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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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FORM 10-Q

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

For the quarterly period ended December 29, 2001.

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 /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 January 31, 2002Common Stock, $.01 par value

10,091,944


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CANDELA CORPORATION

Index



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

2

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Part I. Financial Information

Item 1Financial Statements

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

|                                      |                                      | December 29,
2001                          |       | June 30,
2001 |       
|------------------------------------- | ------------------------------------ | ------------------------------------------ | ----- | ------------- | ------
|Assets                                |                                      |                                            |       |               |       
|Current assets:                       |                                      |                                            |       |               |       
|                                      | Cash and cash equivalents            |                                            | $     | 23,718        |       
|                                      | Accounts receivable, net             |                                            |       | 17,989        |       
|                                      | Notes receivable                     |                                            |       | 572           |       
|                                      | Inventories, net                     |                                            |       | 10,288        |       
|                                      | Other current assets                 |                                            |       | 946           |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total current assets                       |       |               | 53,513
|Property and equipment, net           |                                      |                                            | 3,188 |               |       
|Deferred tax assets                   |                                      |                                            | 5,306 |               |       
|Prepaid licenses                      |                                      |                                            | 1,493 |               |       
|Other assets                          |                                      |                                            | 198   |               |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total assets                               |       | $             | 63,698
|                                      |                                      |                                            |       |               |       
|Liabilities and Stockholders' Equity  |                                      |                                            |       |               |       
|Current liabilities:                  |                                      |                                            |       |               |       
|                                      | Accounts payable                     |                                            | $     | 4,227         |       
|                                      | Accrued payroll and related expenses |                                            |       | 1,494         |       
|                                      | Accrued warranty costs               |                                            |       | 3,785         |       
|                                      | Income taxes payable                 |                                            |       | 802           |       
|                                      | Restructuring reserve                |                                            |       | 1,450         |       
|                                      | Other accrued liabilities            |                                            |       | 2,130         |       
|                                      | Current portion of long-term debt    |                                            |       | 618           |       
|                                      | Deferred revenue                     |                                            |       | 4,448         |       
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total current liabilities                  |       |               | 18,954
|Long-term portion of deferred revenue |                                      |                                            | 1,968 |               |       
|Long-term debt                        |                                      |                                            | 2,557 |               |       
|Commitments and contingencies         |                                      |                                            |      |               |       
|Stockholders' equity:                 |                                      |                                            |       |               |       
|                                      | Common stock                         |                                            |       | 119           |       
|                                      | Additional paid-in capital           |                                            |       | 43,793        |       
|                                      | Accumulated earnings                 |                                            |       | 10,850        |       
|                                      | Treasury stock, at cost              |                                            |       | (12,631       | )     
|                                      | Accumulated other comprehensive loss |                                            |       | (1,912        | )     
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total stockholders' equity                 |       |               | 40,219
|                                      |                                      |                                            |       |               |       
|                                      |                                      | Total liabilities and stockholders' equity |       | $             | 63,698
|                                      |                                      |                                            |       |               |       

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 six months ended: |       
|-------------------------------------------- | --------------------------------------- | --------------------------- | --------------------------------- | ------------------------- | ------
|
|Revenues:                                    |                                         |                             |                                   |                           |       
|                                             | Lasers and other products               |                             | $                                 | 10,254                    |       
|                                             | Product related service                 |                             |                                   | 3,069                     |       
|                                             | Skin care center                        |                             |                                   | 833                       |       
|                                             |                                         |                             |                                   |                           |       
|                                             |                                         | Total revenues              |                                   |                           | 14,156
|Cost of sales:                               |                                         |                             |                                   |                           |       
|                                             | Lasers and other products               |                             |                                   | 5,111                     |       
|                                             | Product related service                 |                             |                                   | 2,256                     |       
|                                             | Skin care center                        |                             |                                   | 677                       |       
|                                             |                                         |                             |                                   |                           |       
|                                             |                                         | Total cost of sales         |                                   |                           | 8,044 
|Gross profit                                 |                                         |                             | 6,112                             |                           |       
|Operating expenses:                          |                                         |                             |                                   |                           |       
|                                             | Selling, general, and administrative    |                             |                                   | 6,814                     |       
|                                             | Research and development                |                             |                                   | 1,236                     |       
|                                             |                                         |                             |                                   |                           |       
|                                             |                                         | Total operating expenses    |                                   |                           | 8,050 
|                                             |                                         |                             |                                   |                           |       
|                                             |                                         |                             | Income (loss) from operations     |                           |       
|Other income (expense):                      |                                         |                             |                                   |                           |       
|                                             | Interest income                         |                             |                                   | 131                       |       
|                                             | Interest expense                        |                             |                                   | (120                      | )     
|                                             | Other income                            |                             |                                   | 412                       |       
|                                             |                                         |                             |                                   |                           |       
|                                             |                                         | Total other income          |                                   |                           | 423   
|                                             |                                         |                             | Income (loss) before income taxes |                           |       
|Provision (benefit) for income taxes         |                                         |                             | (354                              | )                         |       
|                                             |                                         |                             |                                   |                           |       
|Net income (loss)                            |                                         | $                           | (1,161                            | )                         | $     
|                                             |                                         |                             |                                   |                           |       
|                                             |                                         |                             | Basic earnings (loss) per share   |                           | $     
|                                             |                                         |                             | Diluted earnings (loss) per share |                           | $     
|Weighted average shares outstanding          |                                         |                             | 10,176                            |                           |       
|Adjusted weighted average shares outstanding |                                         |                             | 10,176                            |                           |       
|Net Income (loss)                            |                                         | $                           | (1,161                            | )                         | $     
|Other comprehensive income net of tax:       |                                         |                             |                                   |                           |       
|                                             | Foreign currency translation adjustment |                             |                                   | 188                       |       
|                                             |                                         |                             |                                   |                           |       
|Comprehensive income (loss)                  |                                         | $                           | (973                              | )                         | $     
|                                             |                                         |                             |                                   |                           |       

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 six 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 |                                      
|                                                      |                                                                                                     | 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  |                                                                                                     |                                                                                        | (3,067                               
|Cash flows from investing activities:                 |                                                                                                     |                                                                                        |                                      
|                                                      |                                                                                                     | Purchases of property and equipment                                                    |                                      
|                                                      |                                                                                                     |                                                                                        |                                      
|Net cash used for investing activities                |                                                                                                     |                                                                                        | (778                                 
|Cash flows from financing activities:                 |                                                                                                     |                                                                                        |                                      
|                                                      |                                                                                                     | Principal payments of long-term debt                                                   |                                      
|                                                      |                                                                                                     | Net borrowings on line of credit                                                       |                                      
|                                                      |                                                                                                     | Proceeds from the issuance of common stock                                             |                                      
|                                                      |                                                                                                     | Repurchase of treasury stock                                                           |                                      
|                                                      |                                                                                                     |                                                                                        |                                      
|Net cash used for financing activities                |                                                                                                     |                                                                                        | (4,538                               
|Effect of exchange rates on cash and cash equivalents |                                                                                                     |                                                                                        | (217                                 
|Net increase (decrease) in cash and cash equivalents  |                                                                                                     |                                                                                        | (8,600                               
|Cash and cash equivalents at beginning of period      |                                                                                                     |                                                                                        | 32,318                               
|Cash and cash equivalents at end of period            |                                                                                                     | $                                                                                      | 23,718                               
|                                                      |                                                                                                     |                                                                                        |                                      

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

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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. The results for the three-month period or the six-month period ended December 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 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 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

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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 six months ended:
|-------------------------------------------- |  | --------------------------- | ------ | -------------------------
|
|Numerator                                    |  |                             |        |                          
|Net income (loss)                            |  | $                           | (1,161 | )                        
|                                             |  |                             |        |                          
|Denominator                                  |  |                             |        |                          
|Basic Earnings per Share                     |  |                             |        |                          
|Weighted average shares outstanding          |  |                             | 10,176 |                          
|                                             |  |                             |        |                          
|Basic earnings (loss) per share              |  | $                           | (0.11  | )                        
|                                             |  |                             |        |                          
|Diluted Earnings per Share                   |  |                             |        |                          
|Weighted average shares outstanding          |  |                             | 10,176 |                          
|Effect of dilutive securities:               |  |                             |        |                          
|Stock options                                |  |                             |        |                          
|Stock warrants                               |  |                             |        |                          
|                                             |  |                             |        |                          
|Adjusted weighted average shares outstanding |  |                             | 10,176 |                          
|                                             |  |                             |        |                          
|Diluted earnings (loss) per share            |  | $                           | (0.11  | )                        
|                                             |  |                             |        |                          

During
the three and six month periods ended December 30, 2000, options to purchase 224,096 and 141,000 shares of common stock, respectively, were excluded from the calculation of
diluted earnings per share.

4.    Inventories

Inventories consist of the following (in thousands):

December 29, 2001

June 30, 2001Raw materials

$
4,257

$
3,723Work in process


449


951Finished goods


5,582


5,397$
10,288

$
10,071


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.

7

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The
following table reflects the restructuring charges incurred during the six-month period ended December 29, 2001 (in thousands):

Payroll and
Severance

Leasehold
Improvements
and Fixed
Assets

Facility
Costs

TotalBalance at June 30, 2001

$
178

$
841

$
670

$
1,689Cash charges


(22
)




(119
)

(141
)Non-cash charges





(98
)




(98
)Balance at December 29, 2001

$
156

$
743

$
551

$
1,450


For
the six-month period ended December 29, 2001, a total of $239,000 was charged against this reserve, representing costs associated with the Scottsdale facility.
Also, 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 and for
certain other facility improvements up to a specified amount. The sublessee will commence making payments to the landlord in April 2002. Since the Company remains contingently liable for
facility costs and the sublessee will not make sublease rental payments until next quarter, we do not plan to recognize the impact of this sublease until the sublessee has established a payment
history. At that time, we will revise our estimate of future costs associated with the Scottsdale facility and may be required to reverse or increase the restructuring reserve.

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 December 29, 2001, 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 December 29, 2001.
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 under
EITF-86-30. 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.

8

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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.

|                              |                               | Three months ended |        | Six months ended |  
|----------------------------- | ----------------------------- | ------------------ | ------ | ---------------- | -
|
|Line of Business Data:        |                               |                    |        |                  |  
|Revenue:                      |                               |                    |        |                  |  
|                              | Product sales and service     |                    | $      | 13,323           |  
|                              | Skin care/health spa services |                    |        | 833              |  
|                              |                               |                    |        |                  |  
|Total revenue                 |                               | $                  | 14,156 |                  | $
|                              |                               |                    |        |                  |  
|Operating income (loss):      |                               |                    |        |                  |  
|                              | Product sales and service     |                    | $      | (1,518           | )
|                              | Skin care/health spa services |                    |        | (420             | )
|                              |                               |                    |        |                  |  
|Total operating income (loss) |                               | $                  | (1,938 | )                | $
|                              |                               |                    |        |                  |  

|                                          |                               | As of
December 29, 2001 |  | As of
June 30, 2001
|----------------------------------------- | ----------------------------- | ----------------------- |  | -------------------
|Total assets: (net intercompany accounts) |                               |                         |  |                    
|                                          | Product sales and service     |                         |  |                    
|                                          | Skin care/health spa services |                         |  |                    
|                                          |                               |                         |  |                    
|Total assets                              |                               |                         |  | $                  
|                                          |                               |                         |  |                    

8.    Legal Proceedings

During Candela's second fiscal quarter ended December 29, 2001, Candela notified Physicians Sales and Service, Inc. a division of PSS World Medical, Inc., that
Candela was terminating its exclusive Distribution Agreement between Candela and PSS due to PSS's failure to pay outstanding invoices totaling approximately $2.3 million. These invoices arose in
connection with Candela's shipment of various units of equipment to PSS pursuant to firm purchase orders received by Candela from PSS. These invoices arose as of June 30, 2001, and were due and
payable in full on or before September 30, 2001. After receiving the Notice of Termination from Candela, PSS filed a lawsuit against Candela in Middlesex County Superior Court in Massachusetts as well
as a demand for arbitration pursuant to the mandatory arbitration clause in the distribution agreement. Both of PSS's complaints allege breach of contract, a violation of the Massachusetts Unfair
Trade Practices Act, breach of the covenant of good faith and fair dealing, promissory estoppel and intentional interference with contractual relations resulting from Candela's termination of its
distribution agreement with PSS. PSS's motion for injunctive relief was denied, and Candela's motion to stay the lawsuit pending the outcome of arbitration was allowed. Candela has filed counterclaims
in the arbitration for breach of contract and unfair competition, among other claims, and seeking payment on all outstanding invoices. The two parties are in the process of selecting arbitrators at
this time. Candela believes that PSS's claims are without merit and intends to vigorously prosecute its claim for payment of outstanding amounts and to defend against all of PSS's claims in the
arbitration proceeding. As a result of PSS's delay in payment to date and its initiation of legal action, Candela increased its reserve for bad debts by $300,000 at the end of the

9

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second quarter to safeguard against the risk of some nonpayment by PSS. Since PSS has challenged its obligation to pay any of the $2.3 million of invoices at issue in the arbitration, if Candela were
to lose the arbitration proceeding, such loss would have a material adverse effect on Candela.

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

10

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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.

Results of Operations

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

|                |  | Three months ended |        |  |     |   |  
|--------------- |  | ------------------ | ------ |  | --- | - | -
|
|US revenue      |  | $                  | 5,955  |  | 42  | % | $
|Foreign revenue |  |                    | 8,201  |  | 58  | % |  
|                |  |                    |        |  |     |   |  
|Total revenue   |  | $                  | 14,156 |  | 100 | % | $
|                |  |                    |        |  |     |   |  

|                |  | Six months ended |        |  |     |   |  
|--------------- |  | ---------------- | ------ |  | --- | - | -
|
|US revenue      |  | $                | 9,527  |  | 39  | % | $
|Foreign revenue |  |                  | 15,009 |  | 61  | % |  
|                |  |                  |        |  |     |   |  
|Total revenue   |  | $                | 24,536 |  | 100 | % | $
|                |  |                  |        |  |     |   |  

The
US revenue reported for the six-month period ended December 29, 2001 was lower than the same period a 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 increase in US revenue for the three-month period ended
December 29, 2001. The increase in domestic revenue during the three-month period ended December 29, 2001 reflects an increase in sales volume of Vbeam and GentleLase
products, contributing approximately $800,000 to domestic revenue, as compared to the same period one year earlier. Foreign revenue decreased in the three-month and six-month periods ended
December 29, 2001 compared to the same periods one year earlier. A decrease in the average selling price of the AlexLazr and a decrease in sales volume of the
GentleLase systems contributed approximately $700,000 and $800,000 respectively to the decrease in foreign revenue in the three-month period ended December 29, 2001 as compared to
the same period one year earlier. The AlexLazr is sold primarily in foreign markets and the decrease in the average selling price did not affect the domestic market significantly.

It
is not clear to what extent the events of September 11, 2001 impacted purchasing decisions by physicians during the quarter ended December 29, 2001. The increase in
domestic sales during the quarter ended December 29, 2001 may be due in part to delayed purchase decisions that may otherwise have occurred at the end of the previous quarter.

11

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Revenue
source by type is reflected in the following table:

|              |                           | Three months ended |        |        |     |    |  
|------------- | ------------------------- | ------------------ | ------ | ------ | --- | -- | -
|
|              | Lasers and other products |                    | $      | 10,254 |     | 72 | %
|              | Product related service   |                    |        | 3,069  |     | 22 | %
|              | Skin care centers         |                    |        | 833    |     | 6  | %
|              |                           |                    |        |        |     |    |  
|Total revenue |                           | $                  | 14,156 |        | 100 | %  | $
|              |                           |                    |        |        |     |    |  

|              |                           | Six months ended |        |        |     |    |  
|------------- | ------------------------- | ---------------- | ------ | ------ | --- | -- | -
|
|              | Lasers and other products |                  | $      | 17,113 |     | 70 | %
|              | Product related service   |                  |        | 5,895  |     | 24 | %
|              | Skin care centers         |                  |        | 1,528  |     | 6  | %
|              |                           |                  |        |        |     |    |  
|Total revenue |                           | $                | 24,536 |        | 100 | %  | $
|              |                           |                  |        |        |     |    |  

The
decrease in laser product revenue for the three-month and six-month periods ended December 29, 2001, resulted from decreases in the average selling price of the
AlexLazr and decreases in sales volume of GentleLase products in foreign markets. The three-month period ended December 29, 2001 reflects an increase in sales volume
of GentleLase products in domestic markets offsetting these foreign decreases. Product related service revenue decreased inconsequentially during the three-month and six-month
periods ended December 29, 2001 as compared to the same periods one year earlier. Skin care centers revenue decreased during the three-month and six-month periods ended
December 29, 2001 due to decreases in retail products, spa services and salon services, contributing approximately $16,000, $65,000 and $44,000 respectively to the decrease for the three-month
period ended December 29, 2001 as compared to the three-month period ended December 30, 2000.

Gross Profit.Gross profit decreased to $6,112,000 or 43% of revenues and $10,861,000 or 43% of
revenue for the three-month and six-month periods respectively ended December 29, 2001, compared to gross profit of $7,762,000 or 53% and $14,386,000 or 52% for the same respective
periods one year earlier. This decrease in gross profit results principally from a decrease in the average selling price of the AlexLazr. Gross profit on sales of all AlexLazr systems
fell from approximately $600,000 in the three-month period ended December 30, 2000 to approximately $100,000 in the same period one year later on approximately the same sales volume. Gross
profit on product related service fell $439,000 in the quarter ended December 29, 2001 as compared to the same period one year earlier, due in part to a decrease in service revenue and in part
to an increase in first year warranty costs of approximately $400,000. The decrease in skin care center revenue contributed $224,000 to the overall decrease in gross profit.

Selling, General and Administrative Expense.Selling, general and administrative expenses increased
from $5,681,000 and $10,716,000 in the three-month and six-month periods ended December 30, 2000 respectively, to $6,814,000 and $12,518,000 for the three-month and
six-month periods respectively ending December 29, 2001. As a percentage of revenue, selling, general and administrative expenses increased from 39% of revenue for both the three
and six-month periods ended December 30, 2000 to 48% and 51% of revenue for the respective three and six-month periods ended December 29, 2001. This increase is
due in part to a $300,000 increase in the provision for bad debts and a one-time $90,000 settlement to close memberships in the Skin Care Center. Costs to increase our domestic sales force
to replace sales channels formerly serviced by a major U.S. distributor also contributed to the

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increase in selling, general and administrative expenses. Our selling expenses are expected to increase as the domestic sales force is increased, but the added costs should be offset by a
corresponding increase in domestic revenue.

Research and Development Expense.Research and development spending decreased to $1,236,000 and
$2,248,000 respectively for the three and six-month periods ended December 29, 2001, compared to $1,522,000 and $2,937,000 for the same periods one year earlier. As a percentage of
sales, research and development spending decreased slightly from 11% and 10% respectively for the three and six-month periods ended December 30, 2000 to 9% for both the three and
six-month periods ended December 29, 2001. The decrease in research and development expenses is primarily due to efforts to decrease payroll costs in that department. Expenditures
for this department will likely remain at 10% of sales for the remainder of the year.

Restructuring Charge.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.For the six-month period ended December 29, 2001, a total of $239,000 was charged against this reserve, representing costs associated
with the Scottsdale facility. Also, 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 and for certain other facility improvements up to a specified amount. The sublessee will commence making payments to the landlord in April 2002. Since the Company remains
contingently liable for facility costs
and the sub lessee will not make sublease rental payments until next quarter, we do not plan to recognize the impact of this sublease until the sublessee has established a payment history. At that
time, we will revise our estimate of future costs associated with the Scottsdale facility and may be required to reverse or increase the restructuring reserve.

Other Income/Expense.Net other income was $423,000 for the three months ended December 29,
2001, compared to income of $749,000 for the three months ended December 30, 2000. This decrease in other income resulted primarily from lower interest income rates and lower cash balances
invested as compared to the 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 six-month period ended December 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 30% tax benefit for the period ended December 29, 2001, in comparison to the
six-month period ended December 20, 2000, 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 $3,067,000 for the six-month period ended December 29, 2001. This decrease in cash reflects a net
loss combined with cash payments for trade payables and income taxes offset slightly by collections of accounts and notes receivable. Cash used for investing activities totaled $778,000 for the
six-month period ended December 29, 2001 and primarily reflects payments to support the Company's Oracle software implementation initiatives. Cash used for financing activities in
the six-month period ended December 29, 2001 amounted to $4,538,000 and primarily reflects stock purchases pursuant to our stock repurchase program.

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In
connection with our eight-year, 9.75% subordinated notes; a total of $310,000 has been accreted to the notes through December 29, 2001, resulting in a
long-term liability balance of $2.6 million and a short-term liability balance of $618,000 at quarter end. A total of $25,306 of interest expense was recorded in the
three month period ended December 29, 2001.

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

Payments due by PeriodIn thousands

Total

Less than
1 year

1-3 years

4-5 years

After
5 yearsContractual ObligationsLong-term Debt

3,700

618

2,220

862Operating Leases

2,460

652

594

328

885Total Contractual Cash Obligations

6,160

1,270

2,814

1,190

885


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 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

14

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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.

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 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 December 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 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
December 29, 2001, 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 December 29, 2001. 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 under EITF-86-30. 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.

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
December 29, 2001, the Company holds foreign currency contracts with notional values totaling $1,899,253 for the delivery of 192,203,802 Japanese Yen and 395,286 Euros. These
contracts have maturities prior to March 26, 2002. The carrying and net fair value of these contracts was $(42,834) at December 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 value because any adjustments to fair value offset the change in the fair value of the foreign currency
intercompany receivables.

16

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CANDELA CORPORATION

Part II Other Information

Item 1Legal Proceedings

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

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

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

On November 21, 2001, the Company held its Annual Shareholder meeting. At the meeting, the Shareholders acted upon the following proposals: (i) to
elect a Board of Directors; and (ii) to ratify the selection of the firm of Ernst & Young LLP as independent auditors for the fiscal year ending June 29, 2002.

Votes
"For" represent affirmative votes and do not include abstentions or broker non-votes. In cases where a signed proxy was submitted without direction, the shares
represented by the proxy were voted "For" each proposal in the manner disclosed in the Proxy Statement and Proxy.

|MATTER |  |                                      |  | FOR       |  | AGAINST |  | WITHHELD
|------ |  | ------------------------------------ |  | --------- |  | ------- |  | --------
|I.     |  | ELECTION OF DIRECTORS                |  |           |  |         |  |         
|       |  | Gerard E. Puorro                     |  | 5,069,514 |  |         |  | 369,061 
|       |  | Kenneth D. Roberts                   |  | 5,076,914 |  |         |  | 361,661 
|       |  | Douglas W. Scott                     |  | 5,070,414 |  |         |  | 368,161 
|       |  | Richard J. Cleveland, MD             |  | 5,070,314 |  |         |  | 368,261 
|       |  | Nancy Nager                          |  | 5,077,014 |  |         |  | 361,561 
|II.    |  | RATIFICATION OF INDEPENDENT AUDITORS |  | 5,399,702 |  | 22,848  |  | 16,025  

17

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Item 6Exhibits and Reports on Form 8-K

(a)  Exhibits



(b)  Reports
on Form 8-K



18

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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: February 12, 2002 |  | /s/GERARD E. PUORRO                                                                             
|                        |  |                                                                                                 
|                        |  | Gerard E. Puorro
(President and Chief Executive Officer)                                        
|Date: February 12, 2002 |  | /s/F. PAUL BROYER                                                                               
|                        |  |                                                                                                 
|                        |  | F. Paul Broyer
(Senior Vice President of Finance and Administration and Chief Financial Officer)

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