UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 28, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 x

Non-Accelerated Filer o	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 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 5, 2009
Common Stock, $.01 par value per share		22,887,829

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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 28, 2009 and June 28, 2008	3

		Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine-month periods ended March 28, 2009 and March 29, 2008	4

		Condensed Consolidated Statements of Cash Flows for the nine-month periods ended March 28, 2009 and March 29, 2008	5

		Notes to Condensed Consolidated Financial Statements (Unaudited)	6 - 19

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20 - 25

	Item 3.	Quantitative and Qualitative Disclosure about Market Risk	26

	Item 4.	Controls and Procedures	26

Part II.	Other Information:

	Item 1.	Legal proceedings	27 - 28

	Item 6.	Exhibits	29

	Signatures		30

	Index to Exhibits		31

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Part I. Financial Information

Item 1 - Financial Statements

CANDELA CORPORATION

Consolidated Balance Sheets

(in thousands, except per-share data)

(unaudited)

	March 28,			June 28,
	2009			2008
Assets
Current assets:
Cash and cash equivalents	$	22,988		$	21,030
Restricted cash	1,013			29
Marketable securities	1,756			12,131
Accounts receivable, net of allowance for doubtful accounts of $2,861 and $2,322 at March 28 and June 28, respectively	33,020			43,320
Notes receivable	905			728
Inventories, net	27,874			33,141
Other current assets	14,345			9,043

Total current assets	101,901			119,422
Property and equipment, net	3,564			4,027
Deferred tax assets	6,300			8,065
Goodwill	—			13,225
Acquired Intangible assets, net	174			6,916
Marketable securities, long-term	—			3,512
Other assets	1,668			2,928

Total assets	$	113,607		$	158,095

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	10,072		$	15,917
Accrued payroll and related expenses	4,754			4,680
Accrued warranty costs, current	4,961			5,373
Sales tax payable	584			919
Other accrued liabilities	7,200			9,257
Deferred revenue, current	10,983			13,614
Current liabilities of discontinued operations	1,330			1,200

Total current liabilities	39,884			50,960
Deferred tax liability, long-term	291			2,099
Accrued warranty costs, long-term	627			725
Deferred revenue, long-term	3,798			4,522

Total liabilities	44,600			58,306

Stockholders’ equity:
Common stock, $.01 par value, 60,000,000 shares authorized; 26,175,000 and 26,123,000 issued at March 28 and June 28, respectively	262			261
Treasury stock, 3,450,000 common shares at March 28 and June 28, respectively, at cost	(24,855		)	(24,855		)
Additional paid-in capital	75,645			73,174
Accumulated earnings	16,168			45,588
Accumulated other comprehensive income	1,787			5,621

Total stockholders’ equity	69,007			99,789

Total liabilities and stockholders’ equity	$	113,607		$	158,095

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

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CANDELA CORPORATION

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per-share data)

	For the three months ended:						For the nine months ended:
	March 28,			March 29,			March 28,			March 29,
	2009			2008			2009			2008
	(Unaudited)						(Unaudited)
Revenue
Lasers and other products	$	18,528		$	27,986		$	54,414		$	79,380
Product-related service	11,238			10,413			30,773			29,829

Total revenue	29,766			38,399			85,187			109,209
Cost of sales
Lasers and other products	9,673			12,872			29,201			36,944
Product-related service	8,160			8,738			23,423			21,913

Total cost of sales	17,833			21,610			52,624			58,857

Gross profit	11,933			16,789			32,563			50,352
Operating expenses:
Selling, general and administrative	10,797			17,873			41,170			50,191
Research and development	2,488			2,418			8,409			7,637

Total operating expenses	13,285			20,291			49,579			57,828

Loss from operations	(1,352		)	(3,502		)	(17,016		)	(7,476		)

Other income (expense):
Interest income	8			367			425			1,330
Other expense, net	(16		)	(78		)	(637		)	(1,855		)

Total other expense	(8		)	289			(212		)	(525		)

Loss from continuing operations before income taxes	(1,360		)	(3,213		)	(17,228		)	(8,001		)

Benefit from income taxes	(465		)	(1,375		)	(6,259		)	(3,328		)

Loss from continuing operations	(895		)	(1,838		)	(10,969		)	(4,673		)

Income (loss) from discontinued operations, net of income taxes	430			(218		)	(18,451		)	(1,746		)

Net Loss	$	(465	)	$	(2,056	)	$	(29,420	)	$	(6,419	)

Net loss per share of common stock:

Basic
Loss from continuing operations	$	(0.04	)	$	(0.08	)	$	(0.48	)	$	(0.21	)
Income (loss) from discontinued operations	0.02			(0.01		)	(0.81		)	(0.08		)

Net loss	$	(0.02	)	$	(0.09	)	$	(1.29	)	$	(0.29	)

Diluted
Loss from continuing operations	$	(0.04	)	$	(0.08	)	$	(0.48	)	$	(0.21	)
Income (loss) from discontinued operations	0.02			(0.01		)	(0.81		)	(0.08		)

Net loss	$	(0.02	)	$	(0.09	)	$	(1.29	)	$	(0.29	)

Weighted average shares outstanding:
Basic and diluted	22,725			22,672			22,710			22,743

Net loss	$	(465	)	$	(2,056	)	$	(29,420	)	$	(6,419	)
Other comprehensive income (loss):
Foreign currency translation adjustment	(1,216		)	1,965			(3,834		)	3,534
Unrealized gain on available-for-sales securities, net of tax	—			—			—			777

Comprehensive loss	$	(1,681	)	$	(91	)	$	(33,254	)	$	(2,108	)

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

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CANDELA CORPORATION

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	For the nine months ended:
	March 28,			March 29,
	2009			2008
Cash flows from operating activities:
Net loss	$	(29,420	)	$	(6,419	)
Adjustments to reconcile net loss to net cash used by operating activities:
Non-cash items reported in discontinued operations	17,143			—
Loss on other-than-temporary impairment of investment	—			2,546
Share-based compensation expense	2,619			2,912
Depreciation and amortization	2,304			2,188
Provision for bad debts	3,495			2,058
Other non-cash items	267			195
Changes in operating assets and liabilities
Accounts receivable	8,882			(5,148		)
Notes receivable	(177		)	754
Inventories	5,887			(9,009		)
Other current assets	1,592			(2,848		)
Other assets	1,306			50
Accounts payable	(9,839		)	6,018
Accrued payroll and related expenses	(462		)	(999		)
Deferred revenue	(3,777		)	3,477
Accrued warranty costs	(285		)	(2,245		)
Income taxes payable and deferred	(3,524		)	(3,350		)
Other accrued liabilities	(3,858		)	(896		)
Restricted cash	(984		)	19

Net cash used by operating activities	(8,831		)	(10,697		)

Cash flows from investing activities:
Purchases of property and equipment	(689		)	(2,120		)
Maturities of held-to-maturity marketable securities	12,772			15,940
Purchases of held-to-maturity marketable securities	—			(14,250		)
Acquisition of intangible assets	—			(233		)

Net cash provided by (used by) investing activities	12,083			(663		)

Cash flows from financing activities:
Proceeds from the issuance of common stock	64			194
Purchase of treasury stock	—			(2,400		)

Net cash provided by (used by) financing activities	64			(2,206		)

Effect of exchange rates on cash and cash equivalents	(1,358		)	3,535

Net increase (decrease) in cash and cash equivalents	1,958			(10,031		)

Cash and cash equivalents at beginning of period	21,030			27,152

Cash and cash equivalents at end of period	$	22,988		$	17,121

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

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Candela Corporation

Notes to Condensed Consolidated Financial Statements (unaudited)

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 for 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 28, 2009 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 2008 Form 10-K filed with the Securities and Exchange Commission (“SEC”).

Basis of Consolidation

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.

Significant Accounting Policies

As required, the Company adopted SFAS No. 157 for its financial assets on June 29, 2008. Adoption does not have a material impact on the Company’s financial position or results of operations at this time. See Note 3 — Fair Value Measurements.

On December 28, 2008, we adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161 requires additional disclosures about the Company’s objectives in using derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and tabular disclosures of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. See Note 11 — Derivative Instruments and Hedging Activity.

There have been no other changes in our significant accounting policies during the nine months ended March 28, 2009 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended June 28, 2008.

2. Recent Accounting Pronouncements

In April 2008, the Financial Accounting Standards Board (“FASB”) finalized FASB Staff Position (“FSP”) No. 142-3, Determination of the Useful Life of Intangible Assets. The position amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets. The position applies to intangible assets that are acquired individually or with a group of other assets and both intangible assets acquired in business combinations and asset acquisitions. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We do not believe that the adoption of FSP 142-3 will have a material effect on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations , which replaces SFAS No. 141. The statement retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting (previously referred to as the purchase method of accounting) be used for all business combinations, but requires a number of changes, including changes in the way assets and liabilities are recognized as a result of business combinations.It also requires the capitalization of in-process research and development at fair value and requires the expensing of acquisition-related costs as incurred. In April 2009, the FASB issued FSP FAS 141(R)-1 which amends SFAS No. 141(R) by establishing a model to account for certain pre-acquisition contingencies. Under the FSP, an acquirer is required to recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, then the acquirer should follow the recognition criteria in SFAS No. 5, Accounting for Contingencies, and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss – an interpretation of FASB Statement No. 5. SFAS No. 141(R) and FSP FAS 141(R)-1 are effective for us beginning June 28, 2009, and will apply prospectively to business combinations completed on or after that date. The impact of the adoption of SFAS No. 141(R) and FSP FAS 141(R)-1 will depend on the nature of acquisitions completed after the date of adoption.

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In April 2009, the FASB issued three related Staff Positions: (i) FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”), (ii) SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairment (“FSP 115-2” and “FSP 124-2”), and (iii) SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107” and “APB 28-1”), which will be effective for interim and annual periods ending after June 15, 2009. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP 115-2 and FSP 124-2 modify the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS 157 for both interim and annual periods. We are currently evaluating these Staff Positions and the impact, if any, that adoption will have on our financial position and results of operation.

3. Fair Value Measurements

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. The Company did not elect to re-measure any of its existing financial assets or liabilities under the provisions of this standard. Accordingly, adoption did not have a material impact on the Company’s financial position or results of operations at that time.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued FSP No. FAS 157-1, Application of SFAS No. 157 to SFAS No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under SFAS No. 13, and FSP No. FAS 157-2, Effective Date of SFAS No. 157. Collectively, the FSPs defer the effective date of SFAS No. 157 to fiscal years beginning after December 15, 2008, for non-financial assets and non-financial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually, and amends the scope of SFAS 157. As required, the Company adopted SFAS No. 157 for its financial assets on June 29, 2008. Adoption does not have a material impact on the Company’s financial position or results of operations at this time. The Company has not yet determined the impact on its financial statements of the June 28, 2009 adoption of SFAS No. 157 as it pertains to non-financial assets and liabilities.

SFAS No. 157 establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:

· Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments include securities traded on active exchange markets, such as the New York Stock Exchange.

· Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

· Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions market participants would use in pricing the asset or liability.

Our cash and cash equivalents consist of cash on deposit at various financial institutions at March 28, 2009 and include approximately $6.9 million invested in money market funds which are measured at fair value on a recurring basis using type Level I inputs.

The fair value of our derivatives are measured using type Level 2 inputs and had a fair value of less than $0.1 million at March 28, 2009. Also see Note 11 — Derivative Instruments and Hedging Activity.

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4. Discontinued Operations

Candela Skin Care Centers (“CSCC”)

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

Inolase (2002) Ltd.

In the fiscal quarter ended December 27, 2008, in connection with the Company’s plan to focus on its core products, management initiated a plan to close its Inolase (2002) Ltd. (“Inolase”) subsidiary. In accordance with SFAS No. 144, the Company classified the operating results of this business as discontinued operations in the accompanying statements of operations.

The Company determined that there was no future cash value inherent to its Inolase subsidiary and, accordingly, decided to shut down this reporting unit as its fair value was zero. As part of that process the Company recognized a 100% impairment loss associated with the goodwill, other intangible assets, inventory, and fixed assets. These components of the loss recognized during the nine-month period ended March 28, 2009 are as follows:

	In thousands
Goodwill	$	10,596
Patents & Developed Technology	5,162
Inventory	1,681
Fixed Assets, net	237
	$	17,676

In accordance with SFAS No. 146, the Company also recorded restructuring charges of approximately $0.4 million at December 27, 2008 associated with future occupancy costs, minimum termination benefits, and professional service fees.

A summary of the operating results of the discontinued operations are as follows:

	For the three months ended:						For the nine months ended:
	March 28,			March 29,			March 28,			March 29,
(in thousands)	2009			2008			2009			2008
Revenue	$	21		$	491		$	295		$	744

Income (loss) from discontinued operations	(116		)	(258		)	(1,895		)	(1,940		)
Provision for (benefit from) Income tax from discontinued operations	(905		)	(40		)	(587		)	(194		)
Net loss on disposal of discontinued operations, net of tax benefit of $533	(359		)	—			(17,143		)	—

Income (loss) from discontinued operations, net	$	430		$	(218	)	$	(18,451	)	$	(1,746	)

During the three-month period ended March 28, 2009 we recognized certain residual revenues, incurred ongoing operating expenses, and made required adjustments to income taxes in the ordinary course of business.

As of March 28, 2009, the Company had no assets or liabilities held in connection with the disposal of Inolase other than the accrual for future occupancy costs and professional fees detailed in the table below.

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Current liabilities of discontinued operations consist of the following:

	March 28,		June 28,
(in thousands)	2009		2008
Facility closure and other costs - CSCC	$	311	$	361
Deferred revenue, gift certificates - CSCC	839		839
Facility closure and other costs - Inolase	180		—

	$	1,330	$	1,200

5. 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 28, 2009 and March 29, 2008 resulted in the recognition of share-based compensation expense of approximately $0.9 million and $0.8 million, respectively. For the nine-month period ended March 28, 2009 and March 29, 2008, recognition of shared-based compensation expense was approximately $2.6 million and $2.8 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 28, 2009, there was approximately $2.5 million of total unrecognized compensation cost related to non-vested stock options and Stock Appreciation Rights (“SARs”) granted under the Company’s incentive plans. This cost is expected to be recognized over a weighted-average period of 1.1 years.

The amount of cash received from the exercise of stock options for the nine-month periods ended March 28, 2009 and March 29, 2008 was approximately $18,000 and $0.1 million, respectively.

None of the options or SARs outstanding at March 28, 2009 had cash-settlement features.

Stock Compensation Plans

General Discussion

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.

Stock Appreciation Rights (“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.

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 average high/low market price on the last day of semi-annual periods rounded up to the nearest penny. Substantially all full-time employees are eligible to participate in the Purchase Plan. At March 28,

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2009 there were approximately 603,000 shares available for sale. Compensation expense for the purchase plan is recognized over the vesting period.

1998 Candela Corporation Amended and Restated Stock Plan

Effective December 12, 2006, the Third Amended and Restated 1998 Stock Plan (“1998 Stock Plan”) was amended, by affirmative vote at the Company’s Annual Meeting of Shareholders held on the same date, to increase the number of shares for which options and rights could be granted by 2.5 million shares to a maximum of 7.8 million shares.

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. 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 0.6 million stock-based SARs granted during the nine-month period ended March 28, 2009. 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 4.2 million outstanding options/SARs at March 28, 2009 with a weighted-average exercise price of $8.25 per share, an aggregate intrinsic value of zero, and a weighted-average remaining contractual term of 7.47 years.

Of the total 4.2 million outstanding options/SARs, there were approximately 2.5 million of exercisable options/SARs at March 28, 2009 with a weighted-average exercise price of $9.09 per share, an aggregate intrinsic value of zero, and a weighted-average remaining contractual term of 6.74 years.

The total intrinsic value of options exercised during the nine-month period ended March 28, 2009 was approximately $18,000.

The 1998 Stock Plan expired pursuant to its terms on September 18, 2008. As such, there were no options/SARs available for grant under this plan at March 28, 2009.

2008 Candela Corporation Stock Plan

The Company’s 2008 Stock Plan was adopted by the Board of Directors on October 27, 2008 and approved by the stockholders on December 12, 2008. The 2008 Stock Plan permits the Company to make grants of incentive stock options, non-qualified stock options, stock appreciation rights (“SARs”), restricted stock awards and restricted stock units (“RSUs”), which are referred to hereafter individually as a “Stock Right” and collectively as “Stock Rights.”

The 2008 Stock Plan authorizes the issuance of up to 1,300,000 shares of the Company’s Common Stock. The shares of Common Stock subject to Stock Rights may be authorized but unissued shares of Common Stock or shares of Common Stock reacquired by the Company in any manner. Any shares of Common Stock subject to a Stock Right which for any reason expires or terminates unexercised or terminates without the delivery of shares of Common Stock may again be available for future grants under the 2008 Stock Plan. No employee may be granted options and/or SARs with respect to more than 700,000 shares of Common Stock in any one fiscal year. No employee may be granted restricted stock or RSUs having a fair market value in excess of $2,000,000 in any one fiscal year. The number of shares of Common Stock available under the 2008 Stock Plan, the award limits and a grantee’s rights with respect to Stock Rights granted, unless otherwise specifically provided in the written instrument relating to the grant of such Stock Right, shall be adjusted upon the occurrence of any of the following: stock dividends, stock splits, consolidation, mergers, recapitalizations, reorganizations, dissolution or liquidation.

There were approximately 1.0 million stock-based SARs granted under this Plan during the three-month period ended March 28, 2009. The SARs granted to employees become exercisable ratably over one to two years. No SARs were granted to directors during the three-month period ended March 28, 2009.

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Due to forfeitures, there were approximately 0.9 million outstanding SARs under this Plan at March 28, 2009 with a weighted-average exercise price of $0.41 per share, an aggregate intrinsic value of less than $0.1 million, and a weighted-average remaining contractual term of 9.79 years.

The Compensation Committee of the Board of Directors administers the 2008 Stock Plan. Subject to the provisions of the 2008 Stock Plan, the Compensation Committee has the authority to select the persons to whom Stock Rights are granted and determine the terms of each Stock Right. Subject to certain limitations set forth in the 2008 Stock Plan, the Board of Directors may appoint other committees to administer the 2008 Stock Plan and also may delegate to any officer of the Company certain authority under the 2008 Stock Plan, including the authority to grant Stock Rights.

Incentive stock options may be granted to employees of the Company. Non-Qualified options, SARs, restricted stock and RSUs may be granted to any employee, officer, Director or consultant of the Company.

The Compensation Committee may grant incentive stock options, non-qualified stock options and SARs in tandem with an option or on a free standing basis. Each option or SAR expires on the date specified by the Compensation Committee, but not more than (i) ten years from the date of grant in the case of options and SARs generally and (ii) five years from the date of grant in the case of incentive stock options granted to an employee possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company. Options and SARs are subject to early termination in certain circumstances. The exercise price per share of Common Stock of an option may not be less than “fair market value” (as defined in the 2008 Stock Plan) per share of Common Stock on the date of grant. In the case of an incentive stock option to be granted to an employee possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, the exercise price per share of Common Stock may not be less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant. The aggregate fair market value (determined on the date of grant) of the shares of Common Stock subject to incentive stock options granted to an employee and which first become exercisable during any calendar year cannot exceed $100,000. The grant price of SARs 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 an option shall equal the exercise price of the related option. Options and SARs may either be fully exercisable at the time of the grant or may become exercisable in such installments as the Compensation Committee may specify. The Compensation Committee has the right to accelerate the date of exercise of any installment of any option or SAR.

The Compensation Committee may grant restricted stock and RSUs. The instrument relating to the grant of restricted stock and RSUs will specify the restrictions that the Compensation Committee may impose, the number of shares of restricted Common Stock to be granted, and such other provisions as the Compensation Committee may determine. The restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, upon the satisfaction of performance goals or otherwise, as the Compensation Committee determines at the time of the grant of the restricted stock or RSUs. Except as otherwise provided in the applicable instrument relating to the grant of the restricted stock or RSUs, a grantee shall have all of the rights of a stockholder with respect to the restricted stock, and such grantee shall have none of the rights of a stockholder with respect to RSUs until such time as shares of Common Stock are paid in settlement of the RSUs.

The Compensation Committee may take any action as may be necessary to ensure that Stock Rights granted under the 2008 Stock Plan qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code. Any Stock Right granted under the 2008 Stock Plan which is intended to qualify as “performance-based compensation” may be conditioned on the attainment of one or more of the following performance goals: earnings, earnings before interest and taxes, earnings before interest, taxes, depreciation and amortization, earnings per share, economic value created, market share, net income (before or after taxes), operating income, adjusted net income after capital charge, return on assets, return on capital (based on earnings or cash flow), return on equity, return on investment, revenue, cash flow, operating margin, share price, total stockholder return, total market value, and strategic business criteria, consisting of one or more objectives based on meeting specified market penetration goals, productivity measures, geographic business expansion goals,

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cost targets, customer satisfaction or employee satisfaction goals, goals relating to merger synergies, management of employment practices and employee benefits, or supervision of litigation or information technology, and goals relating to acquisitions or divestitures of subsidiaries, affiliates or joint ventures.

Incentive stock options are not transferable by the optionee or grantee except by will or by the laws of descent and distribution. Non-Qualified options, SARs, restricted stock and RSUs are transferable to the extent determined by the Compensation Committee and as set forth in the instrument relating to the grant of any such non-qualified options, SARs, restricted stock and RSUs.

Unless otherwise specified in the instrument relating to the grant of an incentive stock options, if an incentive stock option optionee ceases to be employed other than reason of death or disability, all unvested incentive stock options shall terminate and the vested incentive stock options shall terminate on the earlier of three months after the date of termination of employment or the specified expiration date. If an incentive stock option optionee ceases to be employed by reason of death or disability, all unvested incentive stock options shall terminate and the vested incentive stock options shall terminate on the earlier of one hundred and eighty days after the date of termination of employment or the specified expiration date. The Compensation Committee shall specify in the instrument relating to the grant of nonqualified options, SARs, restricted stock and RSUs the treatment of such Stock Rights upon a grantee’s termination of employment.

In the event of a merger, sale or consolidation of the Company, or a similar “acquisition,” the administrator, or the board of directors of any successor, in its discretion, may either (i) provide for appropriate substitutions or assumptions of outstanding awards, (ii) provide that all option and stock appreciation rights must be exercised, to the extent exercisable, within a specified period following notice at the end of which period all outstanding options or stock appreciation rights will terminate, (iii) provide for the termination of all options and stock appreciation rights in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such award over the exercise price of such award or (iv) terminate all awards, other than options and stock appreciation rights, on such terms and conditions as the administrator or the board of directors of any successor deems appropriate. The 2008 Stock Plan shall automatically expire on October 27, 2018, except as to options outstanding on that date.

The Board of Directors may adopt amendments to the 2008 Stock Plan, subject, in certain cases, to stockholder approval, and may terminate the 2008 Stock Plan at any time (although such action shall not affect Stock Rights previously granted). No Stock Rights may be granted under the 2008 Stock Plan after October 26, 2018.

6. 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 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 28,	March 29,	March 28,	March 29,
(in thousands, except per share data)	2009	2008	2009	2008
Shares used in the calculation of Basic earnings per share	22,725	22,672	22,710	22,743
Effect of dilutive securities:
Stock options/SAR’s	—	—	—	—

Diluted shares used in the calculation of earnings per share	22,725	22,672	22,710	22,743

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During the three-month period ended March 28, 2009 all but 73 potential common shares issuable upon exercise of stock options/SARs were excluded from the calculation of diluted earnings per share from discontinued operations as their effect would have been anti-dilutive.

During the three and nine-month periods ended March 28, 2009 and March 29, 2008, respectively, 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.

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. 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.

See Note 3 for related disclosures relative to fair value measurements.

Marketable securities consist of the following:

	March 28, 2009						June 28, 2008
(in thousands)	Net Carrying Amount		Fair Value		Unrealized loss		Net Carrying Amount		Fair Value		Unrealized (gain) loss
Short-term (Held-to-maturity):
Government-backed securities	$	—	$	—	$	—	$	9,000	$	9,055	$	55
Certificates of deposit	1,756		1,764		8		3,131		3,134		3

Total marketable securities, short-term	$	1,756	$	1,764	$	8	$	12,131	$	12,189	$	58

Long-term (Held-to-maturity):
Government-backed securities	$	—	$	—	$	—	$	2,000	$	2,014	$	14
Certificates of deposit	—		—		—		1,512		1,502		(10		)

Total marketable securities, long-term	$	—	$	—	$	—	$	3,512	$	3,516	$	4

Held-to-maturity investments at March 28, 2009 mature as follows:

	Fiscal Year Ended
(in thousands)	2009		2010		Total
Government-backed securities	$	—	$	—	$	—
Certificates of deposit	244		1,512		1,756

	$	244	$	1,512	$	1,756

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8. Inventories

Inventories consist of the following:

	March 28,		June 28,
(in thousands)	2009		2008
Raw materials	$	10,416	$	13,720
Work in process	924		1,635
Finished goods	16,534		17,786

	$	27,874	$	33,141

9. Property and Equipment

Property and equipment consists of the following:

	March 28,			June 28,
(in thousands)	2009			2008
Leasehold improvements	$	388		$	1,014
Office furniture	407			718
Computers, software, and other equipment	7,667			11,845

	$	8,462		$	13,577
Less: accumulated depreciation	(4,898		)	(9,550		)

Property and equipment, net	$	3,564		$	4,027

Depreciation expense was approximately $0.3 million for each of the three-month periods ended March 28, 2009 and March 29, 2008, respectively.

Depreciation expense was approximately $0.9 million for each of the nine-month periods ended March 28, 2009 and March 29, 2008, respectively.

The decreases in the various components of property and equipment, as well as accumulated depreciation, are directly related to the impairment charges recorded in connection with the discontinued operation more fully explained in Note 3.

10. Goodwill and Acquired Intangible Assets

Goodwill and acquired intangible assets consist of the following:

(in thousands)	March 28, 2009		June 28, 2008
Goodwill	$	—	$	13,225

Intangible assets with finite lives:
Patents	$	174	$	3,128
Developed technology	—		6,009

	174		9,137
Accumulated amortization:
Patents	—		(886		)
Developed technology	—		(1,335		)

	—		(2,221		)

Intangible assets with finite lives, net	$	174	$	6,916

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The changes in the carrying amount of goodwill for the nine-month period ended March 28, 2009 are as follows:

	(in thousands)
Balance at June 28, 2008	$	13,225

Effect of foreign currency adjustments	(2,629		)

Impairment Charge	(10,596		)

Balance at March 28, 2009	$	—

There was no amortization expense for the three-month period ended March 28, 2009 as the assets were previously fully impaired. Amortization expense was approximately $0.4 million for the three-month periods ended March 29, 2008.

Amortization expense was approximately $0.8 million and $1.3 million for the nine-month periods ended March 28, 2009 and March 29, 2008, respectively.

11. Derivative Instruments and Hedging Activity

Foreign Currency Risk: The Company uses derivative instruments to reduce its exposure to fluctuations in foreign exchange rates by creating offsetting positions through the use of foreign currency forward contracts. Changes to the fair value of derivative contracts that do not qualify for hedge accounting are reported in other income (expense) in the period of the change. For derivatives that qualify for hedge accounting, the Company recognizes the instruments as either assets or liabilities in the statement of financial position and measures those instruments at fair value. 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.

We had no derivatives that qualified for hedge accounting during the three or nine-month periods ended March 28, 2009.

During the three and nine-month periods ended March 28, 2009, we recognized the following gains (losses) on derivatives and their related hedged items which were solely comprised of inter-company payables and receivables in the normal course of business.

	For the three months ended:			For the nine months ended:
	March 28,			March 28,
(in thousands)	2009			2009
Other income (expense) - derivatives	$	12		$	(429	)
Other income (expense) - hedged items	(6		)	187

Total	$	6		$	(242	)

We did not enter into any other derivative or hedge contracts for any other risks during the three and nine-month periods ended March 28, 2009.

The Company had three foreign currency forward contracts outstanding at March 28, 2009 in the notional amount of approximately 0.9 million Euros or approximately $1.3 million and a fair value of less than $0.1 million. These derivative contracts serve to mitigate the foreign currency risk of a substantial portion of our Euro-denominated inter-company balances at March 28, 2009.

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.

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The following table reflects changes in the Company’s accrued warranty account during the three and nine-month periods ended March 28, 2009 and March 29, 2008, respectively:

	For the three months ended:						For the nine months ended:
	March 28,			March 29,			March 28,			March 29,
(in thousands)	2009			2008			2009			2008
Beginning balance	$	5,602		$	6,085		$	6,098		$	7,613
Incremental accruals on current sales	1,254			1,784			4,227			4,102
Amortization of prior-period accruals	(1,268		)	(2,324		)	(4,737		)	(6,170		)

Ending balance	$	5,588		$	5,545		$	5,588		$	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.

The following table reflects changes in the Company’s deferred revenue account during the three and nine-month periods ended March 28, 2009 and March 29, 2008, respectively:

	For the three months ended:						For the nine months ended:
	March 28,			March 29,			March 28,			March 29,
(in thousands)	2009			2008			2009			2008
Beginning balance	$	15,503		$	15,225		$	18,136		$	13,751
Deferral of new sales	3,651			5,081			11,449			14,516
Recognition of previously deferred revenue	(4,373		)	(3,350		)	(14,804		)	(11,311		)

Ending balance	$	14,781		$	16,956		$	14,781		$	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 28, 2009 was less than seven 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 28, 2009 and June 28, 2008, respectively.

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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.

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 fiscal years ended 2006 and later remain subject to examination by the IRS for U.S. federal tax purposes, our fiscal years ended 2005 and later remain subject to examination by the appropriate governmental agencies for Spanish and Japanese tax purposes.

In connection with the preparation of the financial statements, the Company performed an analysis to ascertain if it was more likely than not that it would be able to utilize its net deferred tax assets of approximately $16.9 million.

As part of that analysis, management considered the following as positive evidence outweighing the negative evidence of the recent pre-tax book losses:

· The net temporary differences resulting in the deferred tax assets and in the deferred tax liabilities are expected to reverse in similar time periods.

· The Company has a consistent taxpaying history.

· Current projections of future taxable income, exclusive of reversing temporary differences, indicate a return to taxable income in a reasonable period of time.

Based upon the aforementioned, we have concluded that the positive evidence outweighs the negative evidence and, thus, that those deferred tax assets not otherwise subject to a valuation allowance are realizable on a “more likely than not” basis.

17. Legal Proceedings

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

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and Counterclaims was granted in March 2007. Palomar filed a general denial response to Candela’s Amended Answer and Counterclaim in March 2007. In August 2007, the parties had a Markman hearing before the U.S. District Court Judge presiding over the above-described legal proceeding. In a Markman hearing, the Court interprets the definition of the disputed claim term of a patent. On October 31, 2008, the Company requested a stay of the case with the Court, which was granted on November 17, 2008. The Company did so based upon a third party’s re-examination request that was granted by the United States Patent and Trademark Office on August 29, 2008. The re-examination is with respect to both the ‘568 and ‘844 Patents, including many of the Claims at issue in this case. In November 2008, the Court stayed the case until the United States Patent and Trademark Office rules on the re-examination. On December 9, 2008, Candela filed requests for re-examination of the ‘568 and ‘844 Patents with the United States Patent & Trademark Office asserting that all claims currently in dispute with Palomar be held invalid. On January 7, 2009, the United States Patent and Trademark Office granted the Company’s re-examination request of the ‘844 Patent and the ‘568 Patent. The United States Patent and Trademark Office stated that there are substantial new questions of patentability for all claims asserted against the Company by Palomar.

· 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 (the “395 Patent”), and 6,743,222 (the “‘222 Patent”). 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 Patent and ‘222 Patent or that such patents are invalid. In November 2006, the Company answered the counterclaim by denying Palomar’s allegations. In February 2008, Palomar filed a request for re-examination of the Company’s ‘222 Patent with the United States Patent and Trademark Office (“PTO”). In March 2008, the PTO granted re-examination. In June 2008, the Court stayed the case until the PTO rules on the re-examination.

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.

· On April 2 and April 22, 2008, respectively, two substantially similar putative class action lawsuits, entitled Western Pa. Elec. Employees Pension Fund, et al., 1:08-cv-10551-DPW (“Western Pa.”) and Caballero v. Candela Corp., et al., Civ. No. 1:08-cv-10673-DPW (“Caballero”), were filed against Candela and two of its officers in the United States District Court for the District of Massachusetts purporting to assert claims for violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeking, among other things, compensatory damages and reasonable costs and expenses. On July 10, 2008, the court consolidated the cases (the “Consolidated Class Action”) and appointed lead plaintiff and lead counsel. On August 25, 2008, lead plaintiff filed a consolidated amended complaint purporting to be brought on behalf of all open-market purchasers of Candela common stock from November 1, 2005 through August 21, 2006, and alleging that Candela made certain false and misleading statements to investors expressing optimism regarding its financial condition and failed to disclose (i) the possibility that Palomar, one of Candela’s leading competitors, would initiate patent enforcement litigation against Candela and (ii) that Candela was purportedly losing market share to its competitors.

· On April 16, 2008, a shareholder derivative action entitled Forlenzo v. Puorro, et al., Civ. No. 08-1532, was filed in Massachusetts Superior Court for Middlesex County against the individual members of Candela’s board of directors and certain of its current and former officers, purporting to assert claims for breach of fiduciary duty and related claims arising out of allegations similar to those asserted in the class action litigation discussed above (the

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“Derivative Action”). The complaint sought on behalf of Candela, among other things, damages, restitution, and injunctive relief.

On January 16, 2009, the parties to the Consolidated Class Action and the Derivative Action filed stipulations of settlement, together with supporting documents, in the United States District Court for the District of Massachusetts and Massachusetts Superior Court for Middlesex County, respectively. Under the terms of the proposed Consolidated Class Action settlement, Candela will pay $3.85 million into a settlement fund for the benefit of the class members. Under the terms of the proposed Derivative Action settlement, Candela will pay for attorneys’ fees and has agreed to adopt certain corporate governance changes. Candela’s insurer will fund all payments contemplated by the proposed settlements. Neither the Company nor any of the individual defendants admit any wrongdoing under either of the proposed settlements, which are being entered into in return for the release of all claims. The proposed settlements are subject to preliminary and final approval by the respective courts. In February 2009 and March 2009, the District Court of Massachusetts and Massachusetts Superior Courts, respectively, provided preliminary approval of the settlements.

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. Patents 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 intends to vigorously defend against the lawsuit. Based upon Candela’s request, on July 23, 2008, the United States Patent & Trademark Office (“PTO”) agreed to re-examine the validity of the Cardiofocus patents. On October 14, 2008, the Court agreed to stay this matter for a minimum of one year, up to a maximum of two years, but no later than the PTO’s decision with respect to the re-examination proceedings.

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. While we believe that the likelihood of loss in each of the disclosed proceedings is reasonably possible, the possibility of loss or range of loss for each matter is not estimable.

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 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 in August 2006.

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 March 29, 2008, 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.

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Candela Corporation

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

Overview

We research, develop, manufacture, market, 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 2008. Information with respect to changes in our Critical Accounting Policies during the nine-month period ended March 28, 2009 may be found in Note 1 of the Notes to Condensed Consolidated Financial Statements (unaudited) in this Form 10-Q, which information is incorporated herein by reference.

Critical Accounting Estimates

There have been no significant changes in our critical accounting estimates during the nine months ended March 28, 2009 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 28, 2008.

Recent Accounting Pronouncements

Information with respect to Recent Accounting Pronouncements may be found in Note 2 of Notes to Condensed Consolidated Financial Statements (unaudited) in this Form 10-Q, which information is incorporated herein by reference.

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Results of Operations

Revenue

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

	For the three months ended:
	March 28,				March 29,
(in thousands)	2009				2008				Increase (Decrease)
U.S.	$	9,935	33	%	$	12,927	34	%	$	(2,992	)	-23	%
All other countries		19,831	67	%		25,472	66	%		(5,641	)	-22	%

Total worldwide revenue	$	29,766	100	%	$	38,399	100	%	$	(8,633	)	-22	%

	For the nine months ended:
	March 28,				March 29,
(in thousands)	2009				2008				Increase (Decrease)
U.S.	$	27,438	32	%	$	43,125	39	%	$	(15,687	)	-36	%
All other countries	57,749		68	%	66,084		61	%	(8,335		)	-13	%

Total worldwide revenue	$	85,187	100	%	$	109,209	100	%	$	(24,022	)	-22	%

Consolidated revenue was $29.8 million for the three-month period ended March 28, 2009, as compared to $38.4 million for the same period ended March 29, 2008. The overall decrease in quarterly revenue of approximately $8.6 million was driven by reductions in all regions of the world. The breakdown is as follows, U.S. $3.0 million, Europe of $2.8 million, Pacific Rim $2.5 million and Latin America $0.3 million. The decreases appear to be directly related to the slowing economy combined with the tightening credit markets. This quarter international revenue represents 67% of the total revenue which is similar to the same period last year.

Consolidated revenue was $85.2 million for the nine-month period ended March 28, 2009, as compared to $109.2 million for the same period ended March 29, 2008. The overall decrease of $24.0 million we believe was directly related to the slowing economy combined with the tightening credit markets. The U.S. represents the major shortfall in the nine-month results as it decreased by $15.7 million with Europe decreasing by $7.1 million. International revenues represent 68% of the total revenue as compared to 61% for the comparable period last year.

Revenue source by type is reflected in the following table:

	For the three months ended:
	March 28,				March 29,
(in thousands)	2009				2008				Increase (Decrease)
Lasers and other products	$	18,528	62	%	$	27,987	73	%	$	(9,459	)	-34	%
Product-related services	11,238		38	%	10,412		27	%	826			8	%

Total revenue	$	29,766	100	%	$	38,399	100	%	$	(8,633	)	-22	%

	For the nine months ended:
	March 28,				March 29,
(in thousands)	2009				2008				Increase (Decrease)
Lasers and other products	$	54,414	64	%	$	79,380	73	%	$	(24,966	)	-31	%
Product-related services	30,773		36	%	29,829		27	%	944			3	%

Total revenue	$	85,187	100	%	$	109,209	100	%	$	(24,022	)	-22	%

The decrease in revenue from lasers and other products for the three-month period ended March 28, 2009, as compared to the same period ended March 29, 2008, was experienced in all geographic regions of the world. We believe this is directly related to the uncertainty in the global economy combined with tightening worldwide credit markets. Decreases were realized across all product lines with no one product family experiencing a materially larger decrease than another. While there was some degradation in average selling prices (ASP), the shortfall was primarily driven by the sale of fewer units in all global regions.

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The decrease in revenue from lasers and other products for the nine-month period ended March 28, 2009, as compared to the same period ended March 29, 2008, was experienced in all geographic regions of the world with the exception of Latin America which realized a small increase. The U.S. experienced the largest year-over-year decrease as it dropped by approximately 37%. We believe this decrease to be directly related to the slowing economy and the tightening credit markets, of which the U.S. has felt the greatest impact to date. Decreases were realized across all product lines with no one product family experiencing a materially larger decrease than another.

Product-related services increased approximately $0.8 million or 8% in the three-month period ended March 28, 2009 as compared to the same period ended March 29, 2008. The increase is primarily related to fluctuating consumable sales.

Product-related services increased approximately $0.9 million or 3% in the nine-month period ended March 28, 2009 as compared to the same period ended March 29, 2008. The slight increase is primarily related to the increase in the number of service-related contracts sold.

Gross Profit. Gross profit was approximately $11.9 million or 40.1% for the three-month period ended March 28, 2009, as compared to $16.8 million or 43.7% for the same period ended March 29, 2008. The decrease in gross profit for the three-month period ended March 28, 2009, as compared to the same period in the previous fiscal year, is primarily due to 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 $32.6 million or 38.2% for the nine-month period ended March 28, 2009, as compared to $50.4 million or 46.2% for the same period ended March 29, 2008. The decrease in gross profit for the nine-month period ended March 28, 2009, as compared to the same period in the previous fiscal year, is due to changes in product mix, a greater proportion of revenues being derived from the sale of product-related services, and certain product reliability problems which negatively impacted our service margins. It was also affected by an increase in our inventory reserve of approximately $1.2 million which was determined to be necessary due to the current economic conditions.

We believe that we have resolved a substantial number of the above-mentioned product reliability problems and expect to see a positive impact on our service margins in future fiscal periods.

Selling, General and Administrative Expense. Selling, general and administrative (SG&A) expenses were approximately $10.8 million for the three-month period ended March 28, 2009, as compared to $17.9 million for the three-month period ending March 29, 2008. As a percentage of revenue, SG&A expenses decreased to 36.3% from 46.9% of revenues in the comparative prior-year period. The $7.0 million decrease was primarily comprised of a $3.6 million reduction in legal cost, a $1.8 million reduction in sales-related costs, a $0.5 million reduction in marketing programs, and a deduction in labor and labor related costs of $0.6 million.

For the nine-month period ended March 28, 2009, SG&A expenses decreased to approximately $41.2 million from approximately $50.2 million in the comparative period ended March 29, 2008. Concurrently, due to decreasing year-over-year revenues, SG&A expenses increased as a percentage of revenues to 48.3% in the nine-month period ended March 28, 2009, from 46.5% of revenues in the comparative period. The $9.0 million decrease was primarily comprised of a $4.0 million reduction in legal cost (see Part II, Item 1 for a full discussion), a $1.6 million reduction in sales-related costs, a $1.2 million reduction in marketing programs, and a reduction in labor and labor related costs of $2.0 million.

Research and Development Expense. Research and development (R&D) spending increased to approximately $2.5 million for the three-month period ended March 28, 2009, from approximately $2.4 million for the comparative prior-year period. The slight increase is attributed to the increased efforts to finalize and implement improvements to our products.

For the nine-month period ended March 28, 2009, Research and development (R&D) expenses increased to approximately $8.4 million from approximately $7.6 million for the same period ended March 29, 2008. The increase was primarily driven by the write-off of certain intellectual property. The Company had

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acquired certain patents and rights in an attempt to commercialize a light-based product. Based on current economic and market conditions, management decided to cease all future development efforts relative to this technology and its underlying product potential.

Other Income/Expense. Other expense was less than $0.1 million for the three-months ended March 28, 2009, as compared to approximately $0.3 million for the same period ended March 29, 2008. The year-over-year decrease is directly related to decreased interest income earned during the three-month period ended March 28, 2009, as compared to the comparable period ended March 29, 2008, due to a decrease in cash and cash equivalents and in investments during the trailing twelve-month period ended March 28, 2009 combined with decreasing market interest rates

Other expense was approximately $0.2 million for the nine-months ended March 28, 2009, as compared to approximately $0.5 million for the same period ended March 29, 2008. The year-over-year decrease is primarily due to the Company having recognized a $2.5 million loss on the other-than-temporary impairment of our holdings of common shares of OccuLogix, Inc. (Note 18) in the comparable fiscal period, which was offset by higher interest income during the same period. This compares to decreased interest income offset by losses on certain foreign currency positions experienced during the nine-month period ended March 28, 2009.

Income Taxes. The (benefit) 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 36% and 32% for each of the nine-month periods ended March 28, 2009 and March 29, 2008, respectively. The effective tax rate for the period ended March 28, 2009 differs from the statutory rate primarily due to state taxes, differences in foreign tax rates, R&D credits and other permanent items. The effective rate for the period ended March 29, 2008 differs from the statutory rate primarily due to state taxes, differences in foreign tax rates and other permanent items. The foreign rate difference is due to income reported in a high tax rate jurisdiction combined with losses benefited in a jurisdiction with a lower tax rate.

The Company also recorded a discrete tax benefit during the nine months ended March 28, 2009 for the effect of the reinstatement of the R&D credit in the US. During the nine month period ended March 29, 2008 the Company reported a discrete expense item of $0.1 million resulting from a change in the statutory tax rate in Germany. 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 28, 2009 totaled approximately $24.7 million compared with approximately $38.2 million at March 29, 2008. The principal component of the decrease is the general funding of operations. 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 $8.8 million for the nine-month period ended March 28, 2009 as compared to cash used by operating activities of approximately $10.7 million for the same period in the prior year. The decrease in cash used by operating activities is primarily attributable to our year-to-date net loss combined with certain non-cash expenses or losses, offset by an overall monetization of assets and liabilities in the normal course of business.

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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	$	2,250	$	1,000	$	500	$	750	$	—
Operating leases	2,182		1,136		898		138		10

Total contractual obligations	$	4,432	$	2,136	$	1,398	$	888	$	10

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 28, 2008, 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 and related litigation between the two parties 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 as well as our cash 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 could require us to incur substantial costs from litigation, licenses or the development of non-infringing technology.

· Our receipt of final approval from the respective courts in the Western Pa, Caballero and Forlenzo lawsuits. Please see Part II, Item 1 (Legal Proceedings) for a further discussion of the Western Pa, Caballero and Forlenzo litigation.

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· 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.

· Disappointing quarterly revenue or operating results could cause the price of our common stock to fall.

· 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, including but not limited to costs as a result of product failures for which we are responsible under warranty obligations and as a result of our customer’s potential unavailability of liability insurance coverage.

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

· Our failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, operating results, and stock price.

· 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.

· Our business could also be negatively impacted if our customers or suppliers experience disruptions resulting from tighter capital and credit markets, or a slowdown in the general economy. As a result, customers may modify, delay or cancel plans to purchase our products or services, and suppliers may increase their prices, reduce their output or change their terms of sale. Additionally, if customers’ or suppliers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of, accounts receivable owed to us and suppliers may restrict credit or impose different payment terms. Any inability of customers to pay us for our products and services, or any demands by suppliers for different payment terms, may adversely affect the Company’s earnings and cash flow.

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. For the nine-month period ended March 28, 2009, approximately 43% and 25% of the Company’s cost of sales and expenses, respectively, were denominated in foreign currencies. In addition, approximately 34% and 29% of the Company’s consolidated assets were subject to foreign currency exchange fluctuations as of March 28, 2009 and June 28, 2008, respectively, while approximately 52% and 48% of its consolidated liabilities were exposed to foreign currency exchange fluctuations as of March 28, 2009 and June 28, 2008, respectively. 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. The principal foreign currencies applicable to our business are the Euro and the Yen.

Changes to the fair value of derivative contracts that do not qualify for hedge accounting are reported in other income (expense) in the period of the change. For derivatives that qualify for hedge accounting, the Company recognizes the instruments as either assets or liabilities in the statement of financial position and measures those instruments at fair value. 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 three foreign currency forward contracts outstanding at March 28, 2009 in the notional amount of approximately 0.9 million Euros or approximately $1.3 million. These derivative contracts serve to mitigate the foreign currency risk of a substantial portion of our Euro-denominated inter-company balances at March 28, 2009. None of the aforementioned derivatives qualified for hedge accounting at March 28, 2009.

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 28, 2009, the end of the period covered by this quarterly report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management has designed such controls and procedures to provide reasonable assurance of achieving their objectives. Based on the 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 to provide reasonable assurance of achieving their objective.

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 28, 2009 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 two litigation matters with Palomar Medical Technologies, Inc. (“Palomar”).

· Palomar asserts that it is the exclusive licensee from The General Hospital Corporation (“Mass. General”) of U.S. Patent No. 5,735,844 (the “‘844 Patent”) and U.S. Patent No. 5,595,568, which is related to the ‘844 Patent (the “‘568 Patent”). 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 the ‘844 Patent. 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 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 by Candela of the ‘568 Patent, and to allege that additional Candela products infringe the ‘568 Patent. Palomar’s motion to amend its Complaint was granted in August 2007. In February 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 by Palomar. The Company’s motion to amend its Answer and Counterclaims was granted in March 2007. Palomar filed a general denial response to Candela’s Amended Answer and Counterclaim in March 2007. In August 2007, the parties had a Markman hearing before the U.S. District Court Judge presiding over the above-described legal proceeding. In a Markman hearing, the Court interprets the definition of the disputed claim term of a patent. On October 31, 2008, the Company requested a stay of the case with the Court, which was granted on November 17, 2008. The Company did so based upon a third party’s re-examination request that was granted by the United States Patent and Trademark Office on August 29, 2008. The re-examination is with respect to both the ‘568 and ‘844 Patents, including many of the Claims at issue in this case. In November 2008, the Court stayed the case until the United States Patent and Trademark Office rules on the re-examination. On December 9, 2008, Candela filed requests for re-examination of the ‘568 and ‘844 Patents with the United States Patent & Trademark Office asserting that all claims currently in dispute with Palomar be held invalid. On January 7, 2009, the United States Patent and Trademark Office granted the Company’s re-examination request of the ‘844 Patent and the ‘568 Patent. The United States Patent and Trademark Office stated that there are substantial new questions of patentability for all claims asserted against the Company by Palomar.

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Item 6 - Exhibits

(a) Exhibits

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 5, 2009	/s/ Robert E. Quinn
		Robert E. Quinn
		Vice President, Finance, Treasurer, and
		Corporate Controller (Principal Financial Officer)

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Candela Corporation

INDEX TO EXHIBITS

Exhibit No.		Description

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

CANDELA CORP /DE/ 10-Q