UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2007.

Commission file number 000-14742

CANDELA CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		04-2477008
(State or other jurisdiction		(I.R.S. Employer Identification No.)
of incorporation or organization)

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 x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).

Large Accelerated Filer o

Accelerated Filer x

Non-Accelerated Filer o

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

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 9, 2007
Common Stock, $.01 par value per share		23,120,484

CANDELA CORPORATION

Index

			Page
Part I.	Financial Information:

	Item 1.	Unaudited Financial Statements

		Consolidated Balance Sheets as of March 31, 2007 and July 1, 2006	3

		Consolidated Statements of Income and Comprehensive Income for the three-month periods ended March 31, 2007 and April 1, 2006, and for the nine-month periods ended March 31, 2007 and April 1, 2006	4

		Condensed Consolidated Statements of Cash Flows for the nine-month periods ended March 31, 2007 and April 1, 2006	5

		Notes to Consolidated Financial Statements (Unaudited)	6-15

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16-21

	Item 3.	Quantitative and Qualitative Disclosure about Market Risk	22

	Item 4.	Controls and Procedures	22

Part II.	Other Information:

	Item 1.	Legal proceedings	23-24

	Item 6.	Exhibits	25

	Signatures		26

	Index to Exhibits		27

Part I. Financial Information

Item 1 - Financial Statements

CANDELA CORPORATION

Consolidated Balance Sheets

(in thousands, except per share data)

(unaudited)

	March 31,			July 1,
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	27,879		$	40,194
Restricted cash	57			166
Marketable securities	14,960			27,332
Accounts receivable, net of allowance for doubtful accounts of $1,594 and $1,831 at March 31 and July 1, respectively	34,501			34,273
Notes receivable	840			1,611
Inventories, net	19,347			16,666
Other current assets	3,431			1,756

Total current assets	101,015			121,998
Property and equipment, net	3,504			3,302
Deferred tax assets	8,364			8,142
Goodwill and acquired Intangible assets, net	21,984			3,402
Marketable securities, long-term	13,660			11,953
Other assets	315			379

Total assets	$	148,842		$	149,176

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	12,430		$	15,968
Accrued payroll and related expenses	4,275			5,728
Accrued warranty costs, current	5,769			5,868
Income taxes payable	—			933
Sales tax payable	835			854
Royalties payable	768			764
Other accrued liabilities	6,618			3,672
Deferred revenue, current	9,227			8,342
Current liabilities of discontinued operations	1,286			1,287

Total current liabilities	41,208			43,416
Accrued warranty costs, long-term	2,916			3,761
Deferred revenue, long-term	2,716			1,987

Total liabilities	46,840			49,164

Stockholders’ equity:
Common stock, $.01 par value, 60,000,000 shares authorized; 25,978,000 and 25,914,000 issued at March 31 and July 1, respectively	260			259
Treasury stock, 3,020,000 and 2,250,000 common shares at March 31 and July 1, respectively, at cost	(21,268		)	(12,997		)
Additional paid-in capital	67,501			64,234
Accumulated earnings	55,263			48,280
Accumulated other comprehensive income	246			236

Total stockholders’ equity	102,002			100,012

Total liabilities and stockholders’ equity	$	148,842		$	149,176

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

CANDELA CORPORATION

Consolidated Statements of Income and Comprehensive Income

(in thousands, except per share data)

(unaudited)

	For the three-months ended:						For the nine-months ended:
	March 31,			April 1,			March 31,			April 1,
	2007			2006			2007			2006
Revenue
Lasers and other products	$	29,017		$	34,795		$	84,014		$	88,677
Product-related service	9,673			7,519			25,556			19,444

Total revenue	38,690			42,314			109,570			108,121
Cost of sales
Lasers and other products	12,411			15,688			37,007			39,235
Product-related service	6,539			5,228			17,620			13,960

Total cost of sales	18,950			20,916			54,627			53,195

Gross profit	19,740			21,398			54,943			54,926
Operating expenses
Selling, general and administrative	13,208			11,602			36,856			30,858
Research and development	4,873			2,432			13,059			5,873

Total operating expenses	18,081			14,034			49,915			36,731
Income from operations	1,659			7,364			5,028			18,195
Other income (expense)
Interest income	716			546			2,231			1,057
Other income (expense), net	85			(15		)	3,727			(18		)

Total other income	801			531			5,958			1,039

Income before income taxes	2,460			7,895			10,986			19,234
Provision for income taxes	920			2,892			4,003			6,703
Net income	$	1,540		$	5,003		$	6,983		$	12,531

Net income per share of common stock
Basic	$	0.07		$	0.22		$	0.30		$	0.55
Diluted	$	0.07		$	0.21		$	0.30		$	0.53

Weighted average shares outstanding
Basic	22,937			23,255			23,128			22,817

Diluted	23,320			24,204			23,592			23,762

Net income	$	1,540		$	5,003		$	6,983		$	12,531
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment	20			367			135			(7		)
Unrealized loss on available-for-sale securities, net of tax	(63		)	—			(395		)	—

Comprehensive Income	$	1,497		$	5,370		$	6,723		$	12,524

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

CANDELA CORPORATION

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	For the nine-months ended:
	March 31,			April 1,
	2007			2006
Cash flows from operating activities:
Net income	$	6,983		$	12,531
Adjustments to reconcile net income to net cash (used by) provided by operating activities:
Gain on exchange of stock (Note 17)	(3,540		)	—
Share-based compensation expense	2,887			642
Depreciation and amortization	972			354
Provision for bad debts	900			700
Other non-cash items	(89		)	3
Increase (decrease) in cash from working capital
Accounts receivable	(968		)	(1,561		)
Notes receivable	703			(348		)
Inventories	(2,234		)	(2,473		)
Other current assets	(2,751		)	(1,922		)
Other assets	(3,202		)	(2,777		)
Accounts payable	(4,166		)	1,542
Accrued payroll and related expenses	(1,505		)	(551		)
Deferred revenue	938			1,062
Accrued warranty costs	(214		)	7
Income taxes payable	(1,478		)	(1,011		)
Other accrued liabilities	2,748			(170		)
Change in restricted cash	1			32

Net cash (used by) provided by operating activities	(4,015		)	6,060

Cash flows from investing activities:
Purchases of property and equipment	(267		)	(323		)
Maturities of held-to-maturity marketable securities	32,746			—
Cash proceeds from exchange of stock (Note 17)	994			—
Purchases of held-to-maturity marketable securities	(17,278		)	(34,588		)
Acquisition of business, net of cash acquired	(15,686		)	—
Acquisition of intangible assets	(1,380		)	—

Net cash used by investing activities	(871		)	(34,911		)

Cash flows from financing activities:
Proceeds from the issuance of common stock	378			7,321
Purchase of treasury stock	(8,271		)	—

Net cash (used by) provided by financing activities	(7,893		)	7,321

Effect of exchange rates on cash and cash equivalents	521			343

Net decrease in cash and cash equivalents	(12,258		)	(21,187		)

Cash and cash equivalents at beginning of period	40,194			56,383

Cash and cash equivalents at end of period	$	27,936		$	35,196

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

Candela Corporation

Notes to Consolidated Financial Statements (unaudited)

(amounts are in thousands except per share data)

1. Basis of Presentation and Consolidation

Basis of Presentation

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 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 months ended March 31, 2007 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 2006 Form 10-K filed with the Securities and Exchange Commission (“SEC”). Certain prior period amounts have been reclassified to conform to the current period presentation. There was no impact on operating income.

Basis of Consolidation

The financial statements include the accounts of Candela Corporation and its subsidiaries. Intercompany 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.

Segment Information

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group consists of our executive officers. The Company operates principally in one industry segment: the design, manufacture, sale, and service of medical devices and related equipment. The results in this segment have been presented in the Consolidated Statements of Income for the appropriate periods.

2. Recent Accounting Pronouncements

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for our fiscal year 2007 annual financial statements. We are currently assessing the potential impact that the adoption of SAB No. 108 will have on our financial statements; the impact is not expected to be material.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 2008. 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.

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

In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140 (SFAS No. 155). This standard permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; requires evaluation of interests in securitized financial assets; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and eliminates the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This standard is effective for all financial instruments acquired or issued for fiscal years beginning after September 15, 2006. We do not believe that adoption of SFAS No. 155 will have a material effect on our financial position or results of operations.

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 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” and SFAS 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 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:

	March 31,		July 1,
(in thousands)	2007		2006
Facility closure and other costs	$	447	$	447
Deferred revenue, gift certificates	839		840

	$	1,286	$	1,287

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 have not been 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 will be 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 31, 2007 and April 1, 2006 resulted in the recognition of share-based compensation expense of approximately $0.9 million and $0.4 million, respectively. For the nine-month period ended March 31, 2007 and April 1, 2006, recognition of shared-based compensation expense was approximately $2.9 million and $0.6 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 31, 2007, there was approximately $2.9 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 1.32 years. As of April 1, 2006, there was approximately $3.6 million of total unrecognized compensation cost related to nonvested 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 31, 2007 and April 1, 2006 was approximately $0.4 million and $7.2 million, respectively.

Stock Plans

1990 Candela Corporation Employee Stock Purchase Plan

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 31, 2007 there were approximately 678 thousand shares available for sale. Compensation expense for the purchase plan is recognized over the vesting period.

1998 Candela Corporation Stock Option Plan

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.

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.

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 330 thousand stock based SARs granted during the nine-month period ended March 31, 2007. 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 2.2 million outstanding options/SARs at March 31, 2007 with a weighted-average exercise price of $11.19 per share, an aggregate intrinsic value of approximately $0.5 million, and a weighted-average remaining contractual term of 7.49 years.

There were approximately 1.5 million of exercisable options/SARs at March 31, 2007 with a weighted-average exercise price of $9.88 per share, an aggregate intrinsic value of approximately $2.3 million, and a weighted-average remaining contractual term of 7.0 years.

There were approximately 2.7 million options/SARS available to grant at March 31, 2007

The total intrinsic value of options exercised during the three and nine month periods ended March 31, 2007 was approximately $0.1 million and $0.4 million, respectively.

5. Earnings per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period and, if there are dilutive securities, diluted earnings per share is computed by including common stock equivalents outstanding for the period in the denominator. Common stock equivalents include shares issuable upon the exercise of stock options or warrants, net of shares assumed to have been purchased with the proceeds, using the treasury stock method.

	For the three months ended:				For the nine months ended:
	March 31,		April 1,		March 31,		April 1,
(in thousands, except per share data)	2007		2006		2007		2006
Shares used in the calculation of Basic earnings per share	22,937		23,255		23,128		22,817
Effect of dilutive securities: Stock options/SAR’s	383		949		464		945

Diluted shares used in the calculation of earnings per share	23,320		24,204		23,592		23,762

Per share effect of dilutive securities on net income	$	—	$	0.01	$	—	$	0.02

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.

During the three and nine month periods ended April 1, 2006, options/SARs to purchase 220 thousand and 96 thousand 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 agreement to purchase Inolase contains certain earn-out provisions and we are currently assessing the likelihood of their attainment. If we conclude that the outcome of these contingencies is determinable beyond a reasonable doubt, and that they are directly attributable to the purchase price itself, such a conclusion would result in an adjustment to goodwill and the establishment of an additional liability when the purchase-price allocation is finalized. Our final evaluation may also conclude that these provisions are directly attributable to the purchase price itself, but that we are unable to presently calculate the additional future amounts to be paid. If this is our conclusion, any future earn-out payments would represent increases to goodwill in the period(s) in which they are made. The purchase-price allocation is preliminary pending the final determination of the fair value of the assets and liabilities acquired. The preliminary purchase-price allocation was recorded in the third quarter of 2007 and resulted in approximately $10.5 million of goodwill and $6.3 million of other acquired intangible assets, primarily comprised of patents and patent applications, which are being amortized over an estimated weighted average of 7 years. Values assigned to these acquired intangible assets are not deductible for tax purposes.

Based upon the preliminary purchase price allocation, the total purchase price was allocated as follows:

	(in thousands)
Goodwill	$	10,549
Identifiable intangible assets	6,300
Inventory	214
Accounts receivable & other assets	195
Accounts payable and accrued expenses	(248		)
Other liabilities	(201		)

Total preliminary purchase price allocation	$	16,809

The excess of the purchase price of Inolase over the estimated fair values of tangible and intangible assets and liabilities totaling approximately $10.5 million was allocated to goodwill. We believe that such excess in purchase price for accounting purposes was warranted by certain factors, including: 1) the potential to facilitate up-sell and cross-sell opportunities for our products with that of Inolase; 2) the potential to exploit reduced pain applications across our existing and future products; and 3) the potential to leverage Inolase intellectual property into home use applications.

Results of operations for Inolase have been included in our accompanying consolidated statement of operations beginning March 6, 2007.

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 as 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 up to twelve months and equity investments. Long-term marketable securities include debt securities that have remaining maturities of one to three years and equity investments. Unrealized losses related to the held-to-maturity securities are not considered a permanent decline in the market value of such securities.

Marketable securities consist of the following:

	March 31, 2007							July 1, 2006
(in thousands)	Net Carrying Amount		Fair Value		Unrealized loss			Net Carrying Amount		Fair Value		Unrealized loss
Short-term (Held-to-maturity):
Government-backed securities	$	9,998	$	9,994	$	(4	)	$	17,997	$	17,946	$	(51	)
Certificates of deposit	2,920		2,897		(23		)	2,368		2,356		(12		)
Corporate bonds	—		—		—			3,005		2,996		(9		)
Commercial paper	—		—		—			3,962		3,960		(2		)
	12,918		12,891		(27		)	27,332		27,258		(74		)
Short-term (Available-for-sale):
Equity investments	2,042		2,042		—			—		—		—
Total marketable securities, short-term	$	14,960	$	14,933	$	(27	)	$	27,332	$	27,258	$	(74	)

Long-term (Held-to-maturity):
Government-backed securities	$	10,992	$	11,001	$	9		$	8,998	$	8,917	$	(81	)
Certificates of deposit	2,668		2,647		(21		)	2,955		2,903		(52		)
Total marketable securities, long-term	$	13,660	$	13,648	$	(12	)	$	11,953	$	11,820	$	(133	)

There have been no material realized gains or losses for the three and nine months ended March 31, 2007.

8. Inventories

Inventories consist of the following:

	March 31,		July 1,
(in thousands)	2007		2006
Raw materials	$	6,807	$	5,936
Work in process	1,502		1,151
Finished goods	11,038		9,579

	$	19,347	$	16,666

9. Property and Equipment

Property and equipment consists of the following:

	March 31,			July 1,
(in thousands)	2007			2006
Leasehold improvements	$	1,002		$	920
Office furniture	701			603
Computers, software, and other equipment	9,937			9,236

	$	11,640		$	10,759
Less: accumulated depreciation	(8,136		)	(7,457		)

Property and equipment, net	$	3,504		$	3,302

Depreciation expense was approximately $0.2 million and $0.7 million for the three and nine month periods ended March 31, 2007, respectively. Depreciation expense was approximately $0.2 million and $0.6 million for the three and nine month periods ended April 1, 2006, respectively.

10. Intangible assets

Intangible assets with finite lives (amortized) and indefinite lives consist of the following:

	March 31, 2007							July 1, 2006
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value
Patents	$	7,679	$	(290	)	$	7,389	$	—	$	—		$	—
Prepaid licenses	4,878		(832		)	4,046		3,878		(476		)	3,402
Goodwill (indefinite lived)	10,549		—			10,549		—		—			—

	$	23,106	$	(1,122	)	$	21,984	$	3,878	$	(476	)	$	3,402

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 four foreign currency forward contracts outstanding at March 31, 2007, serving to mitigate the foreign currency risk of a substantial portion of Euro-denominated intercompany balances, in the notional amount of approximately 3.7 million Euros. The fair value of the foreign currency derivative contracts outstanding at March 31, 2007 was approximately $4.9 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 31, 2007 and April 1, 2006, respectively:

	For the three months ended:						For the nine months ended:
	March 31,			April 1,			March 31,			April 1,
(in thousands)	2007			2006			2007			2006
Beginning balance	$	9,490		$	8,890		$	9,629		$	8,646
Incremental accruals on current sales	1,240			2,385			4,811			6,071
Amortization of prior-period accruals	(2,045		)	(1,919		)	(5,755		)	(5,361		)

Ending balance	$	8,685		$	9,356		$	8,685		$	9,356

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.

The following table reflects changes in the Company’s deferred revenue account during the three and nine month periods ended March 31, 2007 and April 1, 2006, respectively:

	For the three months ended:						For the nine months ended:
	March 31,			April 1,			March 31,			April 1,
(in thousands)	2007			2006			2007			2006
Beginning balance	$	10,079		$	9,325		$	10,329		$	8,350
Deferral of new sales	4,729			1,339			9,243			7,850
Recognition of previously deferred revenue	(2,865		)	(1,999		)	(7,629		)	(7,535		)

Ending balance	$	11,943		$	8,665		$	11,943		$	8,665

14. Common Stock Buyback

On October 31, 2005, the Company’s Board of Directors authorized the purchase by the Company of up to 10% of the Company’s outstanding shares of its common stock during a two-year period which expires on October 31, 2007.

770 thousand shares of common stock were purchased for approximately $8.3 million during the nine-month period ended March 31, 2007.

15. Commitments and Contingencies

The Company has an agreement with the Regents of the University of California (the “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 royalty obligation of 3%. The 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 31, 2007 was less than 9 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 intangible assets in the March 31, 2007 and July 1, 2006 balance sheets (Note 10).

16. Legal Proceedings

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

· On August 9, 2006, Palomar filed suit against the Company in the United States District Court for the District of Massachusetts, asserting willful infringement by the Company of U.S. Patent No. 5,735,844. Palomar seeks compensatory and treble damages, as well as attorneys’ fees and injunctive relief. In November 2006, the Company answered the complaint by denying Palomar’s allegations and asserting a variety of affirmative defenses and counterclaims against Palomar. This response included a counterclaim by the Company against Palomar seeking a declaratory judgment that United States patent No. 5,595,568 (“the ‘568 Patent”) is either invalid, or products manufactured by the Company do not infringe the ‘568 Patent, or both. In November 2006, Palomar filed an answer denying the Company’s counterclaim. In February 2007, Palomar moved to Amend its Complaint to add The General Hospital Corporation as a party, to add a claim for infringement of the ‘568 patent, and to allege that additional Candela products infringe the ‘568 Patent. The Court has not ruled on whether Palomar’s proposed amendments to its original complaint will be allowed. On February 16, 2007, Candela moved to amend its Answer and Counterclaims to add allegations of inequitable conduct, double-patenting and violation of Mass. Gen. Laws Ch. 93A. The Company’s motion was granted in March of 2007. Palomar filed a general denial response to Candela’s Amended Answer and Counterclaim on March 29, 2007. The parties are presently in the midst of pre-trial fact discovery which is expected to take several months.

· On August 10, 2006, the Company filed suit against Palomar in the United States District Court for the District of Massachusetts, asserting willful infringement by Palomar of U.S. Patent Nos. 6,659,999, 5,312,395, and 6,743,222. The Company seeks compensatory and treble damages for the patent infringement, as well as attorneys’ fees and an injunction against Palomar to prevent Palomar’s continuing infringement. The Company served its complaint on Palomar in August 2006. In October 2006, the Company amended the Company’s suit against Palomar by removing from the suit allegations that Palomar infringes Patent 6,659,999. In October 2006, Palomar answered the Company’s amended complaint by denying the Company’s allegations and asserting an affirmative defense of inequitable conduct with respect to the ‘395 patent. In addition, Palomar filed a demand for a declaratory judgment seeking a judicial determination that Palomar products either do not infringe the ‘395 and ‘222 patents or that such patents are invalid. In November 2006, the Company answered the counterclaim by denying Palomar’s allegations. The parties are in the midst of pre-trial fact discovery.

· In December 2006, the Company filed suit against Palomar in the United States District Court for the Eastern District of Texas, Lufkin Division, asserting that Palomar infringes one or more claims of United States patents Nos: 5,810,801, 6,659,999 and 6,120,497. The Company seeks compensatory and treble damages for past infringement, as well as attorneys’ fees and an injunction against Palomar from future infringement. In January 2007, Palomar answered the complaint by denying the Company’s allegations and filing a declaratory judgment motion seeking a court ruling that it does not infringe such patents and/or that such patents are invalid. In addition, Palomar filed a motion to transfer the case to the United States District Court for the District of Massachusetts. In February 2007, the Company added Massachusetts General Hospital as a party to its action. The Court denied Palomar’s motion to transfer the case to Massachusetts. The parties are in the midst of pre-trial fact discovery.

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.

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.

17. Other Income

During the nine-month period ended March 31, 2007, the Company recognized a $3.5 million gain on the exchange of common stock of Solx Inc. for cash and common stock of Occulogix Inc. (NasdaqGM: OCCX). The gain was a result of the acquisition of Solx Inc., a privately-held company, by Occulogix Inc., a publicly traded company. The Company held 19.99% of the outstanding common stock of Solx Inc. on an as-converted basis, prior to the merger. As a result of the acquisition of Solx, Inc., the Company received approximately $1.0 million in cash plus approximately 1.3 million shares of common stock in Occulogix Inc.

CANDELA CORPORATION

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We research, develop, manufacture, market and service lasers used to perform aesthetic and cosmetic procedures. We sell our lasers 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 the provision of 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, inventories 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 2006.

Recent Accounting Pronouncements

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for our fiscal year 2007 annual financial statements. We are currently assessing the potential impact that the adoption of SAB No. 108 will have on our financial statements; the impact is not expected to be material.

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 2008. 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.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure relative to uncertain tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006, with early adoption encouraged. We are currently assessing the potential impact that the adoption of FIN No. 48 will have our consolidated financial statements.

Results of Operations

Revenue

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

	For the three months ended:
	March 31,				April 1,
(in thousands)	2007				2006				Increase (Decrease)
U.S.	$	15,204	39	%	$	20,157	48	%	$	(4,953	)	-25	%
All other countries	23,486		61	%	22,157		52	%	1,329			6	%

Total worldwide revenue	$	38,690	100	%	$	42,314	100	%	$	(3,624	)	-9	%

	For the nine months ended:
	March 31,				April 1,
(in thousands)	2007				2006				Increase (Decrease)
U.S.	$	47,900	44	%	$	48,894	45	%	$	(994	)	-2	%
All other countries	61,670		56	%	59,227		55	%	2,443			4	%

Total worldwide revenue	$	109,570	100	%	$	108,121	100	%	$	1,449		1	%

Consolidated revenue was $38.7million for the three-month period ended March 31, 2007 compared to $42.3 million for the three-month period ended April 1, 2006. The decrease of $3.6 million was comprised of decreases in the U.S. and Latin America of $5.1 million and $1.4 million, respectively, offset by an increase in Europe of $2.9 million. The decrease in U.S. revenues was primarily related to a leveling-off in demand for our VBeamTM platform and delays in new product completions. The VBeamTM decrease was directly related to the introduction of the upgraded version in the fiscal quarter ended April 1, 2006 which, in turn, created a large initial demand as compared to the quarter ended March 31, 2007. The decrease in Latin America was primarily due to the unexpectedly high revenue for the demographics of the region in the previous comparable period. The increase in Europe was primarily the result of expanded and more efficient distribution channels.

Consolidated revenue was $109.6 million for the nine-month period ended March 31, 2007 compared to $108.1 million for the nine-month period ended April 1, 2006. The net increase of $1.4 million was comprised of decreases in the U.S. and Latin America of $1.0 million and $4.0 million, respectively, offset by increases in Europe of $6.0 million and Asia of $0.4 million. The decrease in Latin America was primarily due to the unexpectedly high revenue for the demographics of the region in the previous comparable period. The increase in Europe was primarily the result of expanded and more efficient distribution channels.

Foreign revenue accounted for approximately 61% of the consolidated revenue for the three-month period ended March 31, 2007. The increase of 6% to $23.5 million for the three-month period ended March 31, 2007 as compared to the three-month period ended April 1, 2006, was comprised primarily of an increase in Europe of $2.9 million offset by a decrease in Latin America of $1.4 million.

Foreign revenue accounted for approximately 56% of the consolidated revenue for the nine-month period ended March 31, 2007. The increase of 1% to $61.7 million for the nine-month period ended March 31, 2007 as compared to the nine-month period ended April 1, 2006, was comprised primarily of an increase in Europe of $6.0 million offset by a decrease in Latin America of $4.0 million. The increase in Europe was primarily the result of expanded and more efficient distribution channels. The decrease in Latin America was primarily due to the unexpectedly high revenue for the demographics of the region in the previous comparable period.

Revenue source by type is reflected in the following table:

	For the three months ended:
	March 31,				April 1,
(in thousands)	2007				2006				Increase (Decrease)
Lasers and other products	$	29,017	75	%	$	34,795	82	%	$	(5,778	)	-17	%
Product-related services	9,673		25	%	7,519		18	%	2,154			29	%

Total revenue	$	38,690	100	%	$	42,314	100	%	$	(3,624	)	-9	%

	For the nine months ended:
	March 31,				April 1,
(in thousands)	2007				2006				Increase (Decrease)
Lasers and other products	$	84,014	77	%	$	88,677	82	%	$	(4,663	)	-5	%
Product-related services	25,556		23	%	19,444		18	%	6,112			31	%

Total revenue	$	109,570	100	%	$	108,121	100	%	$	1,449		1	%

Lasers and other product revenues was $29.0 million as compared to $34.8 million for the three-month periods ended March 31, 2007 and April 1, 2006, respectively. The decrease of $5.7 million was comprised of a decrease of approximately $3.7 million in our VBeamTM platform combined with a $2.2 million decrease in our Gentle YAGTM product line. As noted previously, the VBeamTM decrease was directly related to the introduction of the upgraded version in the fiscal quarter ended April 1, 2006 which, in turn, created a large initial demand as compared to the quarter ended March 31, 2007. The average selling price of our products remained comparable for the three-month periods ended March 31, 2007 and April 1, 2006, respectively.

Product-related services increased $2.1 million or 29% and $6.1 million or 31% in the three and nine month periods ended March 31, 2007 as compared to the same periods ended April 1, 2006. 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.

Lasers and other product revenues was $84.0 million compared to $88.7 million for the nine-month periods ended March 31, 2007 and April 1, 2006, respectively. This reduction in product revenue was experienced across all product lines.

Gross Profit. Gross profit was approximately $19.7 million or 51.0% for the three-month period ended March 31, 2007 compared to $21.4 million or 50.6% for the three-month period ended April 1, 2006. Gross profit was $54.9 million or 50.1% for the nine-month period ended March 31, 2007 compared to $54.9 million or 50.8% for the nine-month period ended April 1, 2006. The changes in gross profit for the three and nine-month periods are principally related to overall sales volume and product mix.

Selling, General and Administrative Expense. Selling, general and administrative expenses increased to approximately $13.2 million for the three-month period ended March 31, 2007, from approximately $11.6 million for the three-month period ended April 1, 2006. As a percentage of revenue, selling, general and administrative expenses increased to 34% from 27% of revenues from the comparative prior year period. The increase was primarily due to legal fees related to the Palomar litigation and to incremental share-based compensation expense, as well as higher salaries due to increased headcount. For the nine-month period ended March 31, 2007, selling, general and administrative expenses increased to approximately $36.8 million from approximately $30.8 million for

the nine-month period ended April 1, 2006. As a percentage of revenue, selling, general and administrative expenses increased to 33.6% from 28.5% of revenues from the comparative prior year period. The increase is due primarily to legal fees related to the Palomar litigation and to share-based compensation expense, as well as higher salaries due to increased headcount.

Research and Development Expense. Research and development spending increased to $4.9 million for the three-month period ended March 31, 2007, from $2.4 million for the three-month period ended April 1, 2006, due primarily to an increase in the number of active projects and an increase in employee costs. Spending in this area increased to $13.1 million for the nine-month period ended March 31, 2007, from $5.9 million for the nine-month period ended April 1, 2006 due primarily to the aforementioned increase in project spending and an increase in employee-related costs.

Other Income/Expense. Other income increased to approximately $0.8 million for the three-months ended March 31, 2007 compared to $0.5 million for the three-month period ended April 1, 2006 due primarily to an increase in interest income earned on the higher level of cash and cash equivalents, and investments. For the nine-month period ended March 31, 2007, other income was approximately $6.0 million compared to other income of approximately $1.0 million for the nine-month period ended April 1, 2006. The increase is due primarily to an increase in interest income as a result of an increase in cash and cash equivalents, investments, and a recognized $3.5 million gain which the Company recognized on the exchange of its shares of common stock of Solx Inc. for cash and common stock of Occulogix Inc.

The gain was a result of the acquisition of Solx Inc., a privately-held company, by Occulogix Inc., a publicly traded company. We held 19.99% of the outstanding common stock of Solx Inc. on an as-converted basis, prior to the merger. As a result of the merger, we received approximately $1.0 million cash plus approximately 1.3 million shares of common stock in Occulogix Inc., a company publicly traded on the Nasdaq Global Market.

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 37% for each of the three-month periods ended March 31, 2007 and April 1, 2006, respectively. We recorded effective tax rates of approximately 36% and 35% for the nine-month periods ended March 31, 2007 and April 1, 2006, respectively. The increase was due primarily to the phase out of the extraterritorial income exclusion deduction in fiscal year 2007 and a decrease in the valuation allowances for foreign jurisdictions in the same period in the previous year, offset slightly by a retroactive reinstatement of the domestic research & development tax credit.

Liquidity and Capital Resources

Our cash and cash equivalents and our investment in short and long-term marketable securities at March 31, 2007 totaled approximately $56.5 million compared with approximately $79.5 million at July 1, 2006. We continue to have no long-term debt. We believe that the combination of existing cash and cash equivalents, and marketable securities on hand, along with cash to be generated by 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 $4.0 million for the nine-month period ended March 31, 2007 as compared to cash provided by operating activities of $6.1 million for the same period in the prior year. The increase in cash used by operating activities is primarily due to the payment of prior year liabilities and a decrease in net income as compared to the same period in the prior year.

Cash used by investing activities amounted to approximately $0.9 million for the nine-month period ended March 31, 2007 as compared to approximately $34.9 million for the nine-month period ended April 1, 2006. The activity for both nine-month periods reflects the maturity or purchase of held-to-maturity investments. Cash used by investing activities also reflects approximately $15.7 million, net of cash received, for the acquisition of Inolase during the nine-month period ended March 31, 2007 as compared to the same period in the prior year (Note 6).

Cash used by financing activities amounted to approximately $7.9 million for the nine-month period ended March 31, 2007 and primarily reflects the re-purchase of Company stock by the Company in open market transactions during the period.

Cash provided by financing activities amounted to approximately $7.3 million for the nine-month period ended April 1, 2006, and primarily reflects the proceeds from the issuance of common stock by the Company to its employees under existing stock option and stock purchase plan.

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	$	5,250	$	1,000	$	2,000	$	1,500	$	750
Operating leases	2,038		1,217		754		67		—

Total contractual obligations	$	7,288	$	2,217	$	2,754	$	1,567	$	750

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 July 1, 2006, as well as other risks and uncertainties referenced in this Quarterly Report on Form 10-Q, and the following:

· On August 9, 2006, one of our competitors, Palomar Medical Technologies, Inc. (“Palomar”), alleged that the manufacture, use and sale of our products for laser hair removal willfully infringe certain United States patents. Public announcements concerning this litigation that are unfavorable to us may result in significant declines in our stock price. An adverse ruling or judgment in this matter is likely to cause our stock price to decline significantly. Litigation with Palomar is expensive and is likely to be protracted, and our intellectual property position may be weakened as a result of an adverse ruling or judgment. Whether or not we are successful in the pending lawsuit, litigation may consume substantial amounts of our financial resources and divert management’s attention away from our core business. Please see Part II, Item 1 (Legal Proceedings) for a further discussion of the Palomar litigation.

· Claims by others that our products infringe their patents or other intellectual property rights, or that the patents which we own or have licensed rights to are invalid, could prevent us from manufacturing and selling some of our products or require us to incur substantial costs from litigation or development of non-infringing technology.

· Our principal source of liquidity is our current cash and equivalents and marketable investments. Our ability to generate cash from operations is dependant upon our ability to generate revenue from selling our lasers and other products and providing product-related services. A decrease in demand for our products and related services or increases in operating costs would likely have an adverse effect on our liquidity.

· Because we typically derive more than half of our revenue from international sales, we are susceptible to currency fluctuations, negative economic changes taking place in foreign marketplaces, and other risks associated with conducting business overseas.

· The failure to obtain alexandrite rods for certain laser systems from our sole supplier would impair our ability to manufacture and sell these laser systems, which has accounted for a substantial portion of our revenue in certain recent periods.

· Our failure to respond to rapid changes in technology and intense competition in the laser industry could make our lasers obsolete.

· Like other companies in our industry, we are subject to a regulatory review process and our failure to receive necessary government clearances or approvals could affect our ability to sell our products and remain competitive.

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

· Achieving complete compliance with FDA regulations is difficult, and if we fail to comply, we could be subject to FDA enforcement action.

· We could incur substantial costs as a result of product liability claims.

· We may be unable to attract and retain management and other personnel we need to succeed.

· Our failure to manage acquisitions and joint ventures effectively may divert management attention from our core business and cause us to incur debt, liabilities or costs.

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.

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 both local and 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 four forward exchange contracts outstanding serving as a hedge of our Euro-denominated intercompany receivables at March 31, 2007. These contracts serve as hedges of a substantial portion of our Euro-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 acting Chief 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 31, 2007, the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and acting Chief 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 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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”).

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.

ITEM 6 - Exhibits

(a) Exhibits

Exhibit 10.1	Amended and Restated Employment Agreement dated as of April 5, 2007, between Candela Corporation and Gerard E. Puorro
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

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 10, 2007	/s/ Robert E. Quinn
		Robert E. Quinn
		(Treasurer, Corporate Controller and
		Principal Financial Officer)

Candela Corporation

INDEX TO EXHIBITS

Exhibit No.		Description

Exhibit 10.1		Amended and Restated Employment Agreement dated as of April 5, 2007, between Candela Corporation and Gerard E. Puorro

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	7th grade Avg

Candela (CLZR) Inactive 10-Q2007 Q3 Quarterly report

Content analysis

4. Stock-based Compensation

10. Intangible assets

11. Derivative Instruments and Hedging Activity

12. Warranty Reserve

The following table reflects changes in the Company’s accrued warranty account during the three and nine month periods ended March 31, 2007 and April 1, 2006, respectively:

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.

The following table reflects changes in the Company’s deferred revenue account during the three and nine month periods ended March 31, 2007 and April 1, 2006, respectively:

14. Common Stock Buyback

15. Commitments and Contingencies

16. Legal Proceedings

17. Other Income

Item 4 - Controls and Procedures

Item 1 - Legal Proceedings

ITEM 6 - Exhibits