |   |   | (9 | ) |   |
| Commercial paper                                                   |       |                        | —     |                       |       |   | — |   |   |   | — |   |   |   | 3,962 |   |   |   | 3,960 |   |   |   | (2 | ) |   |
|                                                               |       |                        | 10,475     |                       |       |   | 10,447 |   |   |   | (28 | ) |   |   | 27,332 |   |   |   | 27,258 |   |   |   | (74 | ) |   |
| Short-term  (Available-for-sale):                                  |       |                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity investments with  an original cost of $2,546 (Note 15) |       |                        | 1,298      |                       |       |   | 1,298 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total marketable  securities, short-term                      |       |                        | $          | 11,773                     |       |   |   | $ | 11,745 |   |   |   | $ | (28 | ) |   |   | $ | 27,332 |   |   |   | $ | 27,258 |   |   |   | $ | (74 | ) |   |
| Long-term  (Held-to-maturity):                                     |       |                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Government-backed  securities                                      |       |                        | $          | 9,993                      |       |   |   | $ | 9,974 |   |   |   | $ | (19 | ) |   |   | $ | 8,998 |   |   |   | $ | 8,917 |   |   |   | $ | (81 | ) |   |
| Certificates of deposit                                            |       |                        | 2,267      |                       |       |   | 2,247 |   |   |   | (20 | ) |   |   | 2,955 |   |   |   | 2,903 |   |   |   | (52 | ) |   |
| Total marketable securities, long-term                        |       |                        | $          | 12,260                     |       |   |   | $ | 12,221 |   |   |   | $ | (39 | ) |   |   | $ | 11,953 |   |   |   | $ | 11,820 |   |   |   | $ | (133 | ) |   |

 

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Long-termheld-to-maturity investments reach maturity as follows:
|                               | ** ** | **Fiscal Year Ended** | ** ** | ** ** | ** ** |
|-------------------------------|------------|---------------------------------|------------|------------|------------|
| ** **                    | ** ** | **2008**                        | ** ** | **2009**   | ** ** | **2010** | ** ** | **Total** | ** ** |
| ** **                    | ** ** | **(in thousands)**         | ** ** |
| Government-backed  securities |       | $                               | 1,999      |       | $          | 5,995 |   | $ | 1,999 |   | $ | 9,936 |   |
| Certificates of  deposit      |       | 97                              |       | 2,170      |       | — |   | 2,267 |   |
|                          |       | $                               | 2,096      |       | $          | 8,165 |   | $ | 1,999 |   | $ | 12,260 |   |

 

**3.**                 Inventories

Inventories consist of thefollowing:

| ** **      | ** ** | **June 30,**       | ** ** | **July 1,** | ** ** |
|-----------------|------------|-------------------------|------------|------------------|------------|
| ** **      | ** ** | **2007**                | ** ** | **2006**         | ** ** |
| ** **      | ** ** | **(in thousands)** | ** ** |
| Raw materials   |       | $                       | 8,377      |             | $          | 5,936 |   |
| Work in process |       | 2,657                   |       | 1,151            |       |
| Finished goods  |       | 10,334                  |       | 9,579            |       |
|            |       | $                       | 21,368     |             | $          | 16,666 |   |

 

**4.**                 Propertyand Equipment

Propertyand equipment consist of the following:

| ** **                                       | ** ** | **June 30,**       | ** ** | **July 1,** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|------------------|------------|
| ** **                                       | ** ** | **2007**                | ** ** | **2006**         | ** ** |
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| Leasehold  improvements                          |       | $                       | 1,014      |             | $          | 920 |   |
| Office furniture                                 |       | 662                     |       | 603              |       |
| Computers,  software, and other equipment        |       | 10,044                  |       | 9,236            |       |
|                                             |       | $                       | 11,720     |             | $          | 10,759 |   |
| Less: accumulated  depreciation and amortization |       | (8,241                  | )          | (7,457           | )          |
| Property and  equipment, net                     |       | $                       | 3,479      |             | $          | 3,302 |   |

 

Depreciation expense wasapproximately $1.0 million, $0.6 million, and $0.8 million for the fiscal yearsended 2007, 2006 and 2005, respectively.

**5.**                 Acquisitions

On March 6, 2007, we acquired Inolase (2002) Ltd.(“Inolase”) a non-public company engaged in the development and manufacture ofproprietary devices for the aesthetic light-based treatment industry as well asthe development of intellectual property related to medical devices and lightsources. The aggregate purchase price was approximately $16.8 million incash, including $0.3 million of acquisition-related transaction costs. No Candelacommon stock was issued in the acquisition. The acquisition-relatedtransactions costs included legal, accounting, and other external costsdirectly related to the acquisition. Results of operations for Inolase havebeen included in the accompanying consolidated statement of operations sincethe date of acquisition.

This acquisition was accounted for as a businesscombination. Assets acquired and liabilities assumed were recorded as theirfair values as of March 6, 2007. The fair value of intangible assets werebased on valuations using an income approach, with estimates and assumptionprovided by management of Inolase and Candela. The excess of the purchase priceover the fair value of tangible assets, identified intangible assets, andliabilities assumed were recorded as goodwill.

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The agreement to purchase Inolase contains certainearn-out provisions and we are currently assessing the likelihood of theirattainment. If we conclude that the outcome of these contingencies isdeterminable beyond a reasonable doubt, and that they are directly attributableto the purchase price itself, such a conclusion would result in an adjustmentto goodwill and the establishment of an additional liability when thepurchase-price allocation is finalized. Our final evaluation may also concludethat these provisions are directly attributable to the purchase price itself,but that we are unable to presently calculate the additional future amounts tobe paid. If this is our conclusion, any future earn-out payments would representincreases to goodwill in the period(s) in which they are made. Thepurchase-price allocation is based upon the external valuation, but ispreliminary pending our final determination in the above-mentioned area.

Basedupon the valuations, the total purchase price was allocated as follows:

| ** **                                   | ** ** | **(in thousands)** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| Goodwill                                     |       |                    | $          | 10,997 |   |   |
| Identifiable  intangible assets              |       |                    | 7,433      |   |   |
| Inventory                                    |       |                    | 214        |   |   |
| Accounts  receivable & other assets |       |                    | 195        |   |   |
| Accounts payable  and accrued expenses       |       |                    | (248       | ) |   |
| Deferred tax liability                       |       |                    | (1,581     | ) |   |
| Other liabilities                            |       |                    | (201       | ) |   |
| Total preliminary  purchase price allocation |       |                    | $          | 16,809 |   |   |

 

Identifiable intangible assets acquired consisted ofpatents related to PSF and developed technology related to PSF. Core technologyrepresents a combination of Inolase’s processes, inventions and trade secretsrelated to the design and development of its products. Developed and coretechnologies totaled $7.4 million and are being amortized over 6 years.

None of the goodwill or intangible assets acquired inthe acquisition is deductible for income tax purposes. As a result, and inaccordance with SFAS 109, *Income Taxes*,we recorded in the purchase accounting a deferred tax liability of $1.6million, equal to the tax effect of the amount of the acquired intangibleassets other than goodwill.

This transaction resultedin $11.0 million of purchase price that exceeded the estimated fair values oftangible and intangible assets and liabilities, all of which was allocated togoodwill. We believe that such excess in purchase price for accounting purposeswas warranted by certain factors, including: 1) the potential to facilitateup-sell and cross-sell opportunities for our products with that of Inolase; 2)the potential to exploit reduced pain applications across our existing andfuture products; and 3) the potential to leverage Inolase intellectual propertyinto home use applications.

**6.**                 WarrantyReserve

Thefollowing table reflects changes in the Company’s accrued warranty accountduring the fiscal years ended June 30, 2007, July 1, 2006, and July2, 2005:

| ** **                            | ** ** | **2007**                | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                            | ** ** | **(in thousands)** | ** ** |
| Beginning balance                     |       | $                       | 9,629      |     | $          | 8,645    |       | $ | 8,257 |   |
| Incremental accruals on current sales |       | 5,722                   |       | 8,323    |       | 8,864    |       |
| Amortization of prior-period accruals |       | (7,738                  | )          | (7,339   | )          | (8,476   | )          |
| Ending balance                        |       | $                       | 7,613      |     | $          | 9,629    |       | $ | 8,645 |   |

 

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**7.**                 DeferredRevenue

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

Thefollowing table reflects changes in the Company’s deferred revenue during thefiscal year ended June 30, 2007 and July 1, 2006:

| ** **                                 | ** ** | **2007**                | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Beginning balance                          |       | $                       | 10,329     |     | $          | 8,350 |   |
| Deferral of new sales                      |       | 13,918                  |       | 11,892   |       |
| Recognition of previously deferred revenue |       | (10,496                 | )          | (9,913   | )          |
| Ending balance                             |       | $                       | 13,751     |     | $          | 10,329 |   |

 

Thefollowing table reflects the Company’s current and long-term portions ofdeferred revenues for the fiscal year ended June 30, 2007 and July 1,2006:

| ** **                             | ** ** | **2007**                | ** ** | **2006** | ** ** |
|----------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                             | ** ** | **(in thousands)** | ** ** |
| Total service  contract revenue        |       | $                       | 13,751     |     | $          | 10,329 |   |
| Less: current  portion                 |       | (10,000                 | )          | (8,342   | )          |
| Long-term pertion  of deferred revenue |       | $                       | 3,751      |     | $          | 1,987 |   |

 

**8.**                 Debt,Lease and Other Obligations

***Line of Credit.***   TheCompany has a renewable $10,000,000 revolving credit agreement with a majorbank with interest at the bank’s base rate or LIBOR plus 2.25 percent. Anyborrowings outstanding under the line of credit are due on demand or accordingto a payment schedule established at the time funds are borrowed. The line ofcredit is unsecured. The agreement contains restrictive covenants limiting theestablishment of new liens, and the purchase of margin stock. No amounts wereoutstanding under the line of credit as of June 30, 2007 or July 1,2006.

***Restricted Cash.***   Afinancing company used by customers has limited recourse with the Company on asmall number of product leases. As such, the Company has placed approximately$0.1 million and $0.2 million in restricted funds at this institution ascollateral as of June 30, 2007 and July 1, 2006, respectively. Thisrestricted cash represents the entire exposure under these agreements.

***Operating Lease Commitments.***   TheCompany leases several facilities and automobiles under non-cancelable leasearrangements. The facility leases may be adjusted for increases in maintenanceand insurance costs above specified levels. In addition, certain facilityleases contain escalation provisions based on certain inflationary indices.These operating leases expire in various years through fiscal year 2012. Theseleases may be renewed for periods ranging from one to five years.

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Outstandinglease commitments arereflected in the following table as of June 30, 2007:

| ** **                   | ** ** | **Amount**              | ** ** |
|------------------------------|------------|-------------------------|------------|
| ** **                   | ** ** | **(in thousands)** | ** ** |
| 2008                         |       |                    | $          | 1,690 |   |   |
| 2009                         |       |                    | 856        |   |   |
| 2010                         |       |                    | 326        |   |   |
| 2011                         |       |                    | 175        |   |   |
| 2012                         |       |                    | 18         |   |   |
| Thereafter                   |       |                    | —     |   |   |
| Total minimum lease payments |       |                    | $          | 3,065 |   |   |

 

Total rent expense was approximately $1.2 million,$0.9 million, and $1.4 million in fiscal years 2007, 2006, and 2005,respectively.

***Royalty.***   InAugust 2000, the Company obtained through an amended license agreement thewith Regents of the University of California (“Regents”), the exclusive licenserights to the Dynamic Cooling Device (‘DCD”)(subject to certain limited licenserights of Cool Touch, Inc. (“Cool Touch”)) in the following fields of use:procedures that involve skin resurfacing and rejuvenation, vascular skinlesions, and laser hair removal. Cool Touch, a subsidiary of New StarTechnology, Inc. obtained a license to the DCD on a co-exclusive basiswith the Company in certain narrower fields of use. Cool Touch is restricted inits ability to assign its license rights to certain existing competitors of theCompany. The Company is entitled to one-half of all royalty income payable tothe Regents from Cool Touch. Under the amended agreement, the Company no longeris 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 entitythat licenses the DCD technology from the Regents in other fields of use.

Effective July 3, 2005, the Company amendedcertain portions of their agreement with the Regents whereby for the annuallicense 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 lumpsum of $3.0 million and is being amortized over the remaining life of thepatent agreement, which as of June 30, 2007 was approximately eight years.This reduced royalty rate and the amortization of the annual license feepayment is reflected in the Company’s financial statements for fiscal years2007 and 2006, respectively. The unamortized portion of the license fee payment is reflected in prepaidlicenses in the June 30, 2007 and July 1, 2006 balance sheets,respectively. The Company recognized royalty expense of $3.4 million and$3.6 million for the fiscal years ended 2007 and 2006, respectively.

The Company recognized royalty expense of $9.2 millionfor fiscal 2005 based on the license agreement in effect with the Regentsduring the year then ended. Included in the fiscal 2005 expense of $9.2 millionwas $4.8 million of expense related to the Regents arbitration decision issuedin 2005. Of that $4.8 million, $1.3 million related to fiscal 2005, $3.0million related to fiscal 2004 and 0.5 million related to prior years.

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Theoutstanding contractual obligations relating to future minimum royaltiespayable to the Regents are reflected in the following table as of June 30,2007:

| ** **                      | ** ** | **(in thousands)** | ** ** |
|---------------------------------|------------|-------------------------|------------|
| 2008                            |       |                    | $          | 1,000 |   |   |
| 2009                            |       |                    | 1,000      |   |   |
| 2010                            |       |                    | 1,000      |   |   |
| 2011                            |       |                    | 250        |   |   |
| 2012                            |       |                    | 250        |   |   |
| Thereafter                      |       |                    | 750        |   |   |
| Total minimum  royalty payments |       |                    | $          | 4,250 |   |   |

 

**9.**                 Stockholders’Equity

**Stock Plans**

***1990 Candela Corporation Employee Stock Purchase Plan***

The 1990 Employee Stock Purchase Plan (the “PurchasePlan”) provides for the sale of up to 1.5 million shares of common stock toeligible employees. The shares are issued at 85% of the market price on thelast day of semi-annual periods. Substantially all full-time employees areeligible to participate in the Purchase Plan. At June 30, 2007 there wereapproximately 661 thousand shares available for sale.

Thefollowing is a summary of shares issued under the Purchase Plan:

| **Fiscal  Year** | ** ** | ** ** | ** ** | **Number  of Shares** | ** ** | **Per-share  Price Range** | ** **      |
|------------------|------------|------------|------------|----------------------------|------------|---------------------------------|-----------------|
| 2005             |       |       | 35,059     |                       |       | $                               | 8.50 to $9.00   |   |
| 2006             |       |       | 25,001     |                       |       | $                               | 12.50 to $13.25 |   |
| 2007             |       |       | 33,978     |                       |       | $                               | 10.00 to $10.75 |   |

 

***1998 Candela Corporation Stock Option Plans***

Effective October 5, 2005, the Second Amended andRestated 1998 Stock Plan (the “1998 Stock Plan”) was amended to clarify thegranting of incentive stock options, non-qualified stock options, and SARs.

Stock options provide the holder with the right topurchase common stock. The exercise price per share of “incentive stockoptions” within the meaning of Section 422 of the Internal Revenue Code of1986, as amended, granted under the 1998 Stock Plan may not be less than thefair market value per share of common stock on the date of grant. In the caseof an incentive stock option granted to an employee possessing more than 10% ofthe total combined voting power of all classes of stock of the Company, theexercise price per share may not be less than 110% of the fair market value pershare of common stock on the date of grant.

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

Options and rights grantedunder the 1998 Stock Plan become exercisable on the date of grant or ininstallments, as specified by a Committee established by the Board ofDirectors, and expire ten years from the date of the grant. The maximum numberof shares for which options and rights may be granted under the 1998 Stock Planwas increased by 2.5 million shares to 7.8 million by affirmative vote at theCompany’s Annual Meeting of Shareholders held December 12, 2006. Uponexercise of a SAR, only the net number of shares of common stock issued inconnection with such exercise shall be deemed “issued” for this purpose. TheCompany may satisfy the awards upon exercise with either newly-issued ortreasury shares.

***1990 and 1993 Candela Corporation Non-EmployeeDirector Stock Option Plans***

The 1990 and 1993 Non-Employee Director Stock OptionPlans (the “Non-Employee Director Plans,” collectively with the Stock OptionPlans, the “Plans”) provide for the issuance of options for the purchase of upto 180,000 and 240,000 shares of common stock, respectively. Under theNon-Employee Director Plans, each new director who is neither an employee noran officer upon becoming a director receives a one-time grant of an option to purchase20,000 shares of common stock at an exercise price equal to the fair marketvalue of the common stock on the date of grant. Under the 1990 and 1993Non-Employee Director Plans, options become exercisable in equal amounts over aperiod of four and two years, respectively. Shares under the Non-EmployeeDirector Plans expire four and ten years, respectively, after the date of grantand are nontransferable.

There were approximately 1.1 million stock based SARsgranted during the fiscal year ended June 30, 2007. The SARs granted toemployees become exercisable ratably over one to four years, while the SARsgranted to directors become exercisable over two years.

There were approximately 2.9 million outstandingoptions/SARs at June 30, 2007 with a weighted-average exercise price of$11.45 per share, an aggregate intrinsic value of approximately $0.4 million,and a weighted-average remaining contractual term of 8.0 years. None of theoptions/SARs outstanding at June 30, 2007 had cash settlement features.

There were approximately 1.5 million of exercisableoptions/SARs at June 30, 2007 with a weighted-average exercise price of$10.00 per share, an aggregate intrinsic value of approximately $2.3 million,and a weighted-average remaining contractual term of 6.85 years.

The total intrinsic value of options exercised duringthe fiscal years ended June 30, 2007 and July 1, 2006 wasapproximately $0.6 million and $17.0 million, respectively.

There were approximately 1.9 million options/SARsavailable to grant at June 30, 2007.

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

| ** **                     | ** ** | **Number of  Shares** | ** ** | **Option Prices** | ** ** | **Weighted  Exercise Price  per Share** | ** ** |
|--------------------------------|------------|----------------------------|------------|------------------------|------------|---------------------------------------------------|------------|
| Balance at  July 3, 2004  |       | 2,109,342                  |       |                   |       |                                              |       |   |   |   |   |   |   |
| Granted                        |       | 572,898                    |       | $                      | 8.00       |                                              | to         |   | $ | 12.33 |   |   | $ | 10.04 |   |   |
| Exercised                      |       | (156,527                   | )          | $                      | 1.08       |                                              | to         |   | $ | 9.90 |   |   | $ | 4.01 |   |   |
| Forfeited and  expired         |       | (41,153                    | )          | $                      | 2.57       |                                              | to         |   | $ | 10.93 |   |   | $ | 9.15 |   |   |
| Balance at  July 2, 2005  |       | 2,484,560                  |       |                   |       |                                              |       |   |   |   | $ | 7.48 |   |   |
| Granted                        |       | 550,000                    |       | $                      | 15.33      |                                              | to         |   | $ | 22.00 |   |   | $ | 15.69 |   |   |
| Exercised                      |       | (1,061,557                 | )          | $                      | 1.95       |                                              | to         |   | $ | 11.98 |   |   | $ | 6.97 |   |   |
| Forfeited and  expired         |       | (8,015                     | )          | $                      | 5.59       |                                              | to         |   | $ | 10.93 |   |   | $ | 10.33 |   |   |
| Balance at  July 1, 2006  |       | 1,964,988                  |       |                   |       |                                              |       |   |   |   |   |   |   |
| Granted                        |       | 1,115,000                  |       | $                      | 11.53      |                                              | to         |   | $ | 15.95 |   |   | $ | 12.15 |   |   |
| Exercised                      |       | (133,238                   | )          | $                      | 1.56       |                                              | to         |   | $ | 10.93 |   |   | $ | 3.68 |   |   |
| Forfeited and  expired         |       | (71,467                    | )          | $                      | 9.90       |                                              | to         |   | $ | 15.95 |   |   | $ | 15.18 |   |   |
| Balance at June 30,  2007 |       | 2,875,283                  |       |                   |       |                                              |       |   |   |   |   |   |   |

 

**10.**          IncomeTaxes

Thecomponents of income before income taxes and the related provision for (benefitfrom) income taxes consist of the following (in thousands):

| ** **                                                       | ** ** | **For the Year Ended** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                       | ** ** | **June 30,**                     | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| ** **                                                       | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Income from continuing  operations before income taxes:          |       |                                  |       |   |   |   |   |
| Domestic                                                         |       | $                                     | 7,684      |   | $ | 20,645 |   | $ | 7,075 |   |
| Foreign                                                          |       | 2,115                                 |       | 1,757 |   | 1,583 |   |
|                                                             |       | $ 9,799                          |       | $ | 22,402 |   | $ | 8,658 |   |
| Income (loss) from  discontinued operations before income taxes: |       |                                  |       |   |   |   |   |
| Domestic                                                         |       | $                                     | —     |   | $ | — |   | $ | 1,374 |   |
| Provision for (benefit  from) income taxes:                      |       |                                  |       |   |   |   |   |
| Current provision:                                               |       |                                  |       |   |   |   |   |
| Federal                                                          |       | $                                     | 2,488      |   | $ | 8,173 |   | $ | 2,101 |   |
| State                                                            |       | 244                                   |       | 735 |   | 193 |   |
| Foreign                                                          |       | 766                                   |       | 952 |   | 375 |   |
| Total current provision  or (benefit from) income taxes          |       | 3,498                                 |       | 9,860 |   | 2,669 |   |
| Deferred provision  (benefit)                                    |       |                                  |       |   |   |   |   |
| Federal                                                          |       | 319                                   |       | (1,409 | ) | 40 |   |
| State                                                            |       | 28                                    |       | (173 | ) | — |   |
| Foreign                                                          |       | (302                                  | )          | (810 | ) | — |   |
| Total deferred provision  or (benefit from) income taxes         |       | 45                                    |       | (2,392 | ) | 40 |   |
| Total provision for income taxes                                 |       | $                                     | 3,543      |   | $ | 7,468 |   | $ | 2,709 |   |

 

The components of the Company’s deferred tax assets andliabilities consist of the following:

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| ** **                                   | ** ** | **June 30,**       | ** ** | **July 1,** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|------------------|------------|
| ** **                                   | ** ** | **2007**                | ** ** | **2006**         | ** ** |
| ** **                                   | ** ** | **(in thousands)** | ** ** |
| Deferred Tax Asset—Current              |       |                    |       |             |       |   |   |
| Bad debt reserve                             |       |                    | $          | 489              |       |   | $ | 485 |   |
| Inventory valuation  reserves                |       |                    | 978        |             |       | 1,186 |   |
| Deferred revenue                             |       |                    | 990        |             |       | 1,657 |   |
| Total Deferred Tax  Asset—Current       |       |                    | $          | 2,457            |       |   | $ | 3,328 |   |
| Deferred Tax Asset—Noncurrent           |       |                    |       |             |       |   |   |
| Accrued warranty reserve                     |       |                    | $          | 2,381            |       |   | $ | 3,569 |   |
| Restructuring reserve                        |       |                    | 165        |             |       | 337 |   |
| Share-based compensation                     |       |                    | 2,214      |             |       | 604 |   |
| Depreciation &  amortization        |       |                    | 198        |             |       |   |   |
| Federal and state tax  credit carryforwards  |       |                    | 524        |             |       | 615 |   |
| Foreign net operating  losses                |       |                    | 708        |             |       | 220 |   |
| Other                                        |       |                    | 48         |             |       | 94 |   |
|                                         |       |                    | 638        |             |       | 5,430 |   |
| Less: Valuation reserve                      |       |                    | (92        | )                |       | (136 | ) |
| Total Deferred Tax  Asset—Noncurrent    |       |                    | $          | 6,146            |       |   | $ | 5,294 |   |
| Deferred Tax Liability—Noncurrent       |       |                    |       |             |       |   |   |
| Depreciation &  amortization        |       |                    | $          | 2,178            |       |   | $ | 480 |   |
| Deferred gain                                |       |                    | 481        |             |       | — |   |
| Total Deferred Tax Liability—Noncurrent |       |                    | $          | 2,659            |       |   | $ | 480 |   |

 

As of June 30, 2007, the Company has no valuationallowance against the deferred tax asset in the United States. A valuationallowance of approximately $0.1 million has been established in Israel. Inaccounting for the deferred tax asset, the Company has relied on historicaldata to determine the necessity of providing a valuation allowance. Under therequirements of SFAS No. 109, “Accounting for Income Taxes”, the Companybelieves it is more likely than not that the deferred tax asset, unlessotherwise noted, will be fully utilized against future income taxes. 

At June 30, 2007, the Company had availableresearch and development tax credits of approximately $0.5 million for stateincome tax purposes:
| **(in  thousands)** | ** ** | ** ** | ** ** | **Available** | ** ** | **Expires** | ** ** |
|---------------------|------------|------------|------------|---------------|------------|-------------|------------|
| Fiscal 2000         |       |       | $          | 286           |       |        | June 2015  |   |
| Fiscal 2002         |       |       | 167        |          |       | June 2017   |       |
| Fiscal 2003         |       |       | 26         |          |       | June 2018   |       |
| Fiscal 2005         |       |       | 39         |          |       | June 2020   |       |
| Total               |       |       | $          | 518           |       |        |       |   |

 

AtJune 30, 2007, the Company had the following foreign net operating lossesavailable to it:
|            | ** ** | **Available**           | ** ** | **Expires** | ** ** |
|------------|------------|-------------------------|------------|-------------|------------|
| ** ** | ** ** | **(in thousands)** | ** ** | ** **  | ** ** |
| Germany    |       |                    | $          | 987         |       |   | No Expiration |   |
| Italy      |       |                    | 10         |        |       | Fiscal 2011 |   |
| Israel     |       |                    | 1,227      |        |       | No Expiration |   |
| Australia  |       |                    | 19         |        |       | No Expiration |   |
| Total      |       |                    | $          | 2,243       |       |   |   |   |

 

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No amount for U.S. incometax has been provided on undistributed earnings of the Company’s foreignsubsidiaries because the company considers the approximately $5.1 million ofaccumulated foreign earnings to be indefinitely reinvested. In the event ofdistribution of those earnings in the form of dividends or otherwise, theCompany would be subject to both U.S. income taxes, subject to an adjustment,if any, for foreign tax credits and foreign withholding taxes payable tocertain foreign tax authorities. Determination of the amount of U.S income taxliability that would be incurred is not practicable because of the complexitiesassociated with this hypothetical calculation; however, unrecognized foreigntax credits carry forwards may be available to reduce some portion of the U.S.tax liability, if any.

**11.   Segment,Geographic and Major Customer Information**

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

***Geographic data***

Geographicinformation for fiscal 2007, 2006 and 2005 is as follows (in thousands):

| ** **                                       | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Revenue:                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States                                    |       | $          | 96,214     |       | $          | 105,273    |       | $ | 85,243 |   |
| Intercompany                                     |       | 27,039     |       | 21,612     |       | 20,460     |       |
|                                             |       | 123,253    |       | 126,885    |       | 105,703    |       |
| Japan                                            |       | 20,333     |       | 20,586     |       | 19,550     |       |
| Spain                                            |       | 21,322     |       | 15,913     |       | 12,242     |       |
| Germany                                          |       | 3,162      |       | 3,088      |       | 3,540      |       |
| France                                           |       | 4,502      |       | 3,404      |       | 3,326      |       |
| Italy                                            |       | 2,033      |       | 1,202      |       | —     |       |
| Israel                                           |       | 858        |       | —     |       | —     |       |
| Australia                                        |       | 133        |       | —     |       | —     |       |
|                                             |       | 175,596    |       | 171,078    |       | 144,361    |       |
| Elimination                                      |       | (27,039    | )          | (21,612    | )          | (20,460    | )          |
| Consolidated total                               |       | $          | 148,557    |       | $          | 149,466    |       | $ | 123,901 |   |
| Income (loss)  from operations:                  |       |       |       |       |       |       |       |
| United States                                    |       | $          | 3,321      |       | $          | 20,057     |       | $ | 7,390 |   |
| Europe                                           |       | 996        |       | 861        |       | 763        |       |
| Japan                                            |       | 1,260      |       | 906        |       | 626        |       |
| All others                                       |       | (354       | )          |       |       |       |       |
| Elimination                                      |       | (1,868     | )          | (1,151     | )          | (688       | )          |
| Consolidated total                               |       | $          | 3,355      |       | $          | 20,673     |       | $ | 8,091 |   |
| Geographic  identification of long-lived assets: |       |       |       |       |       |       |       |
| United States                                    |       | $          | 3,002      |       | $          | 2,979      |       | $ | 3,028 |   |
| All others                                       |       | 477        |       | 323        |       | 212        |       |
| Consolidated  total                              |       | $          | 3,479      |       | $          | 3,302      |       | $ | 3,240 |   |

 

United States revenueincludes export sales to unaffiliated companies located principally in Europe,the Asia-Pacific region and Latin America, which approximated $31.9 million,$35.9 million, and $27.7 million in fiscal years 2007, 2006, and 2005,respectively. 

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**12.   EmployeeBenefit Plans**

The Company offers a 401(k) Plan which allows eligibleUnited States employees to make tax-deferred contributions, a portion of whichare matched by the Company. The Company may make discretionary matchingcontributions to the Plan in an amount determined by its Board of Directors.Company contributions vest ratably with three years of employment and amountedto $0.5 million, $0.4 million, and $0.3 million for the fiscal years ended2007, 2006, and 2005, respectively.

**13.   DiscontinuedOperations**

On September 27, 2003management initiated a plan to close its only remaining skin care center. Theclosure is accounted for as a discontinued operation in accordance withStatement of Financial Accounting Standards (“SFAS”) 144, “*Accounting forthe Impairment or Disposal of Long-Lived Assets*” and SFAS 146, “*Accounting for Costs Associated with Exit or Disposal Activities*”.As a result, in fiscal year 2004, we recorded a $2.1 million charge for theaccrual of $3.0 million of future occupancy costs, primarily relating to futurelease payments for the Boston facility, and $0.4 million of severanceobligations and other related costs of closure, net of anticipated tax benefitsof $1.3 million. 

During fiscal year 2005,the landlord for the Boston facility secured a sublease for that property. Thesub-lessee commenced making payments to the landlord in December of 2004. As aresult of these and future payments scheduled under the sublease, we revisedthe estimated future costs associated with the Boston facility and, in thefiscal year 2005, reversed approximately $0.9 million of the restructuringreserve. This reversal represents the aforementioned anticipated economicbenefit due to sub-lessee payments of $1.7 million, net of legal and other feesof approximately $0.3 million and income taxes of approximately $0.5 million. 

At June 30, 2007, the discontinued segment had a netliability of approximately $1.3 million consisting primarily of theaforementioned reserve of approximately $0.4 million and deferred giftcertificate revenue of approximately $0.9 million. There were no revenues fromdiscontinued operations in fiscal 2007, fiscal 2006, or fiscal 2005.

**14.   LegalProceedings**

TheCompany is currently involved in three litigation matters with Palomar MedicalTechnologies, Inc. (“Palomar”). 

·       OnAugust 9, 2006, Palomar filed suit against the Company in the United StatesDistrict Court for the District of Massachusetts, asserting willfulinfringement by the Company of U.S. Patent No. 5,735,844. Palomar seekscompensatory and treble damages, as well as attorneys’ fees and injunctiverelief. In November, 2006, the Company answered the complaint by denyingPalomar’s allegations and asserting a variety of affirmative defenses andcounterclaims against Palomar. This response included a counterclaim by theCompany against Palomar seeking a declaratory judgment that United Statespatent No. 5,595,568 (“the ‘568 Patent”) is either invalid, or productsmanufactured by the Company do not infringe the ‘568 Patent, or both. InNovember, 2006, Palomar filed an answer denying the Company’s counterclaim. InFebruary, 2007, Palomar moved to amend its Complaint to add The GeneralHospital Corporation as a party, to add a claim for infringement by Candela ofthe ‘568 patent, and to allege that additional Candela products infringe the ‘568Patent. Palomar’s motion to amend its Complaint was granted in August of 2007.In February of 2007, Candela moved to amend its Answer and Counterclaims to addallegations of inequitable conduct, double-patenting and violation of Mass.Gen. Laws Ch. 93A by Palomar. The Company’s motion to amend its complaint wasgranted in March of 2007. Palomar filed a general denial response to Candela’sAmended Answer and Counterclaim in March of 2007. In August of 2007, theparties had a Markman hearing before the U.S. District Court Judge presidingover the above-described legal proceeding. In a Markman hearing, the Courtinterprets the definition of the disputed claim term of 

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a patent. Theparties are presently in the midst of pre-trial fact discovery which shall endon December 31, 2007.

·       OnAugust 10, 2006, the Company filed suit against Palomar in the United StatesDistrict Court for the District of Massachusetts, asserting willfulinfringement by Palomar of U.S. Patent Nos. 6,659,999, 5,312,395, and6,743,222. The Company seeks compensatory and treble damages for the patentinfringement, as well as attorneys’ fees and an injunction against Palomar toprevent Palomar’s continuing infringement. The Company served its complaint onPalomar in August, 2006. In October, 2006, the Company amended the Company’ssuit against Palomar by removing from the suit allegations that Palomarinfringes Patent 6,659,999. In October, 2006, Palomar answered the Company’s amendedcomplaint by denying the Company’s allegations and asserting an affirmativedefense of inequitable conduct with respect to the ‘395 patent. In addition,Palomar filed a demand for a declaratory judgment seeking a judicialdetermination that Palomar products either do not infringe the ‘395 and ‘222patents or that such patents are invalid. In November, 2006, the Companyanswered the counterclaim by denying Palomar’s allegations. The parties are inthe midst of pre-trial fact discovery.

·       InDecember, 2006, the Company filed suit against Palomar in the United StatesDistrict Court for the Eastern District of Texas, Lufkin Division, assertingthat Palomar infringes one or more claims of United States patents Nos:5,810,801, 6,659,999 and 6,120,497. The Company seeks compensatory and trebledamages for past infringement, as well as attorneys’ fees and an injunctionagainst Palomar from future infringement. In January, 2007, Palomar answeredthe complaint by denying the Company’s allegations and filing a declaratoryjudgment motion seeking a court ruling that it does not infringe such patentsand/or that such patents are invalid. In addition, Palomar filed a motion totransfer the case to the United States District Court for the District ofMassachusetts. In February, 2007, the Company added Massachusetts GeneralHospital as a party to its action. The Court denied Palomar’s motion totransfer the case to Massachusetts. The parties are in the midst of pre-trialfact discovery. 

While the Company intends to vigorouslycontest Palomar’s allegations, and to pursue its ownclaims against Palomar, each lawsuit is inherently uncertain andunpredictable as to its ultimate outcome. An adverse outcomein Palomar’s suit against the Company would materially hurt theCompany’s business, financial condition, results of operations and cash flows.In contrast, an adverse outcome in either of the two lawsuits which the Companyhas initiated against Palomar would not likely have a material adverse effecton the business or financial condition of the Company.

**15.   OtherIncome**

During the fiscal yearended June 30, 2007, the Company recognized a $3.5 million gain on the exchangeof 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., aprivately-held company, by OccuLogix, Inc., a publicly traded company. TheCompany held 19.99% of the outstanding common stock of Solx Inc. on anas-converted basis, prior to the merger with an associated book value of $0. 

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

The future cashconsideration of approximately $2.5 million is to be paid in the followinginstallments: $0.6 million in August 2007, $0.9 million in August 2008, and$1.0 million upon the achievement of a contingent event as specified in thetransaction agreement. Due to the inherent uncertainty associated with thecollection of the future cash consideration, Candela did not record the gainrelated to the $2.5 million. The Company will record such future receipts asgains in the periods in which the remaining cash payments are actuallyreceived.

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The value of the shares ofOccuLogix, Inc. is included in Candela’s marketable securities at June 30, 2007as they are considered available-for-sale securities in accordance withSFAS 115. In accordance with the guidance provided by SFAS 115,Candela adjusted the value of this investment to its market value ofapproximately $1.3 million at June 30, 2007 and recorded the associatedunrealized loss, net of related tax effects, as a separate component ofaccumulated other comprehensive income.

**16.   Quarterly Results of Operations (unaudited)**

| ** **                  | ** ** | **Quarter Ended**                                        | ** ** |
|-----------------------------|------------|---------------------------------------------------------------|------------|
| **2007**                    | ** ** | ** **                                                    | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **                  | ** ** | **(in thousands, except per-share data)** | ** ** |
| Revenue                     |       | $                                                             | 33,474     | * | $ | 37,406 |   | $ | 38,690 |   | $ | 38,987 |   |
| Gross profit                |       | 17,425                                                        |       | 17,778 |   | 19,740 |   | 20,120 |   |
| Net income                  |       | 4,419                                                         |       | 1,024 |   | 1,540 |   | (727 | ) |
| Earnings per common  share: |       |                                                          |       |   |   |   |   |   |   |
| Basic                       |       | $                                                             | 0.19       |   | $ | 0.04 |   | $ | 0.07 |   | $ | (0.03 | ) |
| Diluted                     |       | $                                                             | 0.18       |   | $ | 0.04 |   | $ | 0.07 |   | $ | (0.03 | ) |
|                             |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

----

*                    Includes$3.5 million gain on exchange of Solx, Inc. common stock. See Note 15.

| ** **                  | ** ** | **Quarter Ended** | ** ** |
|-----------------------------|------------|------------------------|------------|
| **2006**                    | ** ** | ** **             | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **                  | ** ** | ** **             | ** ** | **(in thousands, except per-share data)** | ** ** |
| Revenue                     |       | $                      | 28,087     |   | $ | 37,720 |   | $ | 42,314 |   | $ | 41,345 |   |
| Gross profit                |       | 14,552                 |       | 18,975 |   | 21,398 |   | 18,923 |   |
| Net income                  |       | 3,017                  |       | 4,510 |   | 5,003 |   | 2,404 |   |
| Earnings per common  share: |       |                   |       |   |   |   |   |   |   |
| Basic                       |       | $                      | 0.13       |   | $ | 0.20 |   | $ | 0.22 |   | $ | 0.10 |   |
| Diluted                     |       | $                      | 0.13       |   | $ | 0.19 |   | $ | 0.21 |   | $ | 0.10 |   |
|                             |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 9.   Changesin and Disagreements with Accountants on Accounting and Financial Disclosure.**

Not Applicable

**Item 9A.   Controlsand Procedures.**

(a) EVALUATION OFDISCLOSURE CONTROLS AND PROCEDURES 

We have establisheddisclosure controls and procedures (“Disclosure Controls”) to ensure thatinformation required to be disclosed in the Company’s reports filed under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in the U.S. Securities andExchange Commission’s rules and forms. Disclosure Controls are also designed toensure that such information is accumulated and communicated to management,including the CEO and CFO, as appropriate to allow timely decisions regardingrequired disclosure. Our Disclosure Controls were designed to providereasonable assurance that the controls and procedures would meet theirobjectives. Our management, including the Chief Executive Officer and PrincipalFinancial Officer, realizes that no control system can prevent allpossibilities of error or fraud. A control system, no matter how well designedand operated, can provide only reasonable assurance of achieving the designedcontrol objectives and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.Because of the inherent limitations in all control systems, no evaluation ofcontrols can provide absolute assurance that all control issues and instancesof fraud, if any, within the Company have been detected. These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns can occur because of simple error or mistake.Additionally, controls can be circumvented by the individual acts of somepersons, by collusions of two or more people, 

71

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or bymanagement override of the control. Because of the inherent limitations in acost-effective, maturing control system, misstatements due to error or fraudmay occur and not be detected.

As ofthe end of the period covered by this Form 10-K, management, with theparticipation of the Chief Executive Officer and Principal Financial Officer,has performed an evaluation of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of1934). This evaluation included consideration of the controls, processes andprocedures that comprise our internal control over financial reporting. Basedon such evaluation, our Chief Executive Officer and Principal Financial Officerconcluded that, as of June 30, 2007, our disclosure controls and procedureswere effective to provide reasonable assurance that information required to bedisclosed by us in the reports that we file under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms and that such information is accumulatedand communicated to our management as appropriate to allow timely decisionsregarding required disclosure.

(b) MANAGEMENT’S REPORT ONINTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting, as such term is defined in Exchange Act Rules 13a-15(f). Under thesupervision and with the participation of management, including our ChiefExecutive Officer and Chief Financial Officer, we conducted an evaluation ofthe effectiveness of our internal control over financial reporting as of June 30,2007, based on the framework in “Internal Control—Integrated Framework” issuedby the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).We have excluded fromour evaluation, the internal control over financial reporting of Inolase (2002)Ltd, which was acquired on March 6, 2007 and is included in the fiscalyear 2007 consolidated financial statements of Candela Corporation since thedate of acquisition, and constituted 11% of the consolidated assets as ofJune 30, 2007, and less than 1% of consolidated revenue for the year thenended.

Based on our assessment,management determined that no material weakness existed in the Company’sinternal controls over financial reporting as of June 30, 2007. Inaddition, based on such assessment, our Chief Executive Officer and ChiefFinancial Officer concluded that, as of June 30, 2007, our disclosurecontrols and procedures were effective to provide reasonable assurance thatinformation required to be disclosed by us in the reports that we file underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms andthat such information is accumulated and communicated to our management asappropriate to allow timely decisions regarding required disclosure.

TheCompany’s external auditors, BDO Seidman, LLP, an independent registered publicaccounting firm, have issued an audit report on their assessment of the Company’sinternal control over financial reporting.

(c) CHANGES IN INTERNALCONTROL OVER FINANCIAL REPORTING 

Therewas no change in our internal control over financial reporting (as definedunder Rule 13a-15(f) under the Exchange Act) during our fourth quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting. 
| /s/ GERARD PUORRO                |                              | /s/ ROBERT E.  QUINN |
|----------------------------------|-----------------------------------|----------------------|
| Gerard Puorro                    | Robert E. Quinn                   |
| *President  and Chief Executive* | *Treasurer, Corporate Controller* |
|                             | *and Principal Financial Officer* |

 

September 12, 2007

**Item 9B.**   Other Information

None.

72

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**Part III**

Anything herein to thecontrary notwithstanding, in no event are the sections entitled “StockPerformance Graph”, “Compensation Committee Report on Executive Compensation”and “Audit Committee Report” to be incorporated by reference herein from theCompany’s definitive proxy statement for the Company’s 2007 annual meeting ofstockholders.

**Item10.**                 Directors andExecutive Officers of the Registrant.

The information requiredby this item concerning the directors and executive officers of the Company isincorporated by reference herein from the information contained in the sectionentitled “Occupations of Directors and Executive Officers” in our definitiveproxy statement (the “Definitive Proxy Statement”) for the 2007 annual meetingof stockholders to be filed with the Securities and Exchange Commission within120 days after the end of Candela’s fiscal year ended June 30,2007.

The information requiredby this item concerning compliance with Section 16(a) of the ExchangeAct required under this item is incorporated herein by reference from theinformation contained in the section entitled“Section 16(a) Beneficial Ownership Reporting Compliance” in theDefinitive Proxy Statement.

The information requiredby this item concerning the Company’s Code of Ethics that applies to alldirectors, officers, and employees of the Company is incorporated by referencefrom the information contained in the section entitled “Code of BusinessConduct and Ethics” in the Definitive Proxy Statement.

The information required concerningthe Company’s audit committee is incorporated by reference from the informationcontained in the section entitled “Meetings of the Board of Directors andCommittees Thereof” in the Definitive Proxy Statement.

**Item11.**                 ExecutiveCompensation.

The information requiredby this item concerning executive compensation is incorporated herein byreference from the information contained in the section entitled “Compensationand Other Information Concerning Directors and Officers” in the DefinitiveProxy Statement.

The information requiredby this item concerning securities authorized for issuance under the equitycompensation plans is incorporated by reference from the information containedin the section entitled “Equity Compensation Plan Information” in thedefinitive Proxy Statement.

**Item12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.

The information requiredby this item concerning security ownership of certain beneficial owners andmanagement is incorporated herein by reference from the information containedin the section entitled “Security Ownership of Certain Beneficial Owners andManagement” in the Definitive Proxy Statement.

**Item13.**                 CertainRelationships and Related Transactions.

The information requiredby this item concerning certain relationships and related transactions isincorporated herein by reference from the information contained in the sectionentitled “Certain Relationships and Related Transactions” in the DefinitiveProxy Statement.

The information requiredconcerning director independence is incorporated by reference from theinformation contained in the section entitled “Meetings of the Board ofDirectors and Committees Thereof” in the Definitive Proxy Statement.

**Item14.**                 Principal AccountantFees and Services.

The information requiredby this item concerning principal accountant fees and services isincorporated herein by reference from the information contained in the sectionentitled “Principal Accountant Fees and Services” in the Definitive ProxyStatement.

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**SCHEDULE IICANDELA CORPORATIONValuation and Qualifying AccountsFor the years ended June 30, 2007, July 1, 2006, and July 2,2005**

| ** **                                          | ** ** | **Balance at**     | ** ** | **Additions**       | ** ** | **Deductions** | ** ** | **Balance at** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|---------------------|------------|----------------|------------|---------------------|------------|
| ** **                                          | ** ** | **Beginning**           | ** ** | **Charged to** | ** ** | **from**       | ** ** | **End of**     | ** ** |
| ** **                                          | ** ** | **of Period**      | ** ** | **Income**          | ** ** | **Reserves**   | ** ** | **Period**          | ** ** |
| ** **                                          | ** ** | **(In thousands)** | ** ** |
| Reserves deducted from  assets to which they apply: |       |                    |       |                |       |           |       |                |       |   |   |   |   |   |   |
| Allowance for  doubtful accounts:                   |       |                    |       |                |       |           |       |                |       |   |   |   |   |   |   |
| Year ended June 30, 2007                       |       |                    | $          | 1,830               |       |           |       | $                   | 989        |   |   |   | $ | 1,407 |   |   | $ | 1,412 |   |
| Year ended July 1, 2006                        |       |                    | 2,065      |                |       |           | 1,241      |                |       |   | 1,475 |   |   | 1,831 |   |
| Year ended July 2, 2005                        |       |                    | 1,492      |                |       |           | 2,806      |                |       |   | 2,233 |   |   | 2,065 |   |
| Reserve for  inventory                              |       |                    |       |                |       |           |       |                |       |   |   |   |   |   |   |
| Year ended June 30, 2007                       |       |                    | $          | 624                 |       |           |       | $                   | 408        |   |   |   | $ | 62 |   |   | $ | 970 |   |
| Year ended July 1, 2006                        |       |                    | 520        |                |       |           | 536        |                |       |   | 432 |   |   | 624 |   |
| Year ended July 2, 2005                        |       |                    | 490        |                |       |           | 525        |                |       |   | 495 |   |   | 520 |   |
| Reserve for  discontinued operations                |       |                    |       |                |       |           |       |                |       |   |   |   |   |   |   |
| Year ended June 30, 2007                       |       |                    | $          | 447                 |       |           |       | $                   | —     |   |   |   | $ | — |   |   | $ | 447 |   |
| Year ended July 1, 2006                        |       |                    | 995        |                |       |           | —     |                |       |   | 548 |   |   | 447 |   |
| Year ended  July 2, 2005                       |       |                    | 3,006      |                |       |           | —     |                |       |   | 2,011 |   |   | 995 |   |

 

74

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**Part IV**

**Item 15.**                 Exhibits,Financial Statement Schedules, and Reports on Form 8-K.

(a)           The followingConsolidated Financial Statements, Notes thereto and Report of IndependentRegistered Public Accounting Firm are set forth under Item 8:

| (1)   Consolidated Financial Statements:                                                                                        |   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Report of Registered  Independent Public Accounting Firm                                                                                  |   | 43     |
| Consolidated  Balance Sheets—July 1, 2006 and July 2, 2005                                                                 |   | 46     |
| Consolidated  Statements of Income and Comprehensive Income Years ended July 1, 2006,  July 2, 2005, and July 3, 2004 |   | 47     |
| Consolidated  Statements of Stockholders’ Equity—Years ended July 1, 2006,  July 2, 2005, and July 3, 2004  |   | 48     |
| Consolidated  Statements of Cash Flows—Years ended July 1, 2006, July 2, 2005,  and July 3, 2004                 |   | 49     |
| Notes to Consolidated  Financial Statements                                                                                               |   | 50     |
| (2)   Consolidated Financial Statement Schedules:                                                                               |   |   |
| Schedule II—Valuation and Qualifying Accounts                                                                                        |   | 74     |

 

All other financialstatements and schedules not listed have been omitted since the requiredinformation is included in the consolidated financial statements or the notesthereto, or is not applicable, material, or required.

(3)   *Exhibits*: Except as otherwise noted, the following documentsare incorporated by reference from the Company’s Registration Statement on Form S-1 (FileNumber 333-78339) or filed herewith:
| 3.1        |   | Certificate of Incorporation, as amended                                                                                                       |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2(9)     |   | By-laws of the Company, as amended and restated                                                                                                |
| 10.1(1)    |   | 1985 Incentive Stock Option Plan                                                                                                               |
| 10.2(2)    |   | 1987 Stock Option Plan                                                                                                                         |
| 10.2.1(2)  |   | 1989 Stock Plan                                                                                                                                |
| 10.2.2(3)  |   | 1990 Employee Stock Purchase Plan                                                                                                              |
| 10.2.3(3)  |   | 1990 Non-Employee Director Stock Option Plan                                                                                                   |
| 10.2.4(7)  |   | 1993 Non-Employee Director Stock Option Plan                                                                                                   |
| 10.2.5(13) |   | 1998 Amended and Restated Stock Plan                                                                                                           |
| 10.2.6(18) |   | 1998 Second Amended and Restated Stock Plan                                                                                                    |
| 10.3(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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| 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. Puorro                                                                                          |
| 21.1**       |   | Subsidiaries of the Company                                                                                                                                                                                               |
| 23.1**       |   | Consent of BDO Seidman, LLP (Independent Registered  Public Accounting Firm)                                                                                                                                              |
| 31.1**       |   | Rule 13a-14(a)/15d-14(a) Certification of  Chief Executive Officer                                                                                                                                              |
| 31.2**       |   | Rule 13a-14(a)/15d-14(a) Certification of  Chief Financial Officer                                                                                                                                              |
| 32.1**       |   | Section 1350 Certification of Chief Executive  Officer                                                                                                                                                               |
| 32.2**       |   | Section 1350 Certification of Chief Financial  Officer                                                                                                                                                               |
| 99.1(16)     |   | McKesson Medical-Surgical Inc. Distribution  Agreement                                                                                                                                                                    |
| 99.2(17)     |   | First Amendment to the Amended and Restated License  Agreement by and between The Regents of the University of California and  Candela Corporation                                                                        |

----

*                    Portions ofthe exhibit have been omitted and filed separately with the SEC in relianceupon the Company’s request for confidential treatment pursuant toRule 24b-2.

**             Filed herewith

(1)          Previously filed as anexhibit to Registration Statement No. 33-54448B and incorporated herein byreference.

(2)          Previously filed as anexhibit to the Company’s Amended and Restated Annual Report on Form 10-Kfor the fiscal year ended June 30, 1988 (Commission file number000-14742), and incorporated herein by reference.

(3)          Previously filed as anexhibit to the Company’s Annual Report on Form 10-K for the fiscal yearended June 30, 1990 (Commission file number 000-14742), and incorporatedherein by reference.

(4)          Previously filed as anexhibit to Form 10-Q for the quarter ended December 29, 1990(Commission file number 000-14742), and incorporated herein by reference.

(5)          Previously filed as anexhibit to Form 10-Q for the quarter ended September 28, 1991(Commission file number 000-14742), and incorporated herein by reference.

(6)          Previously filed as anexhibit to Form 8-K, dated September 8, 1992 (Commission file number 000-14742),and incorporated herein by reference.

(7)          Previously filed as anexhibit to the Company’s Annual Report on Form 10-K for the fiscal yearended July 3, 1993 (Commission file number 000-14742), and incorporatedherein by reference.

76

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(8)          Previously filed as anexhibit to Form 10-Q for the quarter ended January 1, 1994(Commission file number 000-14742), and incorporated herein by reference.

(9)          Previously filed as anexhibit to Form 10-Q for the quarter ended April 2, 1994 (Commissionfile number 000-14742), and incorporated herein by reference.

(10) Previously filed as an exhibit to the Company’s Annual Report onForm 10-K for the fiscal year ended July 2, 1994 (Commission filenumber 000-14742), and incorporated herein by reference.

(11) Previously filed as an S1 filed on May 12, 1999 (Commissionfile number 333-78339), and incorporated herein for reference.

(12) Previously filed as an exhibit to the Company’s Amended and RestatedAnnual Report on Form 10-K for the fiscal year ended June 27, 1998(Commission file number 000-14742), and incorporated herein by reference.

(13) Previously filed as Appendix A to the Company’s Schedule 14A, filedDecember 28, 2002, and incorporated herein by reference.

(14) Previously filed as an exhibit to Form 10-Q for the quarterended March 31, 2001 (Commission file number 000-14742), and incorporatedherein by reference.

(15) Previously filed as an exhibit to Form 10-K for the fiscal yearended July 1, 2000 (Commission file number 000-14742), and incorporated byreference.

(16) Previously filed as an exhibit to Form 10-K for the fiscal yearended July 2, 2005 and incorporated by reference.

(17) Previously filed as an exhibit to Form 10-Q for the fiscalquarter ended December 31, 2005 and incorporated by reference.

(18) Previously filed as an exhibit to Form 10-Q for the quarterended March 31, 2007 (Commission File number          ), and incorporatedherein by reference.

(c)           The Company herebyfiles, as part of this Form 10-K, the exhibits listed in Item15(a)(3) above, other than exhibits 32.1 and 32.2, which the Companyhereby furnishes.

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

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**SIGNATURES**

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, on September 12, 2007.
|        | CANDELA  CORPORATION |
|--------|----------------------|
|   | By:                  | /s/ GERARD E. PUORRO |
|   |                 | Gerard E. Puorro, |
|   |                 | *President, Chief Executive Officer and Director* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
|                          | **Signature** | ** **                       | ** ** | ** **               | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|--------------------------|---------------|----------------------------------|------------|--------------------------|-----------|------------|------------|------------|----------|------------|
|                     |          |                             |       |                     |
| /s/ GERARD E. PUORRO     |          | President, Chief  Executive      |       | September 12,  2007 |
| Gerard E. Puorro         |          | Officer, and Director            |       |                     |
|                     |          | (Principal Executive Officer)    |       |                     |
| /s/ ROBERT E. QUINN      |          | Treasurer,  Corporate Controller |       | September 12, 2007  |
| ROBERT E. QUINN          |          | Principal Financial Officer      |       |                     |
| /s/ KENNETH D. ROBERTS   |          | Chairman of the Board of         |       | September 12, 2007  |
| Kenneth D. Roberts       |          | **Directors**                    |       |                     |
| /s/ NANCY NAGER          |          | Director                         |       | September 12, 2007  |
| Nancy Nager              |          |                             |       |                     |
| /s/ DOUGLAS W. SCOTT     |          | Director                         |       | September 12, 2007  |
| Douglas W. Scott         |          |                             |       |                     |
| /s/ BEN BAILEY, III |          | Director                         |       | September 12, 2007  |
| Ben Bailey, III     |          |                             |       |                     |
| /s/ GEORGE ABE           |          | Director                         |       | September 12, 2007  |
| George Abe               |          |                             |       |                     |

 

78

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**EXHIBIT INDEX**
| 21.1 |   | Subsidiaries of the Company                                                   |
|------|--------|-------------------------------------------------------------------------------|
| 23.1 |   | Consent of BDO Seidman,  LLP, Independent Registered Public Accounting Firm   |
| 31.1 |   | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 |   | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 |   | Certification pursuant  to 18 U.S.C. Section 1350                        |
| 32.2 |   | Certification pursuant  to 18 U.S.C. Section 1350                        |

 

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