UNITED STATES
SECURITIES 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 March 29, 2008.

Commission file number 000-14742

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

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

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

|Large accelerated filer o |  | Accelerated filer ý |  | Non-accelerated filer o (Do not check if a smaller reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

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

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

Class

Outstanding at May 6, 2008Common Stock, $.01 par value per share

22,835,433




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CANDELA CORPORATION

Table of Contents

|         |  |                        |  |                                                                                                                                                                                                                                |  | Page   
|-------- |  | ---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------
|Part I.  |  | Financial Information: |  |                                                                                                                                                                                                                               
|         |  | Item 1.                |  | Unaudited Financial Statements                                                                                                                                                                                                 |  |        
|         |  |                        |  | Condensed Consolidated Balance Sheets as of March 29, 2008 and June 30, 2007                                                                                                                                                   |  | 3      
|         |  |                        |  | Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three-month periods ended March 29, 2008 and March 31, 2007, and for the nine-month periods ended March 29, 2008 and March 31,
2007 |  | 4      
|         |  |                        |  | Condensed Consolidated Statements of Cash Flows for the nine-month periods ended March 29, 2008 and March 31, 2007                                                                                                             |  | 5      
|         |  |                        |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                                                                                                               |  | 6 - 17 
|         |  | Item 2.                |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                          |  | 18 - 23
|         |  | Item 3.                |  | Quantitative and Qualitative Disclosure about Market Risk                                                                                                                                                                      |  | 24     
|         |  | Item 4.                |  | Controls and Procedures                                                                                                                                                                                                        |  | 24     
|Part II. |  | Other Information:     |  |                                                                                                                                                                                                                               
|         |  | Item 1.                |  | Legal proceedings                                                                                                                                                                                                              |  | 25 - 26
|         |  | Item 6.                |  | Exhibits                                                                                                                                                                                                                       |  | 27     
|         |  | Signatures             |  | 28                                                                                                                                                                                                                            
|         |  | Index to Exhibits      |  | 29                                                                                                                                                                                                                            

2

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Part I. Financial Information

Item 1Financial Statements

CANDELA CORPORATION        Condensed Consolidated Balance Sheets(in thousands, except per-share data)        (unaudited)

|                                     |                                                                                                                                    | March 29,
2008                             |        | June 30,
2007 |        
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------- | -------
|Assets                               |                                                                                                                                    |                                            |        |               |        
|Current assets:                      |                                                                                                                                    |                                            |        |               |        
|                                     | Cash and cash equivalents                                                                                                          |                                            | $      | 17,121        |        
|                                     | Restricted cash                                                                                                                    |                                            |        | 29            |        
|                                     | Marketable securities                                                                                                              |                                            |        | 17,312        |        
|                                     | Accounts receivable, net of allowance for doubtful accounts of $2,601 and $1,412 at March 29 and June 30, respectively             |                                            |        | 42,896        |        
|                                     | Notes receivable                                                                                                                   |                                            |        | 270           |        
|                                     | Inventories, net                                                                                                                   |                                            |        | 30,933        |        
|                                     | Other current assets                                                                                                               |                                            |        | 14,204        |        
|                                     |                                                                                                                                    |                                            |        |               |        
|                                     |                                                                                                                                    | Total current assets                       |        |               | 122,765
|Property and equipment, net          |                                                                                                                                    |                                            | 4,277  |               |        
|Deferred tax assets                  |                                                                                                                                    |                                            | 6,034  |               |        
|Goodwill                             |                                                                                                                                    |                                            | 11,253 |               |        
|Acquired Intangible assets, net      |                                                                                                                                    |                                            | 7,228  |               |        
|Marketable securities, long-term     |                                                                                                                                    |                                            | 3,756  |               |        
|Other assets                         |                                                                                                                                    |                                            | 2,739  |               |        
|                                     |                                                                                                                                    |                                            |        |               |        
|                                     |                                                                                                                                    | Total assets                               |        | $             | 158,052
|                                     |                                                                                                                                    |                                            |        |               |        
|Liabilities and Stockholders' Equity |                                                                                                                                    |                                            |        |               |        
|Current liabilities:                 |                                                                                                                                    |                                            |        |               |        
|                                     | Accounts payable                                                                                                                   |                                            | $      | 17,679        |        
|                                     | Accrued payroll and related expenses                                                                                               |                                            |        | 4,554         |        
|                                     | Accrued warranty costs, current                                                                                                    |                                            |        | 4,658         |        
|                                     | Sales tax payable                                                                                                                  |                                            |        | 1,263         |        
|                                     | Royalties payable                                                                                                                  |                                            |        |              |        
|                                     | Other accrued liabilities                                                                                                          |                                            |        | 8,815         |        
|                                     | Deferred revenue, current                                                                                                          |                                            |        | 12,463        |        
|                                     | Current liabilities of discontinued operations                                                                                     |                                            |        | 1,219         |        
|                                     |                                                                                                                                    |                                            |        |               |        
|                                     |                                                                                                                                    | Total current liabilities                  |        |               | 50,651 
|Deferred tax liability, long-term    |                                                                                                                                    |                                            | 1,911  |               |        
|Accrued warranty costs, long-term    |                                                                                                                                    |                                            | 886    |               |        
|Deferred revenue, long-term          |                                                                                                                                    |                                            | 4,493  |               |        
|                                     |                                                                                                                                    |                                            |        |               |        
|                                     |                                                                                                                                    | Total liabilities                          |        |               | 57,941 
|                                     |                                                                                                                                    |                                            |        |               |        
|Stockholders' equity:                |                                                                                                                                    |                                            |        |               |        
|                                     | Common stock, $.01 par value, 60,000,000 shares authorized; 26,102,000 and 26,082,000 issued at March 29 and June 30, respectively |                                            |        | 261           |        
|                                     | Treasury stock, 3,450,000 and 3,125,000 common shares at March 29 and June 30, respectively, at cost                               |                                            |        | (24,855       | )      
|                                     | Additional paid-in capital                                                                                                         |                                            |        | 72,572        |        
|                                     | Accumulated earnings                                                                                                               |                                            |        | 48,117        |        
|                                     | Accumulated other comprehensive income (loss)                                                                                      |                                            |        | 4,016         |        
|                                     |                                                                                                                                    |                                            |        |               |        
|                                     |                                                                                                                                    | Total stockholders' equity                 |        |               | 100,111
|                                     |                                                                                                                                    |                                            |        |               |        
|                                     |                                                                                                                                    | Total liabilities and stockholders' equity |        | $             | 158,052
|                                     |                                                                                                                                    |                                            |        |               |        

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 Income (Loss) and Comprehensive Income (Loss)        (in thousands, except per-share data)

|                                            |                                                                      | For the three months ended:  |        | For the nine months ended: |       
|------------------------------------------- | -------------------------------------------------------------------- | ---------------------------- | ------ | -------------------------- | ------
|
|
|Revenue                                     |                                                                      |                              |        |                            |       
|                                            | Lasers and other products                                            |                              | $      | 28,428                     |       
|                                            | Product-related service                                              |                              |        | 10,463                     |       
|                                            |                                                                      |                              |        |                            |       
|                                            |                                                                      | Total revenue                |        |                            | 38,891
|Cost of sales                               |                                                                      |                              |        |                            |       
|                                            | Lasers and other products                                            |                              |        | 13,260                     |       
|                                            | Product-related service                                              |                              |        | 8,172                      |       
|                                            |                                                                      |                              |        |                            |       
|                                            |                                                                      | Total cost of sales          |        |                            | 21,432
|                                            |                                                                      |                              |        |                            |       
|Gross profit                                |                                                                      |                              | 17,459 |                            |       
|Operating expenses:                         |                                                                      |                              |        |                            |       
|                                            | Selling, general and administrative                                  |                              |        | 18,254                     |       
|                                            | Research and development                                             |                              |        | 3,030                      |       
|                                            |                                                                      |                              |        |                            |       
|                                            |                                                                      | Total operating expenses     |        |                            | 21,284
|                                            |                                                                      |                              |        |                            |       
|(Loss) income from operations               |                                                                      |                              | (3,825 | )                          |       
|Other income (expense):                     |                                                                      |                              |        |                            |       
|                                            | Interest income                                                      |                              |        | 367                        |       
|                                            | Other income (expense), net                                          |                              |        | 67                         |       
|                                            |                                                                      |                              |        |                            |       
|                                            |                                                                      | Total other income (expense) |        |                            | 434   
|                                            |                                                                      |                              |        |                            |       
|(Loss) income before income taxes           |                                                                      |                              | (3,391 | )                          |       
|(Benefit from) provision for income taxes   |                                                                      |                              | (1,335 | )                          |       
|                                            |                                                                      |                              |        |                            |       
|Net (loss) income                           |                                                                      | $                            | (2,056 | )                          | $     
|                                            |                                                                      |                              |        |                            |       
|Net (loss) income per share of common stock |                                                                      |                              |        |                            |       
|                                            | Basic                                                                |                              | $      | (0.09                      | )     
|                                            |                                                                      |                              |        |                            |       
|                                            | Diluted                                                              |                              | $      | (0.09                      | )     
|                                            |                                                                      |                              |        |                            |       
|Weighted average shares outstanding:        |                                                                      |                              |        |                            |       
|                                            | Basic                                                                |                              |        | 22,672                     |       
|                                            | Diluted                                                              |                              |        | 22,672                     |       
|Net (loss) income                           |                                                                      | $                            | (2,056 | )                          | $     
|Other comprehensive income (loss):          |                                                                      |                              |        |                            |       
|                                            | Foreign currency translation adjustment                              |                              |        | 1,965                      |       
|                                            | Unrealized gain (loss) on available-for-sales securities, net of tax |                              |        |                           |       
|                                            |                                                                      |                              |        |                            |       
|Comprehensive (loss) income                 |                                                                      | $                            | (91    | )                          | $     
|                                            |                                                                      |                              |        |                            |       

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

4

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

|                                                      |                   | For the nine months ended:                                                           |                                     
|----------------------------------------------------- | ----------------- | ------------------------------------------------------------------------------------ | ------------------------------------
|
|Cash flows from operating activities:                 |                   |                                                                                      |                                     
|                                                      | Net (loss) income |                                                                                      | $                                   
|                                                      |                   | Adjustments to reconcile net (loss) income to net cash used by operating activities: |                                     
|                                                      |                   | Loss on other-than-temporary impairment of investment (Note 18)                      |                                     
|                                                      |                   | Gain on exchange of stock                                                            |                                     
|                                                      |                   | Share-based compensation expense                                                     |                                     
|                                                      |                   | Depreciation and amortization                                                        |                                     
|                                                      |                   | Provision for bad debts                                                              |                                     
|                                                      |                   | Other non-cash items                                                                 |                                     
|                                                      |                   | Changes in operating assets and liabilities                                          |                                     
|                                                      |                   |                                                                                      | 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                
|                                                      |                   |                                                                                      | Other accrued liabilities           
|                                                      |                   |                                                                                      | Restricted cash                     
|                                                      |                   |                                                                                      |                                     
|Net cash used by operating activities                 |                   |                                                                                      | (10,697                             
|                                                      |                   |                                                                                      |                                     
|Cash flows from investing activities:                 |                   |                                                                                      |                                     
|                                                      |                   | Purchases of property and equipment                                                  |                                     
|                                                      |                   | Maturities of held-to-maturity marketable securities                                 |                                     
|                                                      |                   | Cash proceeds from exchange of stock (Note 18)                                       |                                     
|                                                      |                   | Purchases of held-to-maturity marketable securities                                  |                                     
|                                                      |                   | Acquisition of business, net of cash acquired                                        |                                     
|                                                      |                   | Acquisition of intangible assets                                                     |                                     
|                                                      |                   |                                                                                      |                                     
|Net cash used by investing activities                 |                   |                                                                                      | (663                                
|                                                      |                   |                                                                                      |                                     
|Cash flows from financing activities:                 |                   |                                                                                      |                                     
|                                                      |                   | Proceeds from the issuance of common stock                                           |                                     
|                                                      |                   | Purchase of treasury stock                                                           |                                     
|                                                      |                   |                                                                                      |                                     
|Net cash used by financing activities                 |                   |                                                                                      | (2,206                              
|                                                      |                   |                                                                                      |                                     
|Effect of exchange rates on cash and cash equivalents |                   |                                                                                      | 3,535                               
|                                                      |                   |                                                                                      |                                     
|Net decrease in cash and cash equivalents             |                   |                                                                                      | (10,031                             
|Cash and cash equivalents at beginning of period      |                   |                                                                                      | 27,152                              
|                                                      |                   |                                                                                      |                                     
|Cash and cash equivalents at end of period            |                   | $                                                                                    | 17,121                              
|                                                      |                   |                                                                                      |                                     

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

5

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Candela Corporation        Notes to Condensed Consolidated Financial Statements (unaudited)

1. Basis of Presentation and Consolidation



The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The year-end consolidated balance
sheet is derived from our audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of
management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, considered necessary for a fair
presentation of our financial position, results of operations and cash flows at the dates and for the periods indicated. Actual results may differ from these estimates.

The
results for the three and nine-month periods ended March 29, 2008 are not necessarily indicative of results to be expected for the remainder of the fiscal year.
The information contained in the interim financial statements should be read in conjunction with Management's Discussion and Analysis and the financial statements and notes thereto included in the
Candela
Corporation 2007 Form 10-K filed with the Securities and Exchange Commission ("SEC").



The financial statements include the accounts of Candela Corporation and its subsidiaries. Inter-company transactions and balances have been eliminated.
Investments in which we are not able to exercise significant influence over the investee are accounted for under the cost method.



On July 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, ("FIN 48"), Accounting for Uncertainty in Income
Taxes, as discussed more fully below. Other than this change, there have been no significant changes in our
significant accounting policies during the nine months ended March 29, 2008 as compared to the significant accounting policies described in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2007.

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

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

6

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2. Recent Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 160,Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51. The standard changes the accounting for noncontrolling (minority) interests in consolidated financial
statements including the requirements to classify noncontrolling interests as a component of consolidated stockholders' equity, to identify earnings attributable to noncontrolling interests reported
as part of consolidated earnings, and to measure gain or loss on the deconsolidated subsidiary using fair value of noncontrolling equity investment. Additionally, SFAS No. 160 revises the
accounting for both increases and decreases in a parent's controlling ownership interest. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, with early
adoption prohibited. We do not expect the adoption of SFAS No. 160 to have a material impact on our consolidated financial statements.

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

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

In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements,which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but
provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for our fiscal year 2009. We are
currently assessing the potential impact that the adoption of SFAS No. 157 will have on our financial statements; the impact is not expected to be material.

3. Discontinued Operations

On September 27, 2003 management initiated a plan to close its only remaining skin care center. The closure was accounted for as a discontinued operation
in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assetsand SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. In determining the amount of the facilities closure accrual, we are required to
estimate such factors as future vacancy rates, the time required to sublet properties and

7

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sublease
rates. These estimates are reviewed quarterly and may result in revisions to established facility reserves.

Current
liabilities of discontinued operations consist of the following:

(in thousands)

March 29,
2008

June 30,
2007Facility closure and other costs

$
380

$
418Deferred revenue, gift certificates


839


839$
1,219

$
1,257


4. Stock-based Compensation

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

The
application of SFAS No. 123R and SAB 107 during the three-month periods ended March 29, 2008 and March 31, 2007 resulted in the recognition of share-based
compensation expense of approximately $0.8 million and $0.9 million, respectively. For the nine-month period ended March 29, 2008 and March 31, 2007,
recognition of shared-based compensation expense was approximately $2.8 million and $2.9 million, respectively. These expenses were divided between cost of sales and operating expense
cost centers based upon the functional responsibilities of the individuals holding the respective options.

As
of March 29, 2008, there was approximately $5.4 million of total unrecognized compensation cost related to non-vested stock options/Stock Appreciation Rights
("SARs") granted under the Company's incentive plans. This cost is expected to be recognized over a weighted-average period of 1.7 years. As of March 31, 2007, there was approximately
$2.9 million of total unrecognized compensation cost related to non-vested stock options granted under the Company's incentive plans.

The
amount of cash received from the exercise of stock options for the nine-month periods ended March 29, 2008 and March 31, 2007 was approximately
$0.1 million and $0.4 million, respectively.



The 1990 Employee Stock Purchase Plan (the "Purchase Plan") provides for the sale of up to 1.5 million shares of common stock to eligible employees. The
shares are issued at 85% of the market price on the last day of semi-annual periods. Substantially all full-time employees are eligible to participate in the Purchase Plan. At
March 29, 2008 there were approximately 640,000 shares available for sale. Compensation expense for the purchase plan is recognized over the vesting period.



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

8

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

SARs
provide the holder the right to receive an amount, payable in stock, cash or in any combination of these, as specified by a Committee established by the Board of Directors, equal to
the excess of the market value of our common shares on the date of exercise over the grant price at the time of the grant. The grant price of a SAR may not be less than the fair market value per share
of common stock on the date of grant, provided that the grant price of SARs granted in tandem with stock options shall equal the exercise price of the related stock option. None of the options/SARs
outstanding at March 29, 2008 had cash-settlement features.

Options
and rights granted under the 1998 Stock Plan become exercisable on the date of grant or in installments, as specified by a Committee established by the Board of Directors, and
expire ten years from the date of the grant. The maximum number of shares for which options and rights may be granted under the 1998 Stock Plan was increased by 2.5 million shares to
7.8 million by affirmative vote at the Company's Annual Meeting of Shareholders held December 12, 2006. Upon exercise of a SAR, only the net number of shares of common stock issued in
connection with such exercise shall be deemed "issued" for this purpose. The Company may satisfy the awards upon exercise with either newly-issued or treasury shares.

There
were approximately 1.3 million stock-based SARs granted during the nine-month period ended March 29, 2008. The SARs granted to employees become
exercisable ratably over one to four years, while the SARs granted to directors become exercisable over two years.

There
were approximately 3.8 million outstanding options/SARs at March 29, 2008 with a weighted-average exercise price of $9.19 per share, an aggregate intrinsic value of
less than $0.1 million, and a weighted-average remaining contractual term of 7.85 years.

Of
the total 3.8 million outstanding options/SARs, there were approximately 1.7 million of exercisable options/SARs at March 29, 2008 with a weighted-average
exercise price of $10.47 per share, an aggregate intrinsic value of less than $0.1 million, and a weighted-average remaining contractual term of 6.03 years.

There
were approximately 1.0 million options/SARs available for grant at March 29, 2008.

The
total intrinsic value of options exercised during the nine-month period ended March 29, 2008 was approximately $0.2 million.

5. Earnings or loss per Share

Basic earnings or loss per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding for the period.
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

9

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stock
options or warrants, net of shares assumed to have been purchased with the proceeds, using the treasury stock method.

|                                                             |                     | For the three months ended: |        | For the nine months ended:
|------------------------------------------------------------ | ------------------- | --------------------------- | ------ | --------------------------
|
|Shares used in the calculation of Basic earnings per share   |                     |                             | 22,672 |                           
|Effect of dilutive securities:                               |                     |                             |        |                           
|                                                             | Stock options/SAR's |                             |        |                          
|                                                             |                     |                             |        |                           
|Diluted shares used in the calculation of earnings per share |                     |                             | 22,672 |                           
|                                                             |                     |                             |        |                           
|Per share effect of dilutive securities on net income        |                     | $                           |       |                           
|                                                             |                     |                             |        |                           

During
the three and nine-month periods ended March 29, 2008, potential common shares consisting of all shares issuable upon exercise of stock options/SARs have been
excluded from the computation of diluted loss per share as their effect would have been anti-dilutive.

During
the three and nine-month periods ended March 31, 2007, options/SARs to purchase approximately 1.3 million and 1.0 million shares of common stock,
respectively, were excluded from the calculations of diluted earnings per share as their effect would have been anti-dilutive.

6. Acquisitions

On March 6, 2007, we acquired Inolase (2002) Ltd. ("Inolase") a non-public company engaged in the development and manufacture of
proprietary devices for the aesthetic light-based treatment industry as well as the development of intellectual property related to medical devices and light sources. The aggregate purchase price was
approximately $16.8 million in cash, including $0.3 million of acquisition-related transaction costs. No Candela common stock was issued in the acquisition.

This
acquisition was accounted for as a business combination. The purchase price allocation resulted in goodwill of $11.0 million and other acquired intangible assets of
$7.4 million. Other acquired intangible assets, which are being amortized over a weighted-average period of six years, are primarily comprised of developed technology of $6.0 million and
patents or patent applications of $1.4 million. Values assigned to these acquired intangible assets are not deductible for tax purposes.

7. Marketable Securities

The Company accounts for marketable securities in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity
Securities. SFAS 115 establishes the accounting and reporting requirements for all debt securities and for investments in equity securities that have readily
determinable fair values. All marketable securities must be classified as one of the following: held-to-maturity, available-for-sale, or trading.

The
Company classifies its marketable debt securities as held-to-maturity when the Company has the intent and ability to hold them to maturity. The Company has
classified its equity investments as available-for-sale securities. Accordingly, such investments are reported at fair market value, with the resultant unrealized gains and
losses reported as a separate component of shareholders' equity. Held-to-maturity debt securities are reported at amortized cost which approximates fair value. Current
marketable securities include debt investments with original maturities that are expected to mature in more than three months and less than or equal to twelve months and equity investments.
Long-term marketable securities include debt securities that have remaining maturities of one to three years. Unrealized losses related to the held-to-maturity
securities are not considered a permanent decline in the market value of such securities.

10

---



During
the nine-month period ended March 29, 2008, the Company recognized a $2.5 million loss on the other-than-temporary impairment in
the value of its available-for-sale equity investment in OccuLogix, Inc. (Note 18).

Marketable
securities consist of the following:

|                                        |                              | March 29, 2008 |        | June 30, 2007 |  
|--------------------------------------- | ---------------------------- | -------------- | ------ | ------------- | -
|
|Short-term (Held-to-maturity):          |                              |                |        |               |  
|                                        | Government-backed securities |                | $      | 13,499        |  
|                                        | Certificates of deposit      |                |        | 3,813         |  
|                                        |                              |                |        |               |  
|                                        |                              |                | 17,312 |               |  
|Short-term (Available-for-sale):        |                              |                |        |               |  
|                                        | Equity investments           |                |        |              |  
|                                        |                              |                |        |               |  
|Total marketable securities, short-term |                              | $              | 17,312 |               | $
|                                        |                              |                |        |               |  
|Long-term (Held-to-maturity):           |                              |                |        |               |  
|                                        | Government-backed securities |                | $      | 2,000         |  
|                                        | Certificates of deposit      |                |        | 1,756         |  
|                                        |                              |                |        |               |  
|Total marketable securities, long-term  |                              | $              | 3,756  |               | $
|                                        |                              |                |        |               |  

11

---



8. Inventories

Inventories consist of the following:

(in thousands)

March 29,
2008

June 30,
2007Raw materials

$
11,375

$
8,377Work in process


2,070


2,657Finished goods


17,488


10,334$
30,933

$
21,368


9. Property and Equipment

Property and equipment consists of the following:

(in thousands)

March 29,
2008

June 30,
2007Leasehold improvements

$
1,013

$
1,014Office furniture


710


662Computers, software, and other equipment


11,786


10,044$
13,509

$
11,720Less: accumulated depreciation


(9,232
)

(8,241
)Property and equipment, net

$
4,277

$
3,479


Depreciation
expense was approximately $0.3 million and $0.9 million for the three and nine-month periods ended March 29, 2008, respectively.
Depreciation expense was approximately $0.2 million and $0.7 million for the three and nine-month periods ended March 31, 2007, respectively.

10. Goodwill and Acquired Intangible Assets

Goodwill is the amount by which the cost of acquired net assets in a business acquisition exceeded the fair values of net identifiable assets on the date of our
purchase.

Goodwill
and acquired intangible assets consist of the following:

(in thousands)

March 29,
2008

June 30,
2007Goodwill

$
11,253

$
10,997Intagible assets with finite lives:Patents

$
3,037

$
2,804Developed technology


6,009


6,0099,046


8,813Less: accumulated amortization


(1,818
)

(662
)$
7,228

$
8,151


Amortization
expense was approximately $0.4 million and $1.3 million for the three and nine-month periods ended March 29, 2008, respectively.
Amortization expense was approximately $0.1 million and $0.3 million for the three and nine-month periods ended March 31, 2007, respectively.

12

---



11. Derivative Instruments and Hedging Activity

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

The
Company had two foreign currency forward contracts outstanding at March 29, 2008, serving to mitigate the foreign currency risk of a substantial portion of its
Euro-denominated inter-company balances in the notional amount of approximately 3.5 million Euros. The fair value of the foreign currency derivative contracts outstanding at
March 29, 2008 was approximately $5.5 million. Any gains or losses on the fair value of the effective portion of the derivative contract are largely offset by the losses and gains on the
underlying transactions.

12. Warranty Reserve

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

The
following table reflects changes in the Company's accrued warranty account during the three and nine-month periods ended March 29, 2008 and March 31, 2007,
respectively:

|                  |                                       | For the three months ended: |       | For the nine months ended: |  
|----------------- | ------------------------------------- | --------------------------- | ----- | -------------------------- | -
|
|Beginning balance |                                       | $                           | 6,085 |                            | $
|                  | Incremental accruals on current sales |                             |       | 1,784                      |  
|                  | Amortization of prior-period accruals |                             |       | (2,324                     | )
|                  |                                       |                             |       |                            |  
|Ending balance    |                                       | $                           | 5,545 |                            | $
|                  |                                       |                             |       |                            |  

13. Deferred Revenue

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

Revenues
are recognized when a signed non-cancelable purchase order exists, the product is shipped, title and risk have passed to the customer, the fee is fixed or
determinable, and collection is considered probable. Circumstances which generally preclude the immediate recognition of revenue include shipping terms of FOB destination or the existence of a
customer acceptance clause in a contract based upon customer inspection of the product. In these instances, revenue is deferred until adequate documentation is obtained to ensure that these criteria
have been fulfilled.

13

---



The
following table reflects changes in the Company's deferred revenue account during the three and nine-month periods ended March 29, 2008 and March 31, 2007,
respectively:

|                  |                                            | For the three months ended: |        | For the nine months ended: |  
|----------------- | ------------------------------------------ | --------------------------- | ------ | -------------------------- | -
|
|Beginning balance |                                            | $                           | 15,225 |                            | $
|                  | Deferral of new sales                      |                             |        | 5,081                      |  
|                  | Recognition of previously deferred revenue |                             |        | (3,350                     | )
|                  |                                            |                             |        |                            |  
|Ending balance    |                                            | $                           | 16,956 |                            | $
|                  |                                            |                             |        |                            |  

14. Common Stock Buyback

325,000 shares of common stock were purchased for approximately $2.4 million during the nine-month period ended March 29, 2008.

15. Commitments and Contingencies

The Company has an agreement with the Regents of the University of California ("Regents") for exclusive license rights to the Dynamic Cooling Device ("DCD"),
subject to certain limited license rights of Cool Touch, Inc. ("Cool Touch"), in the following fields of use: procedures that involve skin resurfacing and rejuvenation, vascular skin lesions,
and laser hair removal. Cool Touch, a subsidiary of New Star Technology, Inc., obtained a license to the DCD on a co-exclusive basis with the Company, in certain narrower fields of
use.

The
Company's agreement with the Regents called for an annual license fee of $0.3 million and a minimum annual royalty obligation of $1 million or 3%, whichever is greater.
The multi-year annual fee of $0.3 million was paid to the Regents in a lump sum of $3.0 million and is being amortized over the remaining life of the patent agreement, which
as of March 29, 2008 was less than eight years. The royalty and the amortization of the annual license fee payment are reflected in the Company's consolidated statement of income. The
unamortized portion of the license fee payment is reflected in other current assets and in other assets at March 29, 2008 and June 30, 2007, respectively.

16. Income Taxes

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

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

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

The
Company's policy to include interest and penalties related to gross unrecognized tax benefits within its provision for income taxes did not change upon the adoption of FIN 48.
To the extent

14

---



accrued
interest and penalties do not ultimately become payable, amounts accrued will be reduced in the period that such determination is made and reflected as a reduction of the overall income tax
provision.

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

17. Legal Proceedings

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



15

---





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

On
February 19, 2008, Cardiofocus, Inc. ("Cardiofocus") filed suit against the Company and eight other companies in the United States District Court for the District of
Massachusetts, asserting willful infringement by the Company of U.S. Patent 6,457,780,6,159,203 and 5,843,073. Cardiofocus seeks compensatory and treble damages, as well as attorneys' fees and
injunctive relief. On April 21, 2008, the Company answered Cardiofocus' complaint and asserted a variety of counterclaims against Cardiofocus. The Company believes the complaint to be without
merit and intends to vigorously defend against the lawsuit.

On
April 2, 2008, Western Pennsylvania Electrical Employees' Pension Fund filed a putative securities class-action suit against the Company, its President and CEO, Gerard E.
Puorro, and its former Chief Financial Officer, F. Paul Broyer in the United States District Court for the District of Massachusetts on behalf of investors who purchased our publicly traded securities
between February 1, 2006 and August 21, 2006. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seeks an unspecified amount of
damages, as well as other forms of relief. The Company believes the complaint to be without merit and intends to vigorously defend against the lawsuit.

From
time to time, the Company is party to various legal proceedings incidental to its business. The Company believes that none of the legal proceedings, other than the lawsuit initiated
by Palomar, that are presently pending, if adversely decided against us, will have a material adverse effect upon the Company's financial position, results of operations, or liquidity.

18. Other Income

In August 2007 the Company recognized a $0.6 million gain on the receipt of additional cash consideration related to the acquisition of Solx, Inc.,
a privately held company, by OccuLogix, Inc., a

16

---



publicly
traded company (NasdaqGM: OCCX). Candela Corporation originally held 19.99% of the outstanding common stock of Solx, Inc., on an as-converted basis, prior to Solx's
acquisition by OccuLogix.

During
the nine-month period ended March 31, 2007, the Company recognized a $3.5 million gain on the above-referenced exchange of common stock of
Solx Inc. for cash and common stock of OccuLogix, Inc. As a result of this transaction, Candela received approximately $1.0 million in cash at the time of closing, future cash
consideration of approximately $2.5 million, and approximately 1.3 million shares of common stock in OccuLogix, Inc.

The
Company classified the common shares of OccuLogix as available-for-sale securities recorded at fair value based upon quoted market prices. The temporary
differences between cost and fair value were presented in the consolidated financial statements in accumulated other comprehensive income within stockholders' equity, net of any related tax effect. At
December 29, 2007, in the opinion of management, the value of the investment in the common shares of OccuLogix sustained an other-than-temporary impairment in value and
the Company recognized an associated $2.5 million loss of which approximately $2.4 million was reclassified from accumulated other comprehensive income.

17

---





Candela Corporation

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

Overview

We research, develop, manufacture, market, sell, distribute, and service lasers and light-based products used to perform aesthetic and cosmetic procedures. We
sell our lasers to physicians and personal care 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, light-based devices, and other products, as well as product-related services.

Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates and
judgments on an on-going basis, including those related to revenue recognition, allowance for doubtful accounts, inventory reserves, warranty reserves, contingencies, valuation of
long-lived assets, stock-based compensation, restructurings and income taxes. We base our estimates and judgments on historical experience and on various other assumptions that we believe
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates and judgments under different assumptions or conditions. A discussion of our critical accounting policies and the related estimates and judgments
affecting the preparation of our consolidated financial statements is included in our Annual Report on Form 10-K for fiscal year 2007.

Critical Accounting Estimates

On July 1, 2007, we adopted a new pronouncement related to income taxes, as discussed under the Significant Accounting Policies portion of Note 1 of
the Notes to Condensed Consolidated Financial Statements. Other than this, there have been no significant changes in our critical accounting estimates during the nine months ended March 29,
2008 as compared to the critical accounting estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2007.

Recent Accounting Pronouncements

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

18

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Results of Operations

Revenue

Revenue source by geographic region is reflected in the following table:

|                        |  | For the three months ended: |       
|----------------------- |  | --------------------------- | ------
|
|U.S.                    |  | $                           | 13,274
|All other countries     |  |                             | 25,617
|                        |  |                             |       
|Total worldwide revenue |  | $                           | 38,891
|                        |  |                             |       

|
|

|                        |  | For the nine months ended: |        
|----------------------- |  | -------------------------- | -------
|
|
|U.S.                    |  | $                          | 43,980 
|All other countries     |  |                            | 66,465 
|                        |  |                            |        
|Total worldwide revenue |  | $                          | 110,445
|                        |  |                            |        

Consolidated
revenue was $38.9 million for the three-month period ended March 29, 2008, as compared to $38.7 million for the same period ended March 31, 2007.
The overall increase in quarterly revenue of approximately $0.2 million was comprised of revenue declines in the U.S. and Latin America of approximately $4.0 million which declines were
offset by an increase in revenues in Europe, Asia-Pacific, and Japan of approximately $4.2 million in the most recent quarter. The decrease in U.S. and Latin American revenues was
primarily related to a leveling-off in demand over all product lines. The increase in Europe and Asia-Pacific revenues was primarily the result of expanded and more efficient
distribution channels.

Consolidated
revenue was $110.4 million for the nine-month period ended March 29, 2008, as compared to $109.6 million for the same period ended
March 31, 2007. The overall increase in year-to-date revenue of approximately $0.8 million was comprised of revenue increases in Europe and
Asia-Pacific of approximately $12.0 million, offset by revenue declines in the U.S., Latin America, and Japan of approximately $11.2 million. The decrease in
U.S., Latin American, and Japan revenues was primarily related to a leveling-off in demand over all product lines. The increase in Europe and Asia-Pacific revenues was
primarily the result of expanded and more efficient distribution channels.

Revenue
outside of the U.S. accounted for approximately 66% of the consolidated revenues for the three-month period ended March 29, 2008. The increase to $25.6 million for
the three-month period ended March 29, 2008, as compared to the same period ended March 31, 2007, was comprised of a $4.1 million increase in Europe and Asia-Pacific,
combined with a $2.0 million decrease in Japan and Latin America. The increase in Europe was primarily due to the continued strong growth in the region across all product lines aided by
improved efficiencies in our distribution channels. The decrease in Japan and Latin America was primarily related to a leveling-off in demand over all product lines.

Revenue
outside of the U.S. accounted for approximately 60% of the consolidated revenues for the nine-month period ended March 29, 2008. The increase to
$66.5 million for the nine-month period ended March 29, 2008, as compared to the same period ended March 31, 2007, was comprised of an $12.0 million increase in
Europe and Asia-Pacific, offset by a $7.2 million decrease in Japan and Latin America. The increase in Europe was primarily due to the continued strong growth in the region across
all product lines aided by improved efficiencies in our distribution channels. The decrease in Japan and Latin America was primarily related to a leveling-off in demand over all product
lines.

19

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Revenue
source by type is reflected in the following table:

|                          |  | For the three months ended: |       
|------------------------- |  | --------------------------- | ------
|
|Lasers and other products |  | $                           | 28,427
|Product-related services  |  |                             | 10,464
|                          |  |                             |       
|Total revenue             |  | $                           | 38,891
|                          |  |                             |       

|
|

|                          |  | For the nine months ended: |        
|------------------------- |  | -------------------------- | -------
|
|
|Lasers and other products |  | $                          | 80,483 
|Product-related services  |  |                            | 29,962 
|                          |  |                            |        
|Total revenue             |  | $                          | 110,445
|                          |  |                            |        

The
decrease in revenue from lasers and other products for the three and nine-month periods ended March 29, 2008, compared to the same periods ended March 31,
2007, resulted primarily from a general reduction in sales in the U.S., Japanese, and Latin-American markets.

Product-related
services increased approximately $0.8 million or 8% in the three-month period ended March 29, 2008 as compared to the same period ended March 31,
2007. The increase is primarily related to the increase in the number of service-related contracts sold in addition to an increase in the number of consumables and accessories sold to support our
installed base.

Product-related
services increased approximately $4.4 million or 17% in the nine-month period ended March 29, 2008 as compared to the same period ended
March 31, 2007. The increase is primarily related to the increase in the number of service-related contracts sold in addition to an increase in the number of consumables and accessories sold to
support our installed base.

Gross Profit.Gross profit was approximately $17.5 million or 44.9% for the three-month period
ended March 29, 2008 as compared to $19.7 million or 51.0% for the same period ended March 31, 2007. The decrease in gross profit for the three-month period ended March 29,
2008 as compared to the same period in the previous fiscal year is primarily due to a general decrease in the average selling price (ASP) of our legacy products, changes in product mix, changes in
regional mix, and a greater proportion of revenues being derived from the sale of product-related services in the current period which carry a lower margin than sales of lasers.

Gross
profit was approximately $51.5 million or 46.6% for the nine-month period ended March 29, 2008 as compared to $54.9 million or 50.1% for the same
period ended March 31, 2007. The decrease in gross profit for the nine-month period ended March 29, 2008 as compared to the same period in the previous fiscal year is
primarily due to a general decrease in the ASP of our legacy products, changes in product mix, changes in regional mix, and a greater proportion of revenues being derived from the sale of
product-related services in the current period which carry a lower margin than sales of lasers.

Selling, General and Administrative Expense.Selling, general and administrative (SG&A) expenses
increased to approximately $18.3 million for the three-month period ended March 29, 2008 from approximately $13.2 million for the three-month period ended March 31, 2007.
As a percentage of revenue, SG&A expenses increased to 46.9% from 34.1% of revenues in the comparative prior year period. The increase was due primarily to legal fees related to the Palomar
litigation, SG&A expenses related to recent subsidiary openings in the U.K. and Australia, the acquired Israeli subsidiary, and to increased personnel-related expenses.

20

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For
the nine-month period ended March 29, 2008, SG&A expenses increased to approximately $51.4 million from approximately $36.9 million for the same
period ended March 31, 2007. As a percentage of revenue, SG&A expenses increased to 46.5% from 33.6% of revenues in the comparative prior year period. Again, the increase was primarily due to
legal fees related to the Palomar litigation, SG&A expenses related to recent subsidiary openings in the U.K. and Australia, the acquired Israeli subsidiary, and to increased personnel-related
expenses.

Research and Development Expense.Research and development spending decreased to approximately
$3.0 million for the three-month period ended March 29, 2008, from approximately $4.9 million for the comparative prior-year period. Research and development spending
decreased to approximately $9.7 million for the nine-month period ended March 29, 2008, from approximately $13.1 million for the comparative prior-year
period. The decreases are due primarily to the recently-completed new product introduction plan. These expenses are expected to increase in future periods, however, as the Company transitions to new
projects.

Other Income/Expense.Other income was approximately $0.4 million for the three-months ended
March 29, 2008, as compared to other income of approximately $0.8 million for the same period ended March 31, 2007. The decrease of approximately $0.4 million from the
prior-year comparable period is due primarily to a decrease in interest income earned during the third quarter of fiscal 2008 as compared to the same period in the prior fiscal year.

Other
expense was approximately $0.4 million for the nine-months ended March 29, 2008, as compared to other income of approximately $6.0 million for the
same period ended March 31, 2007. The decrease is due to the Company having recognized a $3.5 million gain on the initial exchange of common stock of Solx, Inc. for cash and
common stock of OccuLogix, Inc. during the nine-month period ended March 31, 2007, as compared to the recognition of a $2.5 million loss on the
other-than-temporary impairment of our holdings of common shares of OccuLogix, Inc. (Note 18) during the nine-month period ended March 29,
2008.

The
decrease in interest income earned during the nine-month period ended March 29, 2008, as compared to the same period in the prior fiscal year, is related to a
decrease in market interest rates combined with an overall decrease in cash and cash equivalents and in marketable securities. During the trailing twelve-month period ended March 29, 2008, the
Company used its cash to repurchase approximately $3.6 million of its own stock and to fund operations.

Income Taxes.The provision for income taxes results from a combination of activities of the Company
and its domestic and foreign subsidiaries. We recorded effective tax rates of approximately 32% and 36% for each of the nine-month periods ended March 29, 2008 and March 31,
2007, respectively. The Company also recorded discrete tax benefit items of approximately $0.3 million during the nine-month period ended March 29, 2008. The discrete items
include an expense of $0.1 million resulting from a change in the statutory tax rate in Germany, incremental interest expense of approximately $0.1 million, and a benefit of
$0.5 million resulting from the completion of an IRS and various state income tax audits.

The
effect of the change in the German statutory rate on current earnings is fully reflected in our effective tax rate indicated above.

Liquidity and Capital Resources

Our cash and cash equivalents and our investment in short and long-term marketable securities at March 29, 2008 totaled approximately
$38.2 million compared with approximately $51.2 million at June 30, 2007. Principal components of the decrease include growth in our inventory over the trailing twelve months, the
use of cash for our stock repurchase program, and the general funding of operations. We continue to have no long-term debt. We believe that the combination of existing cash

21

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and
cash equivalents, and marketable securities on hand, along with cash to be generated by future operations and amounts available under our line of credit, will be sufficient to meet our ongoing
operating and capital expenditure requirements for the foreseeable future. However, we cannot be sure that we will not require additional capital beyond the amounts currently forecasted by us, or that
any such required additional capital will be available on reasonable terms, if at all, as it becomes required.

Cash
used by operating activities amounted to approximately $10.7 million for the nine-month period ended March 29, 2008 as compared to cash used by operating
activities of approximately $4.0 million for the same period in the prior year. The increase in cash used by operating activities is primarily attributable to our
year-to-date net loss and growth in our inventory on-hand, offset by changes in operating asset and liability accounts in the normal course of business.

Off-Balance Sheet Arrangements

Our only off-balance sheet arrangements consist of non-cancelable operating leases entered into in the ordinary course of business and the
license agreement with the Regents. The table below in the next section titled "Contractual Obligations" shows the amounts of our operating lease commitments and purchase commitments payable by year.

Contractual Obligations

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

|(in thousands)                |  | Total |       | Less than
1 year |   | 1 - 3 years |  | 3 - 5 years |       | After
5 years
|----------------------------- |  | ----- | ----- | ---------------- | - | ----------- |  | ----------- | ----- | -------------
|Royalty commitments           |  | $     | 3,250 |                  | $ | 1,000       |  | $           | 1,250 |              
|Operating leases              |  |       | 3,197 |                  |   | 1,635       |  |             | 1,308 |              
|                              |  |       |       |                  |   |             |  |             |       |              
|Total contractual obligations |  | $     | 6,447 |                  | $ | 2,635       |  | $           | 2,558 |              
|                              |  |       |       |                  |   |             |  |             |       |              

Cautionary Statements

Certain statements contained herein may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995
("Reform Act"). We may also make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to stockholders and in press releases. In
addition, our representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and
include any statement that does not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects," and similar
expressions, may identify such forward-looking statements. Such forward-looking statements include but are not limited to: that we have the necessary infrastructure in place to capitalize on
expansion; the affordability of our products will allow for expansion; that we can lower production costs; or that the market will expand beyond baby boomers. We assume no obligation to update or
revise any forward-looking statements whether as a result of new information, future events or otherwise. The risks and uncertainties that may affect forward-looking statements and/or our business
include, among others, those discussed in "Cautionary Statements" in our Annual Report filed on Form 10-K for the fiscal year ended June 30, 2007, as well as other risks and
uncertainties referenced in this Quarterly Report on Form 10-Q, and the following:



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We
caution readers not to place undue reliance upon any forward-looking statements, which speak only as of the date made. We expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any such statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.

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Item 3Quantitative and Qualitative Disclosures about Market Risk

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

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

We
had two forward exchange contracts outstanding serving as hedges of our Euro-denominated intercompany receivables at March 29, 2008. These contracts serve as hedges
of a substantial portion of our foreign currency denominated intercompany balances. Any gains and losses on the fair value of the derivative contract would be largely offset by losses and gains on the
underlying transaction

Item 4Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Principal Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of
March 29, 2008, the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer
have concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective in gathering, analyzing and disclosing information needed to
satisfy our disclosure obligations under the Securities Exchange Act of 1934, as amended.

Changes in Internal Controls over Financial Reporting

There have been no changes in the Company's internal controls over financial reporting that occurred during the quarter ended March 29, 2008 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Candela Corporation

Part II. Other Information

Item 1Legal Proceedings

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



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

On
February 19, 2008, Cardiofocus, Inc. ("Cardiofocus") filed suit against the Company and eight other companies in the United States District Court for the District of
Massachusetts, asserting willful infringement by the Company of U.S. Patent 6,457,780,6,159,203 and 5,843,073. Cardiofocus seeks compensatory and treble damages, as well as attorneys' fees and
injunctive relief. On April 21, 2008, the
Company answered Cardiofocus' complaint and asserted a variety of counterclaims against Cardiofocus. The Company believes the complaint to be without merit and intends to vigorously defend against the
lawsuit.

On
April 2, 2008, Western Pennsylvania Electrical Employees' Pension Fund filed a putative securities class-action suit against the Company, its President and CEO, Gerard E.
Puorro, and its former Chief Financial Officer, F. Paul Broyer in the United States District Court for the District of Massachusetts on behalf of investors who purchased our publicly traded securities
between February 1, 2006 and August 21, 2006. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seeks an unspecified amount of
damages, as well as other forms of relief. The Company believes the complaint to be without merit and intends to vigorously defend against the lawsuit.

From
time to time, the Company is party to various legal proceedings incidental to its business. The Company believes that none of the legal proceedings, other than the lawsuit initiated
by Palomar, that are presently pending, if adversely decided against us, will have a material adverse effect upon the Company's financial position, results of operations, or liquidity.

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Item 6Exhibits



|Exhibit 3(i) |  | Amended and Restated Certificate of Incorporation of Candela Corporation                                                                                 
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer                                                                                    
|Exhibit 31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer                                                                                
|Exhibit 32.1 |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    
|Exhibit 32.2 |  | Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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                                                                                
|----------------- |  | ---------------------------------------------------------------------------------------------------
|Date: May 8, 2008 |  | /s/ROBERT E. QUINNRobert E. Quinn
(Treasurer, Corporate Controller and Principal Financial Officer)

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Candela Corporation

INDEX TO EXHIBITS

|Exhibit No.  |  | Description                                                                                                                                              
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 3(i) |  | Amended and Restated Certificate of Incorporation of Candela Corporation                                                                                 
|Exhibit 31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer                                                                                    
|Exhibit 31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer                                                                                
|Exhibit 32.1 |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    
|Exhibit 32.2 |  | Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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