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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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FORM 10-Q

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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 30, 2002.

Commission file number 0-14742

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

Delaware

04-2477008(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer Identification No.)530 Boston Post Road, Wayland, Massachusetts

01778(Address of principal executive offices)

(Zip code)


Registrant's telephone number, including area code:(508) 358-7400

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

Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

|Class                        |  | Outstanding at May 7, 2002
|---------------------------- |  | --------------------------
|Common Stock, $.01 par value |  | 9,704,944                 

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CANDELA CORPORATION  Index

|         |  |                        |  |                                                                                                                                                                              |  | Page(s)
|-------- |  | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------
|Part I.  |  | Financial Information: |  |                                                                                                                                                                             
|         |  | Item 1.                |  | Unaudited Condensed Consolidated Balance Sheets as of March 30, 2002 and June 30, 2001                                                                                       |  | 3      
|         |  |                        |  | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three-month and nine-month periods ended March 30, 2002 and March 31, 2001 |  | 4      
|         |  |                        |  | Unaudited Condensed Consolidated Statements of Cash Flows for the three-month and nine-month periods ended March 30, 2002 and March 31, 2001                                 |  | 5      
|         |  |                        |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                               |  | 6-9    
|         |  | Item 2.                |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                                        |  | 10-15  
|         |  |                        |  | Cautionary Statements                                                                                                                                                        |  | 15-16  
|         |  | Item 3.                |  | Quantitative and Qualitative Disclosure about Market Risk                                                                                                                    |  | 17     
|Part II. |  | Other Information:     |  |                                                                                                                                                                             
|         |  | Item 1.                |  | Legal proceedings                                                                                                                                                            |  | 18     
|         |  | Item 6.                |  | Exhibits and Reports on Form 8-K                                                                                                                                             |  | 18     

2

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Part I. Financial Information

Item 1Financial Statements

CANDELA CORPORATION  Condensed Consolidated Balance Sheets(in thousands)  (unaudited)

|                                      |                                      | March 30,
2002                             |       | June 30,
2001 |       
|------------------------------------- | ------------------------------------ | ------------------------------------------ | ----- | ------------- | ------
|Assets                                |                                      |                                            |       |               |       
|Current assets:                       |                                      |                                            |       |               |       
|                                      | Cash and cash equivalents            |                                            | $     | 20,664        |       
|                                      | Accounts receivable, net             |                                            |       | 20,577        |       
|                                      | Notes receivable                     |                                            |       | 663           |       
|                                      | Inventories, net                     |                                            |       | 11,467        |       
|                                      | Other current assets                 |                                            |       | 1,171         |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total current assets                       |       |               | 54,542
|Property and equipment, net           |                                      |                                            | 3,188 |               |       
|Deferred tax assets                   |                                      |                                            | 5,306 |               |       
|Prepaid licenses                      |                                      |                                            | 1,449 |               |       
|Other assets                          |                                      |                                            | 201   |               |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total assets                               |       | $             | 64,686
|                                      |                                      |                                            |       |               |       
|Liabilities and Stockholders' Equity  |                                      |                                            |       |               |       
|Current liabilities:                  |                                      |                                            |       |               |       
|                                      | Accounts payable                     |                                            | $     | 5,019         |       
|                                      | Accrued payroll and related expenses |                                            |       | 2,090         |       
|                                      | Accrued warranty costs               |                                            |       | 4,111         |       
|                                      | Income taxes payable                 |                                            |       | 905           |       
|                                      | Restructuring reserve                |                                            |       | 653           |       
|                                      | Other accrued liabilities            |                                            |       | 3,239         |       
|                                      | Current portion of long-term debt    |                                            |       | 740           |       
|                                      | Deferred revenue                     |                                            |       | 4,358         |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total current liabilities                  |       |               | 21,115
|Long-term portion of deferred revenue |                                      |                                            | 2,069 |               |       
|Long-term debt                        |                                      |                                            | 2,274 |               |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total liabilities                          |       |               | 25,458
|Stockholders' equity:                 |                                      |                                            |       |               |       
|                                      | Common stock                         |                                            |       | 119           |       
|                                      | Additional paid-in capital           |                                            |       | 43,853        |       
|                                      | Accumulated earnings                 |                                            |       | 10,560        |       
|                                      | Treasury stock, at cost              |                                            |       | (12,997       | )     
|                                      | Accumulated other comprehensive loss |                                            |       | (2,307        | )     
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total stockholders' equity                 |       |               | 39,228
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total liabilities and stockholders' equity |       | $             | 64,686
|                                      |                                      |                                            |       |               |       

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

3

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CANDELA CORPORATION  Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)(in thousands, except per share data)  (unaudited)

|                                             |                                         | For the three months ended: |       | For the nine months ended: |  
|-------------------------------------------- | --------------------------------------- | --------------------------- | ----- | -------------------------- | -
|
|Revenue                                      |                                         |                             |       |                            |  
|                                             | Lasers and other products               |                             | $     | 11,983                     |  
|                                             | Product-related service                 |                             |       | 3,490                      |  
|                                             | Skin care center                        |                             |       | 674                        |  
|                                             |                                         |                             |       |                            |  
|                                             | Total revenue                           |                             |       | 16,147                     |  
|Cost of sales                                |                                         |                             |       |                            |  
|                                             | Lasers and other products               |                             |       | 5,284                      |  
|                                             | Product-related service                 |                             |       | 3,010                      |  
|                                             | Skin care center                        |                             |       | 504                        |  
|                                             |                                         |                             |       |                            |  
|                                             | Total cost of sales                     |                             |       | 8,798                      |  
|                                             |                                         |                             |       |                            |  
|Gross profit                                 |                                         |                             | 7,349 |                            |  
|Operating expenses:                          |                                         |                             |       |                            |  
|                                             | Selling, general and administrative     |                             |       | 7,006                      |  
|                                             | Research and development                |                             |       | 1,260                      |  
|                                             | Restructuring reserve                   |                             |       | (693                       | )
|                                             |                                         |                             |       |                            |  
|                                             | Total operating expenses                |                             |       | 7,573                      |  
|                                             |                                         |                             |       |                            |  
|Income (loss) from operations                |                                         |                             | (224  | )                          |  
|Other income (expense):                      |                                         |                             |       |                            |  
|                                             | Interest income                         |                             |       | 169                        |  
|                                             | Interest expense                        |                             |       | (120                       | )
|                                             | Other income (expense)                  |                             |       | 113                        |  
|                                             |                                         |                             |       |                            |  
|                                             | Total other income (expense)            |                             |       | 162                        |  
|                                             |                                         |                             |       |                            |  
|Income (loss) before income taxes            |                                         |                             | (62   | )                          |  
|                                             |                                         |                             |       |                            |  
|Provision for (benefit from) income taxes    |                                         |                             | 229   |                            |  
|                                             |                                         |                             |       |                            |  
|Net income (loss)                            |                                         | $                           | (291  | )                          | $
|                                             |                                         |                             |       |                            |  
|Basic earnings (loss) per share              |                                         | $                           | (0.03 | )                          | $
|Diluted earnings (loss) per share            |                                         | $                           | (0.03 | )                          | $
|                                             |                                         |                             |       |                            |  
|Weighted average shares outstanding          |                                         |                             | 9,641 |                            |  
|Adjusted weighted average shares outstanding |                                         |                             | 9,641 |                            |  
|                                             |                                         |                             |       |                            |  
|Net Income (loss)                            |                                         | $                           | (291  | )                          | $
|Other comprehensive income (net of tax):     |                                         |                             |       |                            |  
|                                             | Foreign currency translation adjustment |                             |       | 305                        |  
|                                             |                                         |                             |       |                            |  
|Comprehensive income (loss)                  |                                         | $                           | 14    |                            | $
|                                             |                                         |                             |       |                            |  

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

4

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CANDELA CORPORATION  Condensed Consolidated Statements of Cash Flows(in thousands)  (unaudited)

|                                                      |                                                                                                     | For the nine months ended:                                                             |                                      
|----------------------------------------------------- | --------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | -------------------------------------
|
|Cash flows from operating activities:                 |                                                                                                     |                                                                                        |                                      
|                                                      | Net income (loss)                                                                                   |                                                                                        | $                                    
|                                                      | Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: |                                                                                        |                                      
|                                                      |                                                                                                     | Depreciation and amortization                                                          |                                      
|                                                      |                                                                                                     | Provision for bad debts                                                                |                                      
|                                                      |                                                                                                     | Effect of exchange rate changes on foreign currency denominated assets and liabilities |                                      
|                                                      |                                                                                                     | Reversal of restructuring reserve                                                      |                                      
|                                                      |                                                                                                     | Accretion of debt discount                                                             |                                      
|                                                      |                                                                                                     | Increase (decrease) in cash from working capital:                                      |                                      
|                                                      |                                                                                                     |                                                                                        | Accounts receivable                  
|                                                      |                                                                                                     |                                                                                        | Notes receivable                     
|                                                      |                                                                                                     |                                                                                        | Inventories                          
|                                                      |                                                                                                     |                                                                                        | Other current assets                 
|                                                      |                                                                                                     |                                                                                        | Other assets                         
|                                                      |                                                                                                     |                                                                                        | Accounts payable                     
|                                                      |                                                                                                     |                                                                                        | Accrued payroll and related expenses 
|                                                      |                                                                                                     |                                                                                        | Deferred revenue                     
|                                                      |                                                                                                     |                                                                                        | Accrued warranty costs               
|                                                      |                                                                                                     |                                                                                        | Income taxes payable                 
|                                                      |                                                                                                     |                                                                                        | Restructuring reserve                
|                                                      |                                                                                                     |                                                                                        | Long-term portion of deferred revenue
|                                                      |                                                                                                     |                                                                                        | Other accrued liabilities            
|                                                      |                                                                                                     |                                                                                        |                                      
|Net cash provided by (used for) operating activities  |                                                                                                     |                                                                                        | (5,105                               
|Cash flows from investing activities:                 |                                                                                                     |                                                                                        |                                      
|                                                      |                                                                                                     | Purchases of property and equipment                                                    |                                      
|                                                      |                                                                                                     |                                                                                        |                                      
|Net cash used for investing activities                |                                                                                                     |                                                                                        | (906                                 
|Cash flows from financing activities:                 |                                                                                                     |                                                                                        |                                      
|                                                      |                                                                                                     | Principal payments of long-term debt                                                   |                                      
|                                                      |                                                                                                     | Net borrowings (repayments) on line of credit                                          |                                      
|                                                      |                                                                                                     | Proceeds from the issuance of common stock                                             |                                      
|                                                      |                                                                                                     | Repurchase of treasury stock                                                           |                                      
|                                                      |                                                                                                     |                                                                                        |                                      
|Net cash used for financing activities                |                                                                                                     |                                                                                        | (4,789                               
|Effect of exchange rates on cash and cash equivalents |                                                                                                     |                                                                                        | (854                                 
|                                                      |                                                                                                     |                                                                                        |                                      
|Net increase (decrease) in cash and cash equivalents  |                                                                                                     |                                                                                        | (11,654                              
|Cash and cash equivalents at beginning of period      |                                                                                                     |                                                                                        | 32,318                               
|                                                      |                                                                                                     |                                                                                        |                                      
|Cash and cash equivalents at end of period            |                                                                                                     | $                                                                                      | 20,664                               
|                                                      |                                                                                                     |                                                                                        |                                      

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

5

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CANDELA CORPORATION  Notes to Unaudited Condensed Consolidated Financial Statements

1.    Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and notes do not include all of the disclosures made in the Annual Report on
Form 10-K of Candela Corporation (the "Company") for fiscal 2001, which should be read in conjunction with these financial statements. The financial information included herein is
unaudited, with the exception of the condensed consolidated balance sheet as of June 30, 2001, which was derived from the audited consolidated balance sheet dated June 30, 2001. However,
in the opinion of management, the statements include all necessary adjustments for a fair presentation of the quarterly results and are prepared and presented in a manner consistent with the Company's
Annual Report on Form 10-K. In addition to normal recurring adjustments, the financial statements for the period ended March 30, 2002 include an adjustment to reverse a
portion of the restructuring reserve (see note 5). The results for the three-month period or the nine-month period ended March 30, 2002 are not necessarily indicative of the
results to be expected for the full year.

2.    New Accounting Pronouncements

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

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

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

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

6

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3.    Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period and, if there are
dilutive securities, diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator.

Common
stock equivalents include shares issuable upon the exercise of stock options or warrants, net of shares assumed to have been purchased with the proceeds, using the treasury stock
method.

For the three months ended:

For the nine months ended:(in thousands, except per share data)

March 30,
2002

March 31,
2001

March 30,
2002

March 31,
2001NumeratorNet income (loss)

$
(291
)
$
1,555

$
(2,684
)
$
2,570DenominatorBasic earnings (loss) per shareWeighted average shares outstanding


9,641


10,732


10,194


10,987Earnings (loss) per share

$
(0.03
)
$
0.14

$
(0.26
)
$
0.23Diluted earnings (loss) per shareWeighted average shares outstanding


9,641


10,732


10,194


10,987Effect of dilutive securities:Stock options





268





352Stock warrants





211





282Adjusted weighted average shares outstanding


9,641


11,211


10,194


11,621Earnings (loss) per share

$
(0.03
)
$
0.14

$
(0.26
)
$
0.22


During
the three and nine month periods ended March 31, 2001, options to purchase 279,096 and 209,096 shares of common stock, respectively, were excluded from the calculation of
diluted earnings per share. During the three and nine month periods ended March 30, 2002, options to purchase 1,006,945 and 888,733 shares of common stock, respectively, were excluded from the
calculation of diluted earnings per share.

4.    Inventories

Inventories consist of the following:

(in thousands)

March 30,
2002

June 30,
2001Raw materials

$
4,441

$
3,723Work in process


548


951Finished goods


6,478


5,397Total Inventories, net

$
11,467

$
10,071


7

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5.    Restructuring Charges

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

For
the quarter ended March 30, 2002, the Company has revised the estimate of future costs associated with the Scottsdale facility and has reversed $693,000 of the restructuring
reserve which represents primarily the amount of future contractual sublease payments as well as revisions to the net realizable value of leasehold improvements. The adjusted restructuring reserve at
March 30, 2002 includes provisions for one month of rent to be paid by the Company in each of fiscal years 2003, 2004 and 2005, the remaining book value of leasehold improvements to be
depreciated through fiscal year 2007, and a revised estimate of severance costs to be paid through December 2003.

The
following table reflects the restructuring charges incurred during the nine-month period ended March 30, 2002 and the restructuring reserve reversal:

Payroll and
Severance

Leasehold
Improvements
and Fixed
Assets

Facility
Costs

TotalBalance at June 30, 2001

$
178

$
841

$
670

$
1,689Cash charges


(41
)




(185
)

(226
)Non-cash charges





(117
)




(117
)Restructure reserve


(6
)

(239
)

(448
)

(693
)Balance at March 30, 2002

$
131

$
485

$
37

$
653


6.    Debt

In 1998, the Company issued eight-year, 9.75% subordinated term notes ("Note Agreement") to three investors in the aggregate amount of
$3.7 million, secured by the assets of the Company. The notes become due in October 2006, and require quarterly interest payments. The Company began making quarterly principal payments
of $185,000, along with any unpaid interest, on January 31, 2002. The Note Agreement also contains restrictive covenants establishing maximum leverage, certain minimum ratios, and minimum
levels of net income. As of the quarter ended March 30, 2002, the Company was in violation of minimum profitability levels and the minimum net worth requirement giving the note holders the
right to require us to repay the entire value of the loan at any time. We have received waivers from the note holders for the quarter ended March 30, 2002. Because the note holders have the
right to call the loan at any time, the loan could be classified as a current liability instead of a long-term liability. Since we believe we will be in compliance with the restrictions by
the end of the next quarter we continue to classify the loan as long-term debt on the balance sheet. If we classified the loan as short-term debt, our liquidity ratio,
long-term debt to equity ratio and credit rating could be adversely affected.

7.    Segment Information

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

8

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For the three months ended:

For the nine months ended:(in thousands)

March 30,
2002

March 31,
2001

March 30,
2002

March 31,
2001Revenue:Product sales and service

$
15,473

$
17,805

$
38,481

$
43,722Skin care/health spa services


674


991


2,202


2,874Total revenue

$
16,147

$
18,796

$
40,683

$
46,596Operating income (loss):Product sales and service

$
(574
)
$
2,229

$
(3,612
)
$
3,238Skin care/health spa services


350


(106
)

(518
)

(383
)Total operating income (loss)

$
(224
)
$
2,123

$
(4,130
)
$
2,855


As of
March 30, 2002

As of
June 30, 2001Total assets:(net intercompany accounts)Product sales and service

$
63,733

$
72,718Skin care/health spa services


953


1,300Total assets

$
64,686

$
74,018


8.    Legal Proceedings

Reference is made to the Physicians Sales and Service, Inc. ("PSS") arbitration proceeding previously reported on Form 10-Q for
Candela's second fiscal quarter ended December 29, 2001. No material developments in the resolution of this matter have transpired since it was initially reported.

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

9

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CANDELA CORPORATION

Item 2Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

Significant Accounting Policies

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

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

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

As
of March 30, 2002, our accounts receivable balance of $20,577,000 is reported net of allowances for doubtful accounts of $1,015,000. We believe our reported allowances at
March 30, 2002, are adequate. If the financial conditions of those customers were to deteriorate, however, resulting in their inability to make payments, we may need to record additional
allowances, which would result in

10

---

additional selling, general and administrative expenses being recorded for the period in which such determination was made.

Inventory Reserves.    As a designer and manufacturer of high technology equipment, we are exposed to a number of economic and
industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes in our
markets, our ability to meet changing customer requirements, competitive pressures in products and prices, and the availability of key components from our suppliers. Our policy is to establish
inventory reserves when conditions exist that suggest that our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products and
market conditions. We regularly evaluate the ability to realize the value of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage,
product end of life dates, estimated current and future market values and new product introductions. Purchasing requirements and alternative usage avenues are explored within these processes to
mitigate inventory exposure. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value. As of March 30, 2002, our inventory of
$11,467,000 is stated net of
inventory reserves of $1,851,000. If actual demand for our products deteriorate, or market conditions are less favorable than those that we project, additional inventory reserves may be required.

Product Warranties.    Our products are sold with warranty provisions that require us to remedy deficiencies in quality or
performance of our products over a specified period of time at no cost to our customers. Our policy is to establish warranty reserves at levels that represent our estimate of the costs that will be
incurred to fulfill those warranty requirements at the time that revenue is recognized. We believe that our recorded liability at March 30, 2002, is adequate to cover our future cost of
materials, labor and overhead for the servicing of our products sold through that date. If actual product failures, or material or service delivery costs differ from our estimates, our warranty
liability would need to be revised accordingly.

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

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

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Results of Operations

Revenue.Revenue source by geography is reflected in the following table:

|                |  | For the three months ended: |       
|--------------- |  | --------------------------- | ------
|
|US revenue      |  | $                           | 8,183 
|Foreign revenue |  |                             | 7,964 
|                |  |                             |       
|Total revenue   |  | $                           | 16,147
|                |  |                             |       

|                |  | For the nine months ended: |       
|--------------- |  | -------------------------- | ------
|
|US revenue      |  | $                          | 17,709
|Foreign revenue |  |                            | 22,974
|                |  |                            |       
|Total revenue   |  | $                          | 40,683
|                |  |                            |       

The
US revenue reported for the nine months ended March 30, 2002 was lower than the same period one year earlier due primarily to a decrease in sales from a major US distributor.
Our own direct sales force is now servicing the sales channels previously serviced by this distributor contributing to the lesser decrease in US revenue for the three months ended March 30,
2002 as compared to the same period one year earlier. Lower sales volume of GentleLase products contributed approximately $3,000,000 to the decrease for the nine months ended
March 30, 2002, and was offset by a $1,000,000 increase in sales volume of Vbeam products, as compared to the same period one year earlier. Lower sales volume of GentleLase and
Smoothbeam products contributed approximately $1,800,000 to the decrease for the quarter ended March 30, 2002 as compared to the same period the prior year, but was offset by an approximate
$1,500,000 increase in sales of Vbeam products.

Foreign
revenue decreased in the nine-month period ended March 30, 2002 due primarily to a $1,500,000 decrease in revenue of AlexLazr products and a
$1,700,000 decrease in GentleLase systems as compared to the same periods one year earlier. Both decreases are the result of lower average selling prices and lower sales volume. The
decrease in foreign revenue for the quarter ended March 30, 2002, as compared to the same period one year earlier, is the result of lower sales volume of GentleLase ($400,000),
Vbeam ($500,000), Smoothbeam ($500,000) and AlexLazr ($300,000) products. A lower average selling price of GentleLase products also contributed approximately $400,000 to the
decrease.

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Revenue
source by type is reflected in the following table:

|                          |  | For the three months ended: |       
|------------------------- |  | --------------------------- | ------
|
|Lasers and other products |  | $                           | 11,983
|Product related service   |  |                             | 3,490 
|Skin care centers         |  |                             | 674   
|                          |  |                             |       
|Total revenue             |  | $                           | 16,147
|                          |  |                             |       

|                          |  | For the nine months ended: |       
|------------------------- |  | -------------------------- | ------
|
|Lasers and other products |  | $                          | 29,096
|Product related service   |  |                            | 9,385 
|Skin care centers         |  |                            | 2,202 
|                          |  |                            |       
|Total revenue             |  | $                          | 40,683
|                          |  |                            |       

The
decrease in laser product revenue for the three-month and nine-month periods ended March 30, 2002, resulted primarily from decreases in the sales volumes of
systems as described above. Product related service revenue increased inconsequentially during the three-month and nine-month periods ended March 30, 2002 as compared to the same
periods one year earlier. Skin care centers revenue decreased during the three-month period ended March 30, 2002 primarily due to decreases in revenue from spa services of $130,000 and from
salon services of $150,000 as compared to the same period one year earlier. Decreases in revenue from spa services of $278,000 and from salon services of $280,000 contributed to the decrease in
revenue from the nine-month period ended March 30, 2002 as compared to the same period in the previous fiscal year.

Gross Profit.Gross profit decreased to $7,349,000 (46% of revenue) from $9,432,000 (50% of revenue)
for the quarters ended March 30, 2002 and March 31, 2001 respectively. Gross profit decreased to
$18,209,000 (45% of revenue) for the nine-month period ended March 30, 2002 from $23,818,000 (51% of revenue) for the same period one year earlier. This decrease in gross profit
results principally from a decrease in the sales volume and average selling price of various systems as described above. Gross profit on product related service fell $1,000,000 in the quarter ended
March 30, 2002 as compared to the same period one year earlier, due primarily to increases in field service personnel, unexpected warranty costs and lower service contract revenue. Skin care
center direct labor costs remained stable while revenue fell, resulting in gross profit levels that were $240,000 and $700,000 lower in the three-month and nine-month periods ended
March 30, 2002, respectively, as compared to the same periods one year earlier.

Selling, General and Administrative Expense.Selling, general and administrative expenses increased
from $5,917,000 (31% of revenue) to $7,006,000 (43% of revenue) for the three-month periods ended March 31, 2001 and March 30, 2002. Selling, general and administrative costs increased
from $16,634,000 (36% of revenue) to $19,524,000 (48% of revenue) for the nine-month periods ending March 31, 2001 and March 30, 2002. Higher marketing expenses for the trade
shows and the Cbeam release contributed approximately $500,000 and $900,000 to the overall increase for the three-month and nine-month periods respectively ending March 30, 2002 as
compared to the same periods one year earlier. Costs to increase our domestic sales force to replace sales channels formerly serviced by a major U.S. distributor also contributed approximately
$400,000 and $1,000,000 respectively to the increase in selling, general and administrative expenses for the three-month and nine-month periods respectively ending March 30, 2002 as
compared to the same periods one year earlier. Our selling expenses are expected to continue to increase as the domestic sales force is strengthened, but the added costs should be offset by a
corresponding increase in domestic revenue. A $300,000 increase in

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the provision for bad debts and a one-time $90,000 settlement in the Skin Care Center during the quarter ended December 29, 2001 also contributed to the overall increase in
selling, general and administrative expenses for the nine-month period ended March 30, 2002.

Research and Development Expense.Research and development spending decreased to $1,260,000 (8% of
revenue) and $3,508,000 (9% or revenue) respectively for the three and nine-month periods ended March 30, 2002, compared to $1,392,000 (7% of revenue) and $4,329,000 (9% of revenue)
for the same periods one year earlier. The decrease in research and development expenses is primarily due to the spending cycle associated with product development. Expenditures for this department
will likely remain at less than 10% of sales for the remainder of the year.

Restructuring Charge.For the three months ended March 30, 2002, the Company revised the
estimate of future costs associated with closing the skin care center in Scottsdale, Arizona and reversed $693,000 of the restructuring reserve.

Other Income/Expense.Other income/expense was $162,000 and $653,000 for the three month and
nine-month periods ended March 30, 2002, compared to income of $293,000 and $1,148,000 for the three and nine-month periods ended March 31, 2001. This decrease
resulted primarily from lower interest income due to lower rates and lower cash balances invested as compared to the same periods one year earlier.

Income Taxes.The provision for income taxes results from a combination of activities of both the
domestic and foreign subsidiaries of the Company. The provision for income taxes for the nine-month period ended March 30, 2002, includes a tax provision calculated for income
generated in Japan and Spain using rates in excess of the U.S. statutory rate. The Company has recorded a 23% tax benefit for the nine-month period ended March 30, 2002, in
comparison to the nine-month period ended March 31, 2001, in which the Company recorded a 36% tax rate. The Company expects a tax benefit for U.S. tax purposes based on its ability
to file a net operating loss carry back claim for current year losses.

Liquidity and Capital Resources

Cash used by operating activities amounted to $5,105,000 for the nine-month period ended March 30, 2002 as compared to cash generated by
operating activities of $1,610,000 for the same period in the prior year. This decrease in cash primarily reflects the effects of a net loss for the nine-month period ended
March 30, 2002 versus a net income for the nine-month period ended March 31, 2001. Cash used for investing activities totaled $906,000 for the nine-month period
ended March 30, 2002 compared to cash used for investing activities of $130,000 for the same period one year earlier and primarily reflects payments to support the Company's Oracle software
implementation initiatives. Cash used for financing activities in the nine-month period ended March 30, 2002 amounted to $4,789,000 and primarily reflects stock purchases pursuant
to our stock repurchase program.

In
connection with our eight-year, 9.75% subordinated notes, a total of $335,000 has been accreted to the notes through March 30, 2002, resulting in a
long-term liability balance of $2.3 million and a short-term liability balance of $740,000 at quarter end. A total of $25,510 was accreted to interest expense in the
three-month period ended March 30, 2002.

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

|(in thousands)                     |  | Total |       | Less than
1 year |   | 1-3 years |  | 4-5 years |       | After
5 years
|---------------------------------- |  | ----- | ----- | ---------------- | - | --------- |  | --------- | ----- | -------------
|Long-term debt                     |  | $     | 3,700 |                  | $ | 740       |  | $         | 2,405 |              
|Operating leases                   |  |       | 2,039 |                  |   | 522       |  |           | 740   |              
|                                   |  |       |       |                  |   |           |  |           |       |              
|Total contractual cash obligations |  | $     | 5,739 |                  | $ | 1,262     |  | $         | 3,145 |              

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Additionally,
the Company has a $5,000,000 line of credit available to meet liquidity needs.

We
believe that cash balances will be sufficient to meet anticipated cash requirements for the next twelve months. However, we cannot be sure that we will not require additional capital
beyond the amounts currently forecasted by us, or that any such required additional capital will be available on reasonable terms, if at all, when such capital becomes required.

Accounting Pronouncements

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

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

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

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

Cautionary Statements

This Quarterly Report on Form 10-Q contains forward-looking statements including, without limitation, statements concerning the future of the
industry, product development, business strategy (including the possibility of future acquisitions), anticipated operational and capital expenditure levels, continued acceptance and growth of our
products, and dependence on significant customers and suppliers. This Quarterly Report on Form 10-Q contains forward-looking statements that we have made based on our current
expectations, estimates and projections about our industry, operations, and prospects, not historical facts. We have made these forward-looking statements pursuant to the provisions of the Private
Securities Litigation Reform Act of 1995. These statements can be identified

15

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by the use of forward-looking terminology such as "may," "will," "believe," "expect," "anticipate," "estimate," "intend," "continue" or other similar expressions. These statements discuss future
expectations, and may contain projections of results of operations or of financial condition or state other forward-looking information. These forward-looking statements are subject to business and
economic risks and uncertainties, and our actual results of operations may differ materially from those contained in the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Cautionary Statements" in our annual report filed on Form 10-K for the fiscal year ended June 30, 2001, as
well as other risks and uncertainties referenced in this Quarterly Report. These risks include, but are not limited to, the following:



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Item 3Quantitative and Qualitative Disclosures About Market Risk

At March 30, 2002, the Company's cash and debt are exposed to interest rate risk. We are exposed to foreign currency risk due to accounts receivable from
our foreign subsidiaries.

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

We
currently have long-term debt with a face value of $2.6 million with the interest rate fixed at the time of issuance. The long-term debt will be fully
repaid by October 2006. The Note Agreement also contains restrictive covenants establishing maximum leverage, certain minimum ratios, and minimum levels of net income. As of the quarter ended
March 30, 2002, the Company was in violation of minimum profitability levels and the minimum net worth requirement giving the note holder the right to require us to repay the entire value of
the loan at any time. We have received waivers from the note holder for the quarter ended March 30, 2002. Because the note holder has the right to call the loan at any time, the loan could be
classified as a current liability instead of a long-term liability. Since we believe we will be in compliance with the restrictions by the end of next quarter we continue to classify the
loan as long-term debt on the balance sheet. If we classified the loan as short-term debt, our liquidity ratio, long-term debt to equity ratio and credit rating
could be adversely affected.

At
March 30, 2002, the Company held foreign currency contracts with notional values totaling $1,086,606 for the delivery of 30,467,498 Japanese Yen and 992,781 Euros. These
contracts have maturities prior to June 27, 2002. The carrying and net fair value of these contracts was $(16,107) at March 30, 2002. We believe that any near term changes in currency
rates will be immaterial to any potential losses in future earnings, cash flow and fair value because any adjustments to fair value offset the change in the fair value of the foreign currency
intercompany receivables.

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CANDELA CORPORATION

Part II. Other Information

Item 1Legal Proceedings

Reference is made to the Physicians Sales and Service, Inc. ("PSS") arbitration proceeding previously reported on Form 10-Q for
Candela's second fiscal quarter ended December 29, 2001. No material developments in the resolution of this matter have transpired since it was initially reported.

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

Item 6Exhibits and Reports on Form 8-K







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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                   |  | CANDELA CORPORATION
Registrant                                                                                    
|------------------ |  | ------------------------------------------------------------------------------------------------------------------
|Date: May 14, 2002 |  | /s/ GERARD E. PUORROGerard E. Puorro
(President and Chief Executive Officer)                                      
|Date: May 14, 2002 |  | /s/ F. PAUL BROYERF. Paul Broyer
(Senior Vice President of Finance and Administration
and Chief Financial Officer)

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