The matters discussed in this Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances many of which Candela has little or no control over. A number of important risks and uncertainties, including those identified under the caption "Risk Factors" in Candela's Annual Report on Form 10-K for the year ended June 27, 2009 which was filed with the SEC on October 1, 2009 (SEC File No. 000-14742) (the "Annual Report") and subsequent filings as well as risks and uncertainties discussed elsewhere in this Form 10-Q, could cause Candela's actual results to differ materially from those in the forward-looking statements. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The forward-looking statements in this Form 10-Q are made as of the date of this filing only and Candela does not undertake to update or supplement these statements due to changes in circumstances or otherwise, except as required by law.

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.

Proposed Merger with Syneron

On September 8, 2009, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Syneron Medical Ltd. ("Syneron"), pursuant to which Candela and Syneron will combine their businesses through a merger of Candela and a newly formed, wholly owned subsidiary of Syneron. Existing stockholders of Candela will exchange each of their shares of Candela common stock for 0.2911 ordinary shares of Syneron (the "Merger"). Our board of directors and the board of directors of Syneron have each approved the Merger.

The completion of the Merger is subject to various closing conditions, including adoption and approval of the Merger Agreement by Candela's stockholders and receipt of certain regulatory and antitrust approvals. The Merger is intended to qualify as a reorganization for federal income tax purposes.

The Merger Agreement contains certain termination rights both for us and for Syneron. If the Merger Agreement is terminated under circumstances specified in the Merger Agreement due to action by us, we will be required to pay Syneron a termination fee of $2.6 million.

Satisfaction of the closing conditions for the Merger could take several months or longer. There can be no assurance that the conditions to completion of the Merger will be met, or that the Merger will be completed. If the Merger is not consummated on or before June 1, 2010, either party may terminate the Merger Agreement.

In connection with the Merger, Syneron filed with the SEC a registration statement on Form F-4, which, once effective, will include a proxy statement of Candela and a prospectus of Syneron and other relevant materials in connection with the proposed Merger. Candela will file the same proxy statement/prospectus with the SEC as well as mail it to Candela stockholders. Investors and security holders are urged to read the Form F-4, the proxy statement/prospectus and the other relevant material when they become available because these materials will contain important information about Candela, Syneron and the Merger. Candela and Syneron and their respective executive officers and directors may be deemed to be participants in the solicitation of proxies from the security holders of Candela in connection with the Merger.

Mr. Louis P. Scafuri, currently chief executive officer of Syneron, will remain chief executive officer of the combined company and Mr. Gerard E. Puorro, currently chief executive officer of Candela, will join Syneron's Board of Directors. Investors and security holders may obtain additional information regarding

the direct and indirect interests of Candela and Syneron and their respective executive officers and directors in the Merger by reading the proxy statement/prospectus and the other filings and documents referred to above.

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 2009. Information with respect to changes in our Critical Accounting Policies during the three-month period ended September 26, 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 three months ended September 26, 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 27, 2009.

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.

Results of Operations



Revenue



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



                                            For the three months ended:
                            September 26,       September 27,
(in thousands)                  2009                2008            Increase (Decrease)
U.S.                      $     9,122    35 % $     8,868    33 % $          254         3 %
All other countries            17,102    65 %      17,797    67 %           (695 )      -4 %

Total worldwide revenue   $    26,224   100 % $    26,665   100 % $         (441 )      -2 %

Consolidated revenue was $26.2 million for the three-month period ended September 26, 2009, as compared to $26.7 million for the same period ended September 27, 2008. The decrease in quarterly revenue of approximately $0.4 million is comprised of decreased revenue from Europe and Latin America of approximately $1.9 million offset by increased revenue from in the U.S., Japan and Asia of approximately $1.5 million. This quarter international revenue represents approximately 65% of the total revenue as compared to 67% in the comparable prior-year period.

Revenue source by type is reflected in the following table:

                                              For the three months ended:
                              September 26,       September 27,
(in thousands)                    2009                2008            Increase (Decrease)
Lasers and other products   $    15,618    60 % $    17,102    64 % $        (1,484 )    -9 %
Product-related services         10,606    40 %       9,563    36 %           1,043      11 %

Total revenue               $    26,224   100 % $    26,665   100 % $          (441 )    -2 %

Revenue from lasers and other products decreased for the three-month period ended September 26, 2009, as compared to the same period ended September 27, 2008. On a comparative basis unit sales from legacy products were flat. The shortfall in revenue was primarily driven by degradation in average selling prices (ASP) of our legacy products offset by revenues realized due to the introduction of new products.

Revenues from product-related services increased approximately $1.0 million, or 11%, in the three-month period ended September 26, 2009 as compared to the same period ended September 27, 2008. The increase is primarily related to increased revenues attributable to the increased sale of service contracts, due to a greater install base, during the period ended September 26, 2009 as compared to the same period in the prior fiscal year.

Gross Profit. Gross profit was approximately $9.0 million or 34.5% for the three-month period ended September 26, 2009, as compared to $10.5 million or 39.3% for the same period ended September 27, 2008. The decrease in gross profit for the three-month period ended September 26, 2009, as compared to the same period in the previous fiscal year, is primarily due to decreased average selling prices and a greater proportion of revenues being derived from the sale of product-related services in the current period which carry a lower margin than sales of lasers.

Selling, General and Administrative Expense. Selling, general and administrative (SG&A) expenses, including merger-related costs of $2.3 million, were approximately $10.8 million for the three-month period ended September 26, 2009, as compared to $12.1 million for the three-month period ending September 27, 2008. As a percentage of revenue, SG&A expenses decreased to 46.2% from 55.0% of revenues in the comparative prior-year period. The $1.3 million decrease was primarily comprised of a $2.9 million reduction in legal cost and a $0.6 million reduction in marketing programs, offset by the aforementioned merger-related costs of approximately $2.3 million.

Research and Development Expense. Research and development (R&D) spending decreased to approximately $1.8 million for the three-month period ended September 26, 2009, from approximately $2.3 million for the comparative prior-year period. The decrease is attributed to the completion of our efforts to implement improvements to our products.

Income Taxes. The benefit from income taxes results from a combination of activities of the Company and its domestic and foreign subsidiaries. We recorded effective tax rates of approximately 25% and 45% for each of the three-month periods ended September 26, 2009 and September 27, 2008, respectively.

The effective tax rate for the period ended September 26, 2009 differs from the statutory rate primarily due to differences in foreign tax rates, R&D credits, state taxes, and other permanent items.

The effective rate for the period ended September 27, 2008 differs from the statutory rate primarily due to differences in foreign tax rates, state taxes, 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.

Liquidity and Capital Resources

Our cash and cash equivalents and our investment in short and long-term marketable securities at September 26, 2009 totaled approximately $25.6 million compared with approximately $29.8 million at September 27, 2008. The principal components of the decrease are the general funding of operations and the incurred costs associated with our proposed merger with Syneron Medical, Ltd. 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 $1.5 million for the three-month period ended September 26, 2009 as compared to cash used by operating activities of approximately $3.6 million for the same period in the prior year. The decrease in cash used by operating activities is attributable to the monetization of assets and liabilities in the normal course of business with no single item or group of items representing a significant portion of the year-over-year difference.

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:



                                             Less than                                      After
(in thousands)                    Total       1 year       1 - 3 years     3 - 5 years     5 years
Royalty commitments             $   2,250   $     1,000   $         500   $         500   $      250
Operating leases                    4,368         2,120           2,033              98          117

Total contractual obligations   $   6,618   $     3,120   $       2,533   $         598   $      367