---

---

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

---

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 29, 2001.

Commission file number 0-14742

---

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

Delaware(State or other jurisdiction
of incorporation or organization)

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

01778(Zip code)


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

---

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 /x/  No / /

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 November 8, 2001Common Stock, $.01 par value

10,886,842


---

---

---



CANDELA CORPORATION  Index

|         |  |                        |  |                                                                                                                                                                       |  | Page(s)
|-------- |  | ---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------
|Part I.  |  | Financial Information: |  |                                                                                                                                                                      
|         |  | Item 1.                |  | Unaudited Condensed Consolidated Balance Sheets as of September 29, 2001 and June 30, 2001                                                                            |  | 3      
|         |  |                        |  | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three month periods ended September 29, 2001 and September 30, 2000 |  | 4      
|         |  |                        |  | Unaudited Condensed Consolidated Statements of Cash Flows for the three month periods ended September 29, 2001 and September 30, 2000                                 |  | 5      
|         |  |                        |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                        |  | 6-9    
|         |  | Item 2.                |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                                 |  | 10-12  
|         |  |                        |  | Cautionary Statements                                                                                                                                                 |  | 13     
|         |  | Item 3.                |  | Quantitative and Qualitative Disclosure about Market Risk                                                                                                             |  | 14     
|Part II. |  | Other Information:     |  |                                                                                                                                                                      
|         |  | Item 1.                |  | Legal proceedings                                                                                                                                                     |  | 15     
|         |  | Item 6.                |  | Exhibits and Reports on Form 8-K                                                                                                                                      |  | 15     

2

---



Part I. Financial Information

Item 1Financial Statements

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

|Assets                                |                                      | September 29,
2001                         |       | June 30,
2001 |       
|------------------------------------- | ------------------------------------ | ------------------------------------------ | ----- | ------------- | ------
|Current assets:                       |                                      |                                            |       |               |       
|                                      | Cash and cash equivalents            |                                            | $     | 29,220        |       
|                                      | Accounts receivable, net             |                                            |       | 16,753        |       
|                                      | Notes receivable                     |                                            |       | 790           |       
|                                      | Inventories                          |                                            |       | 11,220        |       
|                                      | Other current assets                 |                                            |       | 813           |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total current assets                       |       |               | 58,796
|                                      |                                      |                                            |       |               |       
|Property and equipment, net           |                                      |                                            | 2,998 |               |       
|Deferred tax assets                   |                                      |                                            | 5,306 |               |       
|Prepaid licenses                      |                                      |                                            | 1,537 |               |       
|Other assets                          |                                      |                                            | 196   |               |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total assets                               |       | $             | 68,833
|                                      |                                      |                                            |       |               |       
|Liabilities and Stockholders' Equity  |                                      |                                            |       |               |       
|Liabilities and Stockholders' Equity  |                                      |                                            |       |               |       
|Current liabilities:                  |                                      |                                            |       |               |       
|                                      | Accounts payable                     |                                            | $     | 4,036         |       
|                                      | Accrued payroll and related expenses |                                            |       | 1,582         |       
|                                      | Accrued warranty costs               |                                            |       | 3,810         |       
|                                      | Income taxes payable                 |                                            |       | 1,791         |       
|                                      | Restructuring reserve                |                                            |       | 1,590         |       
|                                      | Other accrued liabilities            |                                            |       | 1,622         |       
|                                      | Current portion of long-term debt    |                                            |       | 499           |       
|                                      | Deferred income                      |                                            |       | 4,197         |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total current liabilities                  |       |               | 19,127
|                                      |                                      |                                            |       |               |       
|Long-term portion of deferred revenue |                                      |                                            | 1,766 |               |       
|                                      |                                      |                                            |       |               |       
|Long-term debt                        |                                      |                                            | 2,655 |               |       
|                                      |                                      |                                            |       |               |       
|Commitments and contingencies         |                                      |                                            |      |               |       
|                                      |                                      |                                            |       |               |       
|Stockholders' equity:                 |                                      |                                            |       |               |       
|                                      | Common stock                         |                                            |       | 118           |       
|                                      | Additional paid-in capital           |                                            |       | 43,625        |       
|                                      | Accumulated earnings                 |                                            |       | 12,013        |       
|                                      | Treasury stock, at cost              |                                            |       | (8,804        | )     
|                                      | Accumulated other comprehensive loss |                                            |       | (1,667        | )     
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total stockholders' equity                 |       |               | 45,285
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total liabilities and stockholders' equity |       | $             | 68,833
|                                      |                                      |                                            |       |               |       

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

3

---



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

|                                             |                                         | For the three months ended |       
|-------------------------------------------- | --------------------------------------- | -------------------------- | ------
|
|Revenue:                                     |                                         |                            |       
|                                             | Lasers and other products               |                            | $     
|                                             | Product related service                 |                            |       
|                                             | Skin care center                        |                            |       
|                                             |                                         |                            |       
|                                             |                                         | Total revenue              |       
|Cost of revenue:                             |                                         |                            |       
|                                             | Lasers and other products               |                            |       
|                                             | Product related service                 |                            |       
|                                             | Skin care center                        |                            |       
|                                             |                                         |                            |       
|                                             |                                         | Total cost of revenue      |       
|                                             |                                         |                            |       
|Gross profit                                 |                                         |                            | 4,749 
|Operating expenses:                          |                                         |                            |       
|                                             | Selling, general, and administrative    |                            |       
|                                             | Research and development                |                            |       
|                                             |                                         |                            |       
|                                             |                                         | Total operating expenses   |       
|                                             |                                         |                            |       
|Income (loss) from operations                |                                         |                            | (1,966
|Other income (expense):                      |                                         |                            |       
|                                             | Interest income                         |                            |       
|                                             | Interest expense                        |                            |       
|                                             | Other, net                              |                            |       
|                                             |                                         |                            |       
|                                             |                                         | Total other income         |       
|                                             |                                         |                            |       
|Income (loss) before income taxes            |                                         |                            | (1,882
|Provision (benefit) for income taxes         |                                         |                            | (651  
|                                             |                                         |                            |       
|Net income (loss)                            |                                         | $                          | (1,231
|                                             |                                         |                            |       
|Basic earnings (loss) per share              |                                         | $                          | (0.11 
|Diluted earnings (loss) per share            |                                         | $                          | (0.11 
|                                             |                                         |                            |       
|Weighted average shares outstanding          |                                         |                            | 10,766
|Adjusted weighted average shares outstanding |                                         |                            | 10,766
|                                             |                                         |                            |       
|Net income (loss)                            |                                         | $                          | (1,231
|Other comprehensive income net of tax:       |                                         |                            |       
|                                             | Foreign currency translation adjustment |                            |       
|                                             |                                         |                            |       
|Comprehensive income (loss)                  |                                         | $                          | (963  
|                                             |                                         |                            |       

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

4

---



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

|                                                             |                                                        | For the three 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                                                                |                                      
|                                                             |                                                        | Accretion of debt                                                                      |                                      
|                                                             |                                                        | Effect of exchange rate changes on foreign currency denominated assets and liabilities |                                      
|                                                             |                                                        | Changes in operating assets and liabilities:                                           |                                      
|                                                             |                                                        |                                                                                        | Accounts receivable                  
|                                                             |                                                        |                                                                                        | Notes receivable                     
|                                                             |                                                        |                                                                                        | Inventories                          
|                                                             |                                                        |                                                                                        | Other current assets                 
|                                                             |                                                        |                                                                                        | Other assets                         
|                                                             |                                                        |                                                                                        | Accounts payable                     
|                                                             |                                                        |                                                                                        | Accrued payroll and related expenses 
|                                                             |                                                        |                                                                                        | Deferred income                      
|                                                             |                                                        |                                                                                        | Accrued warranty costs               
|                                                             |                                                        |                                                                                        | Income taxes payable                 
|                                                             |                                                        |                                                                                        | Accrued restructuring charges        
|                                                             |                                                        |                                                                                        | Long-term portion of deferred revenue
|                                                             |                                                        |                                                                                        | Other accrued liabilities            
|                                                             |                                                        |                                                                                        |                                      
|Net cash provided by (used for) operating activities         |                                                        |                                                                                        | 2,658                                
|                                                             |                                                        |                                                                                        |                                      
|Cash flows from investing activities:                        |                                                        |                                                                                        |                                      
|                                                             | Purchases of property and equipment                    |                                                                                        |                                      
|                                                             |                                                        |                                                                                        |                                      
|Net cash used for investing activities                       |                                                        |                                                                                        | (443                                 
|                                                             |                                                        |                                                                                        |                                      
|Cash flows from financing activities:                        |                                                        |                                                                                        |                                      
|                                                             | Net borrowings from line of credit                     |                                                                                        |                                      
|                                                             | Tax benefit of non-qualified stock options             |                                                                                        |                                      
|                                                             | Purchases of treasury stock                            |                                                                                        |                                      
|                                                             | Principal payments of long-term debt                   |                                                                                        |                                      
|                                                             | Proceeds from the issuance of common stock             |                                                                                        |                                      
|                                                             |                                                        |                                                                                        |                                      
|Net cash provided by (used for) financing activities         |                                                        |                                                                                        | (880                                 
|                                                             |                                                        |                                                                                        |                                      
|Effect of exchange rate changes on cash and cash equivalents |                                                        |                                                                                        | 844                                  
|                                                             |                                                        |                                                                                        |                                      
|Net increase (decrease) in cash and cash equivalents         |                                                        |                                                                                        | (3,098                               
|                                                             |                                                        |                                                                                        |                                      
|Cash and cash equivalents at beginning of period             |                                                        |                                                                                        | 32,318                               
|                                                             |                                                        |                                                                                        |                                      
|Cash and cash equivalents at end of period                   |                                                        | $                                                                                      | 29,220                               
|                                                             |                                                        |                                                                                        |                                      

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

5

---



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. The results for the three month period ended September 29, 2001 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 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 address 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 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 144 will have on its financial position, results of operations, or cash flows.

6

---

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:
|-------------------------------------------- |  | ---------------------------
|
|Numerator                                    |  |                            
|Net income (loss)                            |  | $                          
|                                             |  |                            
|Denominator                                  |  |                            
|Basic Earnings per Share                     |  |                            
|Weighted average shares outstanding          |  |                            
|                                             |  |                            
|Earnings (loss) per share                    |  | $                          
|                                             |  |                            
|Diluted Earnings per Share                   |  |                            
|Weighted average shares outstanding          |  |                            
|Effect of dilutive securities:               |  |                            
|Stock options                                |  |                            
|Stock warrants                               |  |                            
|                                             |  |                            
|Adjusted weighted average shares outstanding |  |                            
|                                             |  |                            
|Earnings (loss) per share                    |  | $                          
|                                             |  |                            

During
the three month periods ended September 29, 2001, and September 30, 2000, there were 757,411 and 141,000 options, respectively, to purchase shares of common stock
that were excluded from the calculation of diluted earnings per share because the options' exercise price was greater than the average market price of the common stock.

4. Inventories

Inventories consist of the following (in thousands):

September 29, 2001

June 30, 2001Raw materials

$
4,258

$
3,723Work in process


660


951Finished goods


6,302


5,397$
11,220

$
10,071


7

---

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 quarter ended June 30, 2001, the Company determined that impairment indicators existed relating to
its skin care/health spa services. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to Be Disposed Of," the Company wrote off all remaining undepreciated long-lived spa-related assets of $640,000.

The
following table reflects the restructuring charges incurred in the most recent quarter (in thousands):

|                              |  | Payroll and
Severance |     | Leasehold
Improvements
and Fixed
Assets |   | Facility
Costs |   | Total |    
|----------------------------- |  | --------------------- | --- | --------------------------------------- | - | -------------- | - | ----- | ---
|Balance at June 30, 2001      |  | $                     | 178 |                                         | $ | 841            |   | $     | 670
|Cash charges                  |  |                       | (12 | )                                       |   |                |   |       | (38
|Non-cash charges              |  |                       |     |                                         |   | (49            | ) |       |    
|                              |  |                       |     |                                         |   |                |   |       |    
|Balance at September 29, 2001 |  | $                     | 166 |                                         | $ | 792            |   | $     | 632
|                              |  |                       |     |                                         |   |                |   |       |    

For
the three month period ended September 29, 2001, a total of $99,000 was charged against this reserve, representing costs associated with the Scottsdale facility. Subsequent
to September 29, 2001, the Company secured a sublease for the Scottsdale facility. Per the sublease agreement, the sublessor will pay all costs associated with the facility through the end of
the lease term ending June 2006. As an incentive to the sublessor, the Company agreed to pay eight months of rent during the life of the sublease and for certain other facility improvements up to a
specified amount. The sublessee will commence making payments to the landlord in April 2002.

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 is required to make mandatory quarterly
principal payments of $185,000, along with any unpaid interest, beginning 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 September 29, 2001, the Company was in violation of minimum profitability levels, for which a waiver has been received
for such quarter.

7. 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 three months ended September 29, 2001, includes a tax provision calculated for income generated in Japan, France and Spain using rates in excess of the U.S. statutory rate. The
Company has recorded a 35% tax benefit for the period ended September 29, 2001, in comparison to the three month period ended September 20,

8

---

2000, in which the Company recorded a 40% tax rate. The Company expects a tax benefit for U.S. tax purposes based on its ability to file a net operating loss carryback claim for current year
losses.

8. 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.

|                                    |                               | For the three months ended |       
|----------------------------------- | ----------------------------- | -------------------------- | ------
|
|Revenue:                            |                               |                            |       
|                                    | Product sales and service     |                            | $     
|                                    | Skin care/health spa services |                            |       
|                                    |                               |                            |       
|Total revenue                       |                               | $                          | 10,380
|                                    |                               |                            |       
|Income (loss) from operations:      |                               |                            |       
|                                    | Product sales and service     |                            | $     
|                                    | Skin care/health spa services |                            |       
|                                    |                               |                            |       
|Total income (loss) from operations |                               | $                          | (1,966
|                                    |                               |                            |       

|                                             |                               | As of
September 29, 2001 |        | As of
June 30, 2001
|-------------------------------------------- | ----------------------------- | ------------------------ | ------ | -------------------
|Total Assets (net of intercompany accounts): |                               |                          |        |                    
|                                             | Product sales and service     |                          | $      | 67,482             
|                                             | Skin care/health spa services |                          |        | 1,351              
|                                             |                               |                          |        |                    
|Total assets                                 |                               | $                        | 68,833 |                    
|                                             |                               |                          |        |                    

9. Legal Proceedings

From time to time, we are a party to various legal proceedings incidental to our business. We believe 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. Need to talk about PSS situation.

9

---



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.

Results of Operations

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

|(unaudited)     |  | September 29, 2001 |        | September 30, 2000 |     | Change |  
|--------------- |  | ------------------ | ------ | ------------------ | --- | ------ | -
|US revenue      |  | $                  | 3,572  |                    | 34  | %      | $
|Foreign revenue |  |                    | 6,808  |                    | 66  | %      |  
|                |  |                    |        |                    |     |        |  
|Total revenue   |  | $                  | 10,380 |                    | 100 | %      | $
|                |  |                    |        |                    |     |        |  

Revenue
fell over the three month period ended September 29, 2001, compared to the three month period ended September 30, 2000, due in part to a significant decrease in
orders from a key North American distributor. We have taken steps to terminate our distributor agreement with this key distributor which previously accounted for greater than 10% of our total revenue
in fiscal 2001 and 2000, and also in the quarter ended September 30, 2000. The termination of this relationship may result in reduced product sales in current and future periods. We will also
incur expense to add direct sales personnel to replace the sales channel provided by this distributor.

Foreign
revenue increased slightly compared to the same period a year earlier. This increase resulted primarily from an increased sales effort in the European market.

It
is not clear to what extent the events of September 11, 2001 impacted purchasing decisions by physicians at the end of the quarter when a number of our sales typically
occur.

Revenue
source by type is reflected in the following table:

|(unaudited)               |  | September 29, 2001 |        | September 30, 2000 |     | Change |  
|------------------------- |  | ------------------ | ------ | ------------------ | --- | ------ | -
|Lasers and other products |  | $                  | 6,860  |                    | 66  | %      | $
|Product related service   |  |                    | 2,826  |                    | 27  | %      |  
|Skin care centers         |  |                    | 694    |                    | 7   | %      |  
|                          |  |                    |        |                    |     |        |  
|Total revenue             |  | $                  | 10,380 |                    | 100 | %      | $
|                          |  |                    |        |                    |     |        |  

The
decrease in laser product revenue for the three month period ended September 29, 2001, compared to the three month period ended September 30, 2000, resulted from a
decrease in the sales

10

---

volume of our GentleLase and AlexLazr product lines. Product related service revenue did not significantly change during the quarter. Skin care center revenue decreased
primarily due to a decrease in the sale of accessories and treatments.

Gross Profit.Gross profit decreased to $4,749,000 or 46% of revenues for the three month
period ended September 29, 2001, compared to gross profit of $6,624,000 or 51% for the same period one year earlier. This decrease in gross profit results principally from a lower volume of
shipments of GentleLase systems.

Selling, General and Administrative Expense.Selling, general and administrative expenses
increased from $5,035,000 in the three month period September 30, 2000, to $5,703,000 for the three month period ending September 29, 2001. As a percentage of revenue, selling, general
and administrative expenses increased to 55% of revenues in comparison to 38% of revenues in the year prior. Startup costs for a new Japanese office and consulting fees to explore new ventures account
for the increase in selling, general, and administrative costs over the same period a year earlier.

Research and Development Expense.Research and development spending decreased to $1,012,000
for the three months ended September 29, 2001, compared to $1,415,000 for the same period one year earlier. As a percentage of sales, research and development spending remained constant at 10%.

Restructuring Charge.During the quarters ended December 27, 1997 and June 30,
2001, a combined restructuring charge was recorded and a reserve established in the amount of $3,721,000 resulting from management's decision to close the skin care center located in Scottsdale,
Arizona. During the quarter ended June 30, 2001, the Company determined that impairment indicators existed relating to its skin care/health spa services. In accordance with SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of," the Company wrote off all
remaining undepreciated long-lived spa-related assets of $640,000.

For
the three month period ended September 29, 2001, a total of $99,000 was charged against this reserve, representing costs associated with the Scottsdale facility. Subsequent
to September 29, 2001, the Company secured a sublease for the Scottsdale facility. Per the sublease agreement, the sublessor will pay all costs associated with the facility through the end of
the lease term ending June 2006. As an incentive to the sublessor, the Company agreed to pay eight months of rent during the life of the sublease and for certain other facility improvements up to a
specified amount. The sublessee will commence making payments to the landlord in April 2002.

Other Income/Expense.Net other income was $84,000 in income for the three months ended
September 29, 2001, compared to income of $107,000 for the three months ended September 30, 2000. This decrease in other income resulted primarily from lower interest income as compared
to same period a 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 three months ended September 29, 2001, includes a tax provision calculated for income generated in
Japan, France
and Spain using rates in excess of the U.S. statutory rate. The Company has recorded a 35% tax benefit for the period ended September 30, 2001, in comparison to the three month period ended
September 20, 2000, in which the Company recorded a 40% tax rate. The Company expects a tax benefit for U.S. tax purposes based on its ability to file a net operating loss carryback
claim for current year losses.

Liquidity and Capital Resources

Cash used by operating activities amounted to $2,658,000 for the three months ended September 29, 2001, in comparison to cash provided by operating
activities in the amount of $1,322,000

11

---

for the same period a year earlier. This decrease in cash reflects a net loss and an increase in inventories, other current assets and a decrease in accounts payable. Cash used by investing activities
totaled $443,000 for the three months ended September 29, 2001, compared to an outflow of $66,000 for the same period in the prior year. This change reflects more cash used to support the
Oracle software implementation. Cash used for financing activities amounted to $877,000 in comparison to cash provided from financing activities of $327,000 for the same period a year earlier. The
change in cash used for financing primarily reflects the repurchase of stock by the corporation in the period ended September 29, 2001. The change in additional paid in capital results from a
tax benefit of disqualifying dispositions from the fiscal year ended June 30, 2001.

In
connection with out outstanding issuance of our eight-year, 9.75% subordinated notes, a total of $285,000 has been accreted to the notes through September 29,
2001, resulting in a long-term liability balance of $2.6 million and a short-term liability balance of $499,000 at quarter end. A total of $25,105 of interest expense
has been recorded in the three month period ended September 29, 2001.

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 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 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 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 address 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 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

12

---

Company has not yet determined the effect SFAS 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 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 dated 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:



13

---



Item 3Quantitative and Qualitative Disclosures About Market Risk

At September 29, 2001, 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 becomes due
in October 2006. We believe that any near term changes in interest rates will be immaterial to any potential losses in future earnings, cash flow and fair values.

At
September 29, 2001, the Company holds foreign currency contracts with notional values totaling $3,646,922 for the delivery of 177,214,399 Japanese Yen, 269,664 German Marks,
3,087,818 French Francs, and 1,896,799 Euros. These contracts have maturities prior to December 27, 2001. The carrying and net fair value of these contracts was $(397,529) at
September 29, 2001. We believe that any near term changes in currency rates will be immaterial to any potential losses in future earnings, cash flow and fair values because any adjustments to
fair value offset the change in the fair value of the foreign currency intercompany receivables.

14

---



CANDELA CORPORATION

Part II Other Information

Item 1Legal Proceedings

From time to time, we are a party to various legal proceedings incidental to our business. We believe 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. Need to discuss PSS

Item 6Exhibits and Reports on Form 8-K

(a)
Exhibits



(b)
Reports on Form 8-K



15

---



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: November 13, 2001 |  |  |  | /s/GERARD E. PUORROGerard E. Puorro (President and Chief Executive Officer)                                      
|Date: November 13, 2001 |  |  |  | /s/F. PAUL BROYERF. Paul Broyer (Senior Vice President of Finance and Administration and Chief Financial Officer)

16

---

QuickLinks