<PAGE>
 
================================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                            _______________________
                                   FORM 10-Q
                                        

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarter ended December 27, 1997.

                        Commission file number 0-14742
                              CANDELA CORPORATION
            (Exact name of registrant as specified in its charter)


               Delaware                                    04-2477008
    (State or other jurisdiction No.)            (I.R.S. Employer Identification
    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  [_]




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

             Class                           Outstanding at February 5, 1998
         ---------------                     -------------------------------
   Common Stock, $.01 par value                        5,435,679

================================================================================
<PAGE>
 
                              CANDELA CORPORATION
                                     INDEX

<TABLE>  
<CAPTION> 
                                                     Page(s)
                                                     -------
<S>                                                <C> 
Part I.  Financial Information:

    Item 1.  Consolidated Balance Sheets                3
 
             Consolidated Statements of Operations      4
 
             Consolidated Statements of Cash Flows      5
 
             Notes to Consolidated Financial
               Statements                              6-7
 

    Item 2.  Management's Discussion and
               Analysis of Financial Condition
               and Results of Operations               8-14


Part II.  Other Information:

    Item 6.  Exhibits and Reports on Form 8-K           15

             Exhibit 27.1   Financial Data Schedule     17

</TABLE> 

                                       2
<PAGE>
 
                              CANDELA CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)
 
<TABLE>  
<CAPTION> 
 
                                             December 27,          June 28,
                                                1997                 1997
ASSETS                                       (unaudited)
----------------------------------------------------------------------------
<S>                                          <C>                     <C> 
Current assets:
    Cash and equivalents                     $  1,727                $ 2,674
    Accounts receivable                         5,228                  8,848
    Notes receivable                            1,345                  1,284
    Inventory                                   7,550                  6,776
    Other current assets                          486                    522
----------------------------------------------------------------------------
          Total current assets                 16,336                 20,104
----------------------------------------------------------------------------
Property and equipment, net                     3,380                  3,523
Other assets                                      863                  1,210
----------------------------------------------------------------------------
                   Total Assets               $20,579                $24,837
============================================================================
 
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------
Current liabilities:
    Lines of credit and short-term notes     $  2,321                $ 1,488
    Current portion of long-term debt             345                    339
    Deferred income                             1,743                  2,071
    Accounts payable                            4,149                  5,879
    Accrued payroll and related expenses          739                    833
    Accrued warranty costs                      1,239                  1,338
    Income taxes payable                          358                    516
    Other accrued liabilities                   1,154                    608
    Reserve for restructuring costs             2,609                      0
----------------------------------------------------------------------------
          Total current liabilities            14,657                 13,072
----------------------------------------------------------------------------
Long-term debt                                  1,227                  1,519
----------------------------------------------------------------------------
Stockholders' equity:
    Common stock                                   54                     54
    Additional paid-in capital                 17,300                 17,223
    Accumulated deficit                       (12,177)                (6,885)
    Cumulative translation adjustment            (482)                  (146)
----------------------------------------------------------------------------
          Total stockholders' equity            4,695                 10,246
----------------------------------------------------------------------------
                   Total Liabilities and
                    Stockholders' Equity      $20,579                $24,837
============================================================================
 
</TABLE> 
 
 
 
The accompanying notes are an integral part of the consolidated financial
statements.

                                       3
<PAGE>
 
                              CANDELA CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
 
<TABLE> 
<CAPTION> 
 
                                              For the three months ended:           For the six months ended:
                                              December 27,   December 28,           December 27,  December 28,
                                                 1997            1996                   1997         1996
                                                     (unaudited)                            (unaudited)
--------------------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>                    <C>             <C>  
Revenue                                        $ 8,522         $ 9,406               $16,345         $17,045
Cost of sales                                    4,824           4,750                 9,326           8,635
--------------------------------------------------------------------------------------------------------------
Gross profit                                     3,698           4,656                 7,019           8,410
 
Operating expenses:
     Research and development                      742             555                 1,320           1,127
     Selling, general and administrative         4,695           3,031                 8,090           5,537
     Restructuring costs                         2,609               0                 2,609               0
------------------------------------------------------------------------------------------------------------
         Total operating expenses                8,046           3,586                12,019           6,664
------------------------------------------------------------------------------------------------------------
(Loss) income from operations                   (4,348)          1,070                (5,000)          1,746
 
Other income (expense):
     Interest income                                 9              16                    17              31
     Interest expense                              (69)            (15)                 (135)            (31)
     Other                                         (33)            (20)                  (96)             33
------------------------------------------------------------------------------------------------------------
               Total other income (expense)        (93)            (19)                 (214)             33
------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes               (4,441)          1,051                 5,214           1,779
Provision for income taxes                           0             315                    78             534
------------------------------------------------------------------------------------------------------------
Net (loss) income                              $(4,441)         $  736               $(5,292)        $ 1,245
============================================================================================================
Basic earnings (loss) per share                $ (0.82)         $ 0.14               $ (0.97)        $  0.23
 
Diluted earnings (loss) per share              $ (0.78)         $ 0.13               $ (0.94)        $  0.22
============================================================================================================
</TABLE>
 
The accompanying notes are an integral part of the consolidated financial
statements.
 

                                       4
<PAGE>
 
                              CANDELA CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
<TABLE>   
<CAPTION>                                                           For the six months ended:
                                                                  Dec 27,               Dec 28,
                                                                   1997                  1996
                                                                           (unaudited)
-------------------------------------------------------------------------------------------------
<S>                                                             <C>                     <C>       
Cash flows from operating activities:                           $ (5,292)               $ 1,245
    Net income (loss)                       
    Adjustments to reconcile net income (loss) to net          
      cash provided by (used for) operating activities:                                       
      Depreciation and amortization                                  380                    235
      Provision for restructuring charges                          2,609
      Change in assets and liabilities:                                  
         Accounts receivable                                       3,312                 (1,687)
         Notes receivable                                           (188)                 1,121
         Inventory                                                  (965)                   450
         Other current assets                                         18                   (360)
         Other assets                                                336                   (465)
         Accounts payable                                         (1,410)                   840
         Accrued payroll and related expenses                       (102)                   (27)
         Deferred income                                            (287)                  (163)
         Accrued warranty costs                                      (88)                   174
         Income taxes payable                                       (193)                   447
         Other accrued liabilities                                   569                   (407)
-------------------------------------------------------------------------------------------------
           Total adjustments                                       3,991                    158
-------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities              (1,301)                 1,403
-------------------------------------------------------------------------------------------------
 
Cash flows from investing activities:       
    Proceeds from sale of equipment                                    0                     45
    Payment for additions to property                                          
     and equipment                                                  (141)                  (889)
-------------------------------------------------------------------------------------------------
Net cash used for investing activities                              (141)                  (844)
-------------------------------------------------------------------------------------------------
 
Cash flows from financing activities:
    Payments of capital lease obligations                           (198)                   (51)
    Issuance (payment) of long-term debt                             754                   (334)
    Proceeds from the issuance of common stock                        76                     85
-------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities                 632                   (300)
-------------------------------------------------------------------------------------------------

Accumulated translation adjustment                                  (137)                  (152)
-------------------------------------------------------------------------------------------------
 
Net increase  (decrease) in cash and equivalents                    (947)                   107
-------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of period                        2,674                  3,041
-------------------------------------------------------------------------------------------------
Cash and equivalents at end of period                            $ 1,727                $ 3,148
=================================================================================================

</TABLE>
 
The accompanying notes are an integral part of the consolidated financial
statements.

                                       5
<PAGE>
 
                              CANDELA CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION

   The accompanying financial statements and notes do not include all of the
   disclosures made in the Company's Annual Report on Form 10-K for fiscal 1997,
   which should be read in conjunction with these statements.  The financial
   information included herein, with the exception of the consolidated balance
   sheet at June 28, 1997 has not been audited.  However, in the opinion of
   Management, these consolidated financial statements include all necessary
   adjustments for a fair presentation of the quarterly results and are prepared
   and presented in a manner consistent with the Company's annual report on Form
   10-K.  The results for the three and six month periods ended December 27,
   1997 are not necessarily indicative of the results to be expected for the
   full year.

2. INVENTORY

   Inventory consists of the following (in thousands):


<TABLE>
<CAPTION>
 
                          December 27, 1997   June 28, 1997
                          ------------------  -------------
                              (unaudited)        /(1)/
<S>                       <C>                 <C>
       Raw materials             $3,069          $2,429
       Work in process            1,177           1,023
       Finished goods             3,304           3,324
                                 ------          ------
                                 $7,550          $6,776
                                 ======          ====== 
 
</TABLE>

3. PROPERTY AND EQUIPMENT

   Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
 
                                    December 27, 1997   June 28, 1997
                                    -----------------   -------------
                                       (unaudited)          /(1)/
<S>                                <C>                  <C>
       Leasehold improvements          $ 2,092            $ 2,014 
       Office furniture & equipment      1,070              1,064 
       Laser systems                       483                483 
       Equipment                         4,411              4,271 
                                       -------            ------- 
       Total                             8,056              7,832 
                                                                  
       Less accumulated depreciation                              
        and amortization                (4,676)            (4,309)
                                       -------            ------- 
                                                                  
                                       $ 3,380            $ 3,523 
                                       =======            =======  
</TABLE>

/(1)/ Derived from audited financial statements

                                       6
<PAGE>
 
                              CANDELA CORPORATION
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)
                                        

4. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

   Net income per share is computed by dividing net income by the weighted
   average number of shares of common stock and, if dilutive, common stock
   equivalents outstanding.  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.

<TABLE>
<CAPTION>
 
  
                                  For the three months ended   For the six months ended
                                 ---------------------------  -------------------------
                                  December 27   December 28   December 27   December 28
                                      1997          1996          1997         1996
                                 -------------  ------------  ------------  -----------
<S>                                 <C>            <C>          <C>           <C>
NUMERATOR
---------
Net income(loss)                     $ (4,441)      $    736     $ (5,292)     $  1,245
                                     ========       ========     ========      ========
DENOMINATOR                          
-----------
BASIC EARNINGS PER SHARE
------------------------
Weighted average shares
    outstanding                         5,443          5,394        5,443         5,394
                                     --------       --------     --------      --------
 
   Earnings(loss) per share           $ (0.82)        $ 0.14      $ (0.97)       $ 0.23
                                     ========       ========     ========      ========
 
DILUTED EARNINGS PER SHARE
-------------------------------
   Weighted average shares
       outstanding                      5,443          5,394        5,443         5,394
 
   Dilutive options                       231            264          216           275
                                     --------       --------     --------      --------
 
   Adjusted weighted average
       shares outstanding               5,674          5,658        5,659         5,669
                                     --------       --------     --------      -------- 
 
   Earnings(loss) per share           $ (0.78)        $ 0.13      $ (0.94)       $ 0.22
                                     ========       ========     ========      ========
</TABLE>

5. RESTRUCTURING COSTS AND OTHER CHARGES

   During the quarter ended December 27, 1997, the Company recorded
   restructuring charges of $2,609,000 resulting from management's decision to
   close the LaserSpa(TM) located in Scottsdale, Arizona. In addition, the
   Company recorded a charge of $550,000 against earnings principally for the
   purpose of covering accounts and notes receivable from one of Candela's
   distributors of medical devices.

                                       7
<PAGE>
 
                              CANDELA CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                        
                                        
OVERVIEW:
---------

   Candela Corporation develops, manufactures, and distributes innovative
clinical solutions that enable physicians, surgeons and personal care
practitioners to treat selected cosmetic and medical problems using lasers,
cryosurgery and other proven technologies.  In addition, the Company operates
a Company-owned LaserSpa(TM) (a combination skin care center and spa).

   The Company has continued to accumulate losses from its wholly-owned
subsidiary, Candela Skin Care Centers, Inc. ("CSCC"), which in turn has utilized
significant cash reserves,  while the laser operation (the manufacture, sale and
servicing of lasers) continued to post positive operating trends.  As a result
of the continued losses from CSCC the Company has decided to close the
Scottsdale LaserSpa.(TM)  Based on this decision a charge of $2,609,000 was made
against second quarter income to cover the cost of closing the Scottsdale
facility.  The Company continues to operate one LaserSpa(TM) located in Boston, 
Massachusetts. The following discussion and analysis is based on the increasing
significance of revenue and costs associated with the operation of the skin care
centers in relation to the Company in total, and reflects the impact of the
additional charge on the results of operations stated herein.

RESULTS OF OPERATIONS
---------------------
 
   Total revenue for the three and six months ended December 27, 1997 was
$8,522,000 and $16,345,000 respectively. For the three-month period ended
December 27, 1997 revenue decreased 9% versus the same period a year earlier.
For the six-month period ended December 27, 1997 revenue decreased 4% versus the
same period last year. Compared to the same period a year earlier, the decrease
for the three and six month periods reflects a lower level of shipments to a
South Korean distributor and elsewhere in the Far East.  Additionally, increased
price pressure has resulted in a lower average selling price than in prior
periods. Revenues for CSCC reflect a 20% increase resulting from a full period
of operation for each spa location during the fiscal year 98 six-month period
compared to partial operations in the same period a year earlier.

<TABLE>
<CAPTION>
                     
($ in 000's) 
                     Revenue for the six-month period   
                     --------------------------------
                        FY 98     FY 97    Change
                       --------  --------  -------
<S>                    <C>       <C>       <C>      
Laser operations        $14,986   $15,912    -5.8% 
Skin care centers         1,359     1,133    19.9%
                        -------   -------

       Total            $16,345   $17,045    -4.1%

</TABLE>

   Gross margins were 43% for both the three and six month periods ending
December 27, 1997, compared to gross margins of 49% for the three and six month
periods a year earlier.  The decline in gross margin reflects lower volume of
higher margin units and the impact of selling price pressures principally in the
Far East.

   Research and development spending associated with laser operations increased
to $742,000 and $1,320,000 for the three and six months ended December 27, 1997,
respectively. These amounts reflect increases of 34% and 17% over the same three
and six month periods the year before. Such increases are the result of the
Company's development efforts on a number of new projects that will enhance the
laser product lines.

                                       8
<PAGE>
 
   Selling, general and administrative expenses for the three and six month
periods ending December 27, 1997 were $4,695,000 and $8,090,000, representing
increases of 55% and 46%, respectively, versus the same period a year earlier.
The increases in this area reflect a provision in uncollectible notes and
accounts receivable during the quarter of $678,000, including a charge of
$550,000 for accounts receivable from a distributor, and miscellaneous one-time
charges for legal and consulting of $328,000.  Additionally,  the Company's
entry into the skin care clinic market has accounted for an increase of $910,000
in expenses over the same period a year earlier.

   During the quarter ended December 27, 1997, a restructuring charge was made
against income in the amount of $2,609,000. This charge represents the
anticipated costs associated with closing the Scottsdale, Arizona, LaserSpa(TM),
including costs of maintaining the facility, write-off of leasehold
improvements, and a reserve against a loss upon liquidation of the equipment at
the site.

   Loss from operations was $4,348,000 and $5,000,000, respectively, for the
three and six months ended December 27, 1997.  For the same periods one year
earlier profit from operations was $1,070,000 and $1,746,000, respectively.

   Other income and expense for the three-month and six-month period ended
December 27, 1997, reflected expenses of $93,000 and $214,000, respectively.
The same periods a year earlier reflected expense of $19,000 for the second
quarter and income for the six-month period of $33,000.  This increase in
expenses for the current year represents an increase in the level of interest
expense resulting from the increased level of debt combined with losses
resulting from foreign currency transactions.

   The provision for income taxes results from a combination of activities of
both the domestic and foreign subsidiaries of the Company.  Provision for income
taxes for the six months ended December 27, 1997, reflects the utilization of a
portion of the Company's domestic net operating loss carryforwards and minimum
tax provisions calculated in Japan at a rate in excess of the U.S. statutory tax
rate, yielding an effective tax rate of 30%.

                                       9
<PAGE>
 
                              CANDELA CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (CONTINUED)
                                        
                                        
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

   The Company has continued to utilize cash resources in the development of the
LaserSpas.(TM) For the six months ending December 27, 1997, cash used for
operating and investing activities totaled $1,442,000 which was partially offset
by additional borrowing against a bank line of credit in the amount of $754,000.
After giving consideration for payments against lease obligations, net cash
provided by financing activities totaled $632,000.

   Cash and equivalents at December 27, 1997 decreased to $1,727,000 from
$2,674,000 at June 28, 1997.  Major factors impacting this change include
payments for additions to property and equipment, payment of capital lease
obligations, and the use of cash for operating activities of $1,301,000.

   After reassessing the future funding requirements of the Scottsdale, Arizona
LaserSpa(TM), it was decided to close the facility in December 1997.  The
Company is attempting to sub-lease the facility and will liquidate any equipment
that remains at the location. Equipment leasing has provided a portion of the
funds used by the Company for the initial capital investment costs for this
facility.  The lease covering the equipment will be reduced to the extent that
leased equipment is liquidated from the Scottsdale facility.

   CSCC's facility in Boston, Massachusetts, reopened as a LaserSpa(TM) in April
1997.  That location, situated in one of Boston's best residential/commercial
areas, with an established clientele, continues to conduct business as usual and
is not expected to require a significant amount of cash resources in the future.
Equipment leasing has provided a portion of the capital required to convert this
facility to a combination skin care center and spa, the remainder of the
required funding has been advanced from the parent company.

   In support of the Company's laser production operations and the development
of CSCC's LaserSpa(TM) operations, the Company obtained a renewable $3,500,000
line of credit with a major bank during fiscal 1997. The line of credit bore
interest at 1/2% over the bank's prime lending rate and is secured by total
domestic and international accounts receivable and inventory and a pledge of the
stock of CSCC. At December 27, 1997, the Company had utilized $1,950,000 of the
line of credit at an interest rate of 9%.

   The Company was not in compliance with the financial covenants contained in
the line of credit as of December 27, 1997, but such covenants have been waived
by the bank. The line of credit expired by its terms on December 31, 1997, and 
is currently under review by the bank for potential renewal.

                                       10
<PAGE>
 
   The Company's Japanese subsidiary has borrowed funds to be used for payment
of equipment purchases made from the parent corporation. At December 27, 1997,
this liability is $562,000, converted at the quarter-end exchange rate. The
Company's remaining short-term and long-term debt is comprised of capital lease
obligations which were $2,666,000 and $1,227,000, respectively, at December 27,
1997, compared to $1,827,000 and $1,519,000, respectively, at June 28, 1997.

   The Company continues to pursue lines of credit from alternative sources and
private sector sources of funds. There can be no assurance that such funding
will be available on terms acceptable to the Company, or at all, and if external
sources of financing do not become available, the Company's operations could be
adversely impacted.

                                       11
<PAGE>
 
                              CANDELA CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (CONTINUED)

 CAUTIONARY STATEMENTS

    In addition to the other information in this Quarterly Report on Form 10-Q,
 the following cautionary statements should be considered carefully in
 evaluating the Company and its business.  Statements contained in this 
 Form 10-Q that are not historical facts (including, without limitation,
 statements concerning anticipated operational and capital expense levels and
 such expense levels relative to the Company's total revenues) and other
 information provided by the Company and its employees from time to time may
 contain certain "forward-looking" information, as that term is defined by (i)
 the Private Securities Litigation Reform Act of 1995 (the "Act") and, (ii) in
 releases made by the Securities and Exchange Commission (the "SEC"). The
 factors identified in the cautionary statements below, among other factors,
 could cause actual results to differ materially from those suggested in such
 forward-looking statements. The cautionary statements below are being made
 pursuant to the provisions of the Act and with the intention of obtaining the
 benefits of the "safe harbor" provisions of the Act.

   VARIABILITY OF QUARTERLY OPERATING RESULTS.  The Company's quarterly
 operating results may vary significantly from quarter to quarter, depending
 upon factors such as the timing of product sales, the timing of expenditures in
 anticipation of future product orders, the introduction and market acceptance
 of new products, effectiveness in managing manufacturing processes, changes in
 cost and availability of labor and product components, order cancellations, the
 budgetary cycles of its customers, the timing of regulatory approvals and the
 cost of operating the LaserSpa(TM) owned by the Company's wholly-owned
 subsidiary, Candela Skin Care Centers, Inc. (CSCC).  The Company's ability to
 accurately forecast future revenues and income for any period is necessarily
 limited, and any forward-looking information provided from time to time by the
 Company represents only management's then-best current estimate of future
 results or trends, and actual results may differ materially from those
 contained in the Company's estimates.

    POTENTIAL VOLATILITY OF STOCK PRICE.  There has been significant volatility
 in the market price of securities of companies in the medical device industry.
 Factors such as announcements of new products by the Company or its
 competitors, quarterly fluctuations in the financial results of the Company or
 its competitors, shortfalls in the Company's actual financial results compared
 to results previously forecast by stock market analysts, conditions in the
 medical device industry and the financial markets and the economy generally
 could cause the market price of the Company's securities to fluctuate
 substantially and may adversely affect the price of the Company's securities.

                                       12
<PAGE>
 
                              CANDELA CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (CONTINUED)
                                        
    RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.  A significant portion of
 the Company's revenues are attributable to international operations and
 revenues from international operations are likely to continue to represent a
 significant portion of the Company's revenues in future periods.  The Company's
 international business and financial performance may be adversely affected by a
 number of factors, including without limitation, fluctuations in exchange
 rates, tariffs and other trade barriers, adverse tax regulation, and adverse
 political and economic conditions.  Adverse effect on the Company's
 international operations may have materially adverse effects on the Company's
 overall financial condition and operating results.

    BUSINESS STRATEGIC DEVELOPMENT.  While continuing to expand and diversify
 its core cosmetic and surgical laser equipment business, the Company embarked
 on a new business strategy of opening combined spa and laser cosmetic skin care
 centers.  Currently the Company operates a combined spa/skin care facility in
 Boston, Massachusetts, created by combining the Company's skin care treatment
 center previously located in Framingham, Massachusetts with the spa in Boston.
 A combined spa/skin care facility located in Scottsdale, Arizona was closed in
 December 1997. The surgical skin care treatments performed in the LaserSpa(TM)
 are administered by board-certified physicians under contract with CSCC. While
 the target audience for the Company's core laser equipment tends to be medical
 practice groups and other health care providers, its target audience for its
 spa and skin care center is individuals who are typically reached through
 entirely different marketing efforts. The cost structures, new client accretion
 methods and other demands associated with the Company's new facilities are
 largely untested, and the Company could continue to incur losses in connection
 with its spa and skin care centers.
 
    GOVERNMENTAL REGULATION.  Medical devices are subject to approval before
 they can be utilized for clinical studies or sold commercially.  In addition,
 the Company's activities in connection with its CSCC business may subject the
 Company to additional regulation under state and federal laws.  The process for
 obtaining the necessary approvals and compliance with applicable regulations
 can be costly and time consuming.  Many foreign countries in which the Company
 markets or may market its products have similar regulatory bodies and
 restrictions.  There is no assurance the Company will be able to obtain any
 such government approvals or successfully comply with any such regulations in a
 timely and cost-effective manner, if at all, and failure to do so may have an
 adverse effect on the Company's financial condition and results of operations.

                                       13
<PAGE>
 
                              CANDELA CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (CONTINUED)
                                        
    RISKS ASSOCIATED WITH PRODUCT LIABILITY.  The administration of medical and
 cosmetic treatments using laser products is subject to various risks of
 physical injury to the patient which may result in product liability or other
 claims against the Company.  The costs and resources involved in defending or
 settling any such claims, or the payment of any award in connection therewith,
 may adversely affect the Company's financial condition and operating results.
 The Company maintains product liability insurance, but there is no assurance
 that its policy will provide sufficient coverage for any claim or claims that
 may arise, or that the Company will be able to maintain such insurance coverage
 on favorable economic terms.

    RAPID TECHNOLOGICAL CHANGE; COMPETITION.  The medical laser industry is
 subject to rapid and substantial technological development and product
 innovations.  The Company, to be successful, must be responsive to new
 developments in laser technology and applications of existing technology, and
 the Company's financial condition and operating results may be adversely
 affected by the failure of new or existing products to compete favorably in
 response to such technological developments.  In addition, the Company competes
 against numerous other companies offering products similar to the Company's
 and/or alternative products and technologies, some of which have greater
 financial, marketing and technical resources than the Company.  There can be no
 assurance the Company will be able to compete successfully.  In addition, the
 Company's CSCC operations face a host of competitors including hair salons,
 health spas, massage therapists, aestheticians, health and fitness clubs,
 personal trainers, dermatologists, plastic surgeons, cosmetic laser centers and
 cosmetic retailers.  The Company also believes its CSCC operations will face
 competition from laser manufacturing companies that have, or may develop, plans
 to open facilities based on concepts similar to the Candela LaserSpa(TM)
 concept.  Such competition could have a material adverse effect on the
 Company's business, financial condition and results of operations.  Further,
 even if the Company is able to successfully compete, there can be no assurance
 that it would be able to do so in a profitable manner.

    RELIANCE ON ATTRACTING AND RETAINING KEY EMPLOYEES.  The Company's success
 will depend in large part on its ability to attract and retain highly-qualified
 scientific, technical, managerial, sales and marketing, management and other
 personnel.  Competition for such personnel is intense and any decline in the
 Company's ability to attract and retain such personnel may have adverse effects
 on its financial condition and operating results.

                                       14
<PAGE>
 
                              CANDELA CORPORATION
                          PART II   OTHER INFORMATION

                                        
Item 6 Exhibits and Reports on Form 8-K

       (a) Exhibits

           Exhibit 27.1, Financial Data Schedule, page 14.

       (b) Reports on Form 8-K

           No reports on Form 8-K were filed during the quarter ended
           December 27, 1997.

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                                  SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                  CANDELA CORPORATION
                                  Registrant



Date:  February 9, 1998           /s/ Gerard E. Puorro
       ----------------           ------------------------------------  
                                  Gerard E. Puorro
                                  (President , Chief Executive Officer)



Date:  February 9, 1998           /s/ F. Paul Broyer
       ----------------           ------------------------------------
                                  F. Paul Broyer
                                  (Vice President, Treasurer and
                                  Chief Financial Officer)

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