<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 September 26, 1998


                        Commission file number 0-14742
                              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
    ---------    



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 November 3, 1998
----------------------------                   -------------------------------
Common Stock, $.01 par value                               5,481,686

 ____________________________________________________________________________

 ____________________________________________________________________________
<PAGE>
 
                              CANDELA CORPORATION
                                     INDEX



                                                                        Page(s)
                                                                        -------

Part I.   Financial Information:
 
          Item 1.  Unaudited Condensed Consolidated Balance Sheets
                   as of September 26, 1998 and June 27, 1998               3
 
                   Unaudited Consolidated Statements of Operations 
                   for the three months ended September 26, 1998 and
                   September 27, 1997                                       4
                   
                   Unaudited Consolidated Statements of Cash Flows 
                   for the three months ended September 26, 1998
                   and September 27, 1997                                   5
 
                   Notes to Unaudited Consolidated Financial
                   Statements                                              6-8
 
 
          Item 2.  Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                     9-11
 
                   Cautionary Statements                                  12-14
 
          Item 3.  Quantitative and Qualitative Disclosure
                   about Market Risk                                       14
 
Part II.  Other Information:

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

                   Exhibit 27.1  Financial Data Schedule                   17
 

                                       2
<PAGE>
 
                        PART I.  FINANCIAL INFORMATION

Item 1 - Financial Statements
------------------------------

                              CANDELA CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)
                                  (unaudited)
 
<TABLE> 
<CAPTION> 
 
                                        September 26,       June 27,
                                            1998              1998
ASSETS                                 
--------------------------------------------------------------------
<S>                                     <C>                <C> 
Current assets:                        
   Cash and cash equivalents                $ 2,463          $ 1,615
   Accounts receivable, net                   8,434            8,419
   Notes receivable                           1,548            1,486
   Inventories (Note 2)                       7,133            7,241
   Other current assets                         553              200
--------------------------------------------------------------------
     Total current assets                    20,131           18,961
--------------------------------------------------------------------
Property and equipment, net                   2,812            3,120
Other assets                                    481              523
--------------------------------------------------------------------
     Total Assets                           $23,424          $22,604
====================================================================

 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------
Current liabilities:                     
   Accounts payable                         $ 4,013          $ 4,292
   Accrued payroll and related expenses       1,417            1,319
   Accrued warranty costs                     2,123            2,012
   Income taxes payable                         423              335
   Restructuring reserve                      1,929            1,995
   Other accrued liabilities                  1,333              957
   Lines of credit and short-term notes       2,945            3,052
   Current portion of long-term debt            365              597
   Deferred Income                            1,663            1,763
--------------------------------------------------------------------
     Total current liabilities               16,211           16,322
--------------------------------------------------------------------
Long-term debt                                  492              887
--------------------------------------------------------------------
Commitments and contingencies                     -                -
--------------------------------------------------------------------
Stockholders' equity:                    
   Common stock                                  55               55
   Additional paid-in capital                17,415           17,407
   Accumulated deficit                      (10,428)         (11,337)
   Cumulative translation adjustment           (321)            (730)
--------------------------------------------------------------------
     Total stockholders' equity               6,721            5,395
--------------------------------------------------------------------
     Total Liabilities and             
     Stockholders' Equity                   $23,424          $22,604
====================================================================
</TABLE> 
 
The accompanying notes are an integral part of the unaudited consolidated 
financial statements.

                                       3
<PAGE>
 
                              CANDELA CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
                                  (unaudited)
 
<TABLE> 
<CAPTION> 
 
                                                  For the three months ended:
                                                 September 26,    September 27,
                                                     1998             1997
------------------------------------------------------------------------------
<S>                                          <C>                 <C> 
Revenue:                                            
     Product sales                                   8,022            5,264
     Services and other revenue                      2,716            2,558
------------------------------------------------------------------------------
          Total revenue                             10,738            7,822
                                                    
Cost of sales:                                      
     Product costs                                   3,801            2,315
     Service costs and other cost of sales           1,873            2,187
------------------------------------------------------------------------------
          Total cost of sales                        5,674            4,502
------------------------------------------------------------------------------
                                                    
Gross profit                                         5,064            3,320
 
Operating expenses:
     Research and development                          688              578
     Selling, general and administrative             3,333            3,394
------------------------------------------------------------------------------
          Total operating expenses                   4,021            3,972
------------------------------------------------------------------------------
Income (loss) from operations                        1,043             (652)
 
Other income (expense):
     Interest income                                    11                8
     Interest expense                                  (78)             (65)
     Other                                              34              (64)
------------------------------------------------------------------------------
          Total other income (expense)                 (33)            (121)
------------------------------------------------------------------------------
Income (loss) before income taxes                    1,010             (773)
Provision for income taxes                             100               78
------------------------------------------------------------------------------
Net income (loss)                                  $   910          $  (851)
==============================================================================
 
Basic earnings (loss) per share                    $  0.17          $ (0.16)
 
Diluted earnings (loss) per share                  $  0.16          $ (0.16)
==============================================================================
 
Weighted average shares outstanding                  5,479            5,426
 
Adjusted weighted average shares outstanding         5,566            5,426
==============================================================================
</TABLE> 

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

                                       4
<PAGE>
 
                              CANDELA CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
                                  (unaudited)

<TABLE> 
<CAPTION> 
                                                 For the three months ended:
                                             September 26,       September 27,
                                                 1998                1997
-------------------------------------------------------------------------------
<S>                                             <C>             <C> 
Cash flows from operating activities:
     Net income (loss)                           $   910            $  (851)
   
     Adjustments to reconcile net income (loss) 
        to net cash provided by (used for)
        operating activities:
     Depreciation and amortization                   180                202
     Provision for bad debts                          36                  9
     Increase (decrease) in cash from 
        working capital:
        Accounts receivable                          300              2,777
        Notes receivable                             (13)              (253)
        Inventories                                  190               (840)
        Other current assets                        (497)                 6
        Other assets                                 (19)               115
        Accounts payable                            (734)            (1,473)
        Accrued payroll and related expenses          92               (116)
        Deferred income                             (102)              (208)
        Accrued warranty costs                       117                (53)
        Income taxes payable                         (13)              (180)
        Accrued restructuring charges                (38)  
        Other accrued liabilities                    627                 95
-------------------------------------------------------------------------------
Net cash provided by (used for) 
   operating activities                            1,036               (770)
-------------------------------------------------------------------------------

Cash flows from investing activities:
     Purchases of property and equipment             (39)               (59)
-------------------------------------------------------------------------------
Net cash used for investing activities               (39)               (59)
-------------------------------------------------------------------------------

Cash flows from financing activities:
     Borrowings from line of credit, net               -                500
     Principal payments of long-term debt           (358)              (155)
     Principal  payments of capital
       lease obligations                            (132)              (102) 
     Proceeds from the issuance
       of common stock                                 8                 35 
     Proceeds from equipment financing                 -                 84 
 
-------------------------------------------------------------------------------
Net cash provided by (used for) 
  financing activities                              (482)               362
-------------------------------------------------------------------------------

Effect of exchange rates on cash and
 cash equivalents                                    333                (11)
-------------------------------------------------------------------------------
 
Net increase (decrease) in cash and cash 
 equivalents                                          848              (478)
-------------------------------------------------------------------------------
Cash and cash equivalents at beginning 
 of period                                          1,615             2,674
-------------------------------------------------------------------------------
Cash and cash equivalents at end of period         $2,463           $ 2,196
===============================================================================
</TABLE>
 
The accompanying notes are an integral part of the unaudited consolidated
financial statements.

                                       5
<PAGE>
 
                              CANDELA CORPORATION
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

   The accompanying unaudited financial statements and notes do not include all
   of the disclosures made in the Company's Annual Report on Form 10-K/A for
   fiscal 1998, which should be read in conjunction with these statements.  The
   financial information included herein is unaudited, with the exception of the
   consolidated balance sheet which has been derived from the audited
   consolidated balance sheet dated June 27, 1998.  However, in the opinion of
   management, the 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/A. The
   results for the three month period ended September 26, 1998, are not
   necessarily indicative of the results to be expected for the full year.

2. INVENTORIES

   Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
 
                          September 26, 1998  June 27, 1998
                          ------------------  -------------
<S>                       <C>                 <C>
 
       Raw materials             $2,925           $3,110    
       Work in process            1,148            1,062    
       Finished goods             3,060            3,069    
                                 ------           ------    
                                 $7,133           $7,241    
                                 ======           ======    
 
</TABLE>

3. DEBT

   At September 26, 1998, the Company had utilized $2,700,000 of the line of
   credit at an interest rate of 9.5%.  The Company was not in compliance with
   one of its debt covenants as of September 26, 1998.  The Company is required
   to maintain a minimum quick ratio of 1.00:1.00, the Company's quick ratio was
   0.86:1.00 at the end of the period.   This violation was waived by the bank
   on October 22, 1998.

   Subsequent to quarter end, on October 15, 1998, the Company issued eight
   year, 9.75% subordinated notes to three investors in the aggregate amount of
   $3,700,000.  The notes become due in October, 2006, and require quarterly
   interest payments.   In addition, the Company issued warrants to purchase
   370,000 shares of common stock to the note holders carrying an exercise price
   of $4.00 per share.  The value ascribed to the warrants, using the Black
   Scholes pricing model, is $920,560 as of October 15, 1998.  It was assumed
   that the exercise of the warrants will occur after 8 years.

   On October 22, 1998, part of the note proceeds was used to pay the full
   amount outstanding on the line of credit amounting to $2,700,000.  However,
   the Company continues to maintain the revolving credit facility, which is
   presently scheduled to expire on December 1, 1998, absent a renewal thereof.

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

4. EARNINGS PER SHARE

   Basic earnings per share is computed by dividing net income by the weighted
   average number of shares of common stock outstanding and, if dilutive,
   diluted earnings per share is computed by including 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, using the treasury stock method.

<TABLE> 
<CAPTION> 
                                  For the three months ended
                                  --------------------------
                                  September 26,  September 27,
                                     1998          1997
                                     ----          ----
<S>                                 <C>            <C>
   NUMERATOR
   ---------
   Net income(loss)                 $  910      $  (851)
                                    ======      ========
 
   DENOMINATOR
   -----------
   BASIC EARNINGS PER SHARE
   ------------------------
   Weighted average shares
       outstanding                   5,479        5,426
                                    ------       ------
                                           
   Earnings(loss) per share         $ 0.17       $(0.16)
                                    ======       ======
 
   DILUTED EARNINGS PER SHARE
   --------------------------
   Weighted average shares
       outstanding                   5,479        5,426
                                    ------       ------
 
   Dilutive options                     87            0
                                    ------       ------
 
   Adjusted weighted average
       shares outstanding            5,566        5,426
                                    ------       ------
 
   Earnings(loss) per share         $ 0.16       $(0.16)
                                    ======       ======

   Dilutive options 
       under FAS 128                                153
                                                 ====== 


</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.  During the quarter
   ended September 26, 1998, a total of $66,000 was charged against this
   reserve, representing costs associated with the shutdown of the Scottsdale
   facility.  Plans to divest of the Scottsdale facility continue, however, as a
   result of the inability to liquidate the Company's position in Scottsdale,
   the Company feels there may be some costs incurred beyond the current year.
 
6. INCOME TAXES

   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 three months ended September 26, 1998, 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.

                                       7
<PAGE>
 
                              CANDELA CORPORATION
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

7. COMPREHENSIVE INCOME
 
   Effective June 28, 1998, the Company adopted Statement of Financial
   Accounting Standard No. 130 ("SFAS 130") "Reporting Comprehensive Income."
   This Statement establishes new rules for the reporting and display of
   comprehensive income and its components; however, the adoption of this
   Statement had no impact on the Company's net income or stockholders' equity.
   The Company's comprehensive earnings were as follows:

<TABLE>
<CAPTION>
                                           For the three months ended
                                           --------------------------
                                    September 26, 1998      September 27, 1997
                                --------------------------  -------------------
<S>                             <C>                         <C>
 
Net income                                $  910                  $  (851)     
Foreign currency translation                                                   
 adjustment, net                             326                     (192)     
                                          ------                  -------      
                                          $1,236                  $(1,043)     
                                          ======                  =======      
</TABLE>


8. NEW ACCOUNTING PRONOUNCEMENTS
 
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 131 ("SFAS 131"), "Disclosure about
Segments of an Enterprise and Related Information." Based on the management
approach to segment reporting, SFAS No. 131 establishes requirements to report
selected segment information and to report entity-wide disclosures about
products and services, major customers and the countries in which the entity
holds material assets and reports material revenue. The Company will adopt SFAS
No. 131 for its fiscal year ending July 3, 1999, and management is currently
evaluating its effects on the Company's reporting of segment information.

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as "derivatives"), and for hedging
activities. SFAS 133 requires companies to recognize all derivatives as either
assets or liabilities, with the instruments measured at fair value. The
accounting for changes in fair value, gains or losses, depends on the intended
use of the derivative and its resulting designation. The statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company plans to implement SFAS 133 for its fiscal year 2000. Had the Company
implemented the policy in the current period it would not have a material impact
on the consolidated financial statements.

 

 

                                       8
<PAGE>
 
                              CANDELA CORPORATION

Item 2 - 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
one Company-owned LaserSpa(TM) (a combination skin care center and spa).
 

RESULTS OF OPERATIONS
---------------------

   Total revenue for the three months ended September 26, 1998, increased 37% to
$10,738,000 in comparison to revenues of $7,822,000 for the same period a year
earlier.  Revenues increased as the Company made strong gains in the United
States and European markets.  The increase over the same period a year ago was
mainly due to the introduction in March 1998 of the Company's GentleLASE(TM)
product line, which experienced strong demand over the quarter and was not yet
available for purchase during the same period last year.  The Company's
GentleLASE(TM) system was approved by the U.S. Food and Drug Administration as a
hair removal device in July, 1998.  Skin care center revenue increased 15% for
the period, over the same period a year ago, reflecting increased revenue from
cosmetic medical procedures offered at the skin care center.

<TABLE>
<CAPTION>
 
Revenue for quarter 1:
   (thousands)
                                    1999          1998  Change
                                 -------        ------  ------
<S>                             <C>       <C>           <C>
           Laser operations      $10,022        $7,199      39%
           Skin care centers         716           623      15%
                                 -------        ------
 
               Total             $10,738        $7,822      37%
</TABLE>

   Gross margins were 47% for the three months ended September 26, 1998,
compared to gross margins of 42% for the same period a year earlier.  The
increase in gross margin resulted from changes in the product mix, mainly
increased sales of higher margin laser systems and the closing of the Scottsdale
LaserSpa(TM).

   Research and development spending is associated with laser operations and
increased 19% to $688,000 for the three months ended September 26, 1998 in
comparison to $578,000 for the same period a year earlier.  The increase in
research and development reflect the Company's efforts to develop products and
product improvements designed to enhance and augment the existing product lines.

   Selling, general and administrative expenses decreased 2%, from $3,394,000 to
$3,333,000, for the three month period ending September 26, 1998 compared to the
same period one year earlier. This reflects significant savings from operating a
single LaserSpa(TM) over the period, when compared to the prior year, which
savings were partially offset by increased marketing costs associated with the
Company's increased sales volume.
 
   Income from operations was $1,043,000 for the three months ended September
26, 1998, compared to a loss of $652,000 for three months ended September 27,
1997.

                                       9
<PAGE>
 
                              CANDELA CORPORATION
                                        
  ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
  ------------------------------------------------------------------------
           RESULTS OF OPERATIONS (CONTINUED)
           ---------------------------------

   Other income and expense reflected $33,000 in expenses for the three months
ended September 26, 1998, in comparison to expenses of $121,000 for the same
period a year earlier.  The improvement resulted from a decrease in exchange
losses incurred at the Company's foreign subsidiaries.

   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 three months ended September 26, 1998, 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.


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

   Cash provided by operating activities amounted to $1,036,000 for the three
months ended September 26, 1998, in comparison to cash used for operating
activities of $770,000 for the same period a year earlier.  Cash used for
investing activities totaled $39,000 for the first quarter compared to $59,000
for the same period a year earlier.  Cash used for financing activities amounted
to $482,000 in comparison to cash provided by financing activities of $362,000
over the same period a year earlier.   This reflects the payment of a short-term
note by the Company's Japanese subsidiary for 50,000,000 Japanese Yen, or
$358,000 based on average exchange rates for the quarter, and the lack of any
new borrowings during the period.  The Company borrowed $500,000 on its line of
credit during the same period a year ago.

   Cash and cash equivalents at September 26, 1998, increased by $848,000 to
$2,463,000 from $1,615,000 at June 27, 1998, due principally to increases in
shipments of the Company's new laser.

   In support of the Company's laser production operations, the Company
maintains a renewable $3,500,000 line of credit with a major bank which expires
on December 1, 1998.  The line of credit bears interest at 1% over the bank's
prime lending rate and is collateralized by total domestic and international
accounts receivable, inventory, all tangible and intangible assets, and a pledge
of the stock of CSCC.  At September 26, 1998, the Company had utilized
$2,700,000 of the line of credit at an interest rate of 9.5%.  The Company was
not in compliance with one financial covenant contained in the line of credit
agreement as of September 26, 1998, however that covenant was waived by the
bank.  The Company is required to maintain a minimum quick ratio of 1.00:1.00,
the Company's quick ratio was 0.86:1.00 at the end of the period.

   On October 15, 1998, subsequent to the end of the first quarter, the Company
issued eight year, 9.75% subordinated notes to three investors in the aggregate
amount of $3,700,000.  The notes become due in October, 2006, and require
quarterly interest payments. In addition, the Company issued warrants to
purchase 370,000 shares of common stock to the note holders carrying an exercise
price of $4.00 per share.  The value ascribed to the warrants, using the Black
Scholes pricing model, is $920,560 as of October 15, 1998.  It was assumed that
the exercise of the warrants will occur after 8 years.  A portion of the
proceeds of this debt issuance was used to repay all of the then outstanding
debt on the line of credit.  The Company feels that this debt issuance, in
conjunction with the bank line of credit, will enable the Company to operate for
the foreseeable future.

                                       10
<PAGE>
 
                              CANDELA CORPORATION
                                        
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
         OF OPERATIONS (CONTINUED)
         -------------------------
   The Company's Japanese subsidiary has borrowed funds to be used for payment
of equipment purchases made from the parent corporation.  At September 26, 1998,
this liability is $245,000, 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 $365,000 and $492,000 respectively, at September 26,
1998, compared to $362,000 and $828,000, respectively, at June 27, 1998.

YEAR 2000 COMPLIANCE
--------------------

   The Company has established a committee to assess the implications of Year
2000 issues on operations, from information and financial systems to each aspect
of its manufacturing processes, in order to determine the extent to which the
Company may be adversely affected by Year 2000 issues.  Indications based on the
internal assessment, which is  approximately 50% complete, reveals minimal
impact of Year 2000 issues on the Company.  The Company expects to finish the
assessment process by December 1998.  Though limited testing of systems has been
performed to date, the Company has developed its systems and products with Year
2000 in mind, thus minimizing the impact of the change.  The Company may conduct
further testing and/or an external audit following the conclusion of its
internal assessment.  To date there has been a limited number of hours devoted
to Year 2000 issues, with no additional cost expended in systems upgrades
directly relating to Year 2000 issues.  Present estimates for further
expenditures of both employee time and expenses to address Year 2000 issues are
between 40 and 120 hours and between $0 and $20,000, respectively.  All
expenditures will be expensed as incurred and they are not expected to have a
significant impact on the Company's ongoing results of operations.

   The Company has undertaken an informal survey of its suppliers' Year 2000
compliance status with responses indicating Year 2000 compliance at this time.
Further, the Company has conferred with significant customers to assure that
various systems used for data and information exchanges between them will be
compatible following December 31, 1999.

    Based on its assessments to date, the Company believes it will not
experience any material disruption as a result of Year 2000 issues in internal
manufacturing processes, information processing or interface with key customers,
or with processing orders and billing.  However, if certain critical third party
providers, such as those supplying electricity, water or telephone service,
experience difficulties resulting in disruption of service to the Company, a
shutdown of the Company's operations at individual facilities could occur for
the duration of the disruption.

    At present, the Company has not developed contingency plans but intends to
determine whether to develop any such plan by January 1999.  There can be no
assurance that Year 2000 issues will not have a material adverse effect on the
Company's business, results of operation and financial condition.

                                       11
<PAGE>
 
                              CANDELA CORPORATION

ITEM 2 - 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.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.  A significant portion of the
Company's revenues are attributable to international operations and those
revenues  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, to fluctuations in exchange rates, tariffs and
other trade barriers, adverse tax regulation, and adverse political and economic
conditions.  Adverse effects on the Company's international operations may have
materially adverse effects on the Company's overall financial condition and
operating results.

                                       12
<PAGE>
 
                              CANDELA CORPORATION
                                        
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
         OF OPERATIONS (CONTINUED)
         -------------------------

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 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.  While the Company continues to operate the Boston facility, it
has made the decision to sell the assets of both the Scottsdale and the Boston
facilities.  The Company anticipates that the sale of both facilities will be
finalized within the fiscal year, but no assurances can be made that the
sale/sublease will be successful. The surgical skin care treatments performed in
the Boston skin care center are administered by board-certified physicians under
contract with the Company's wholly-owned subsidiary, CSCC.  While the target
market for the Company's core laser equipment tends to be medical practice
groups and other health care providers, its target market 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 spa and skin care center are largely
untested, and the Company could incur significant losses in relation thereto.

GOVERNMENTAL REGULATION.  Medical devices are subject to governmental 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 that 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.

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.  To
be successful, the Company must be responsive to new developments in laser
technology and new 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 those of the Company 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 against these companies.  In
addition, the Company's CSCC operation faces a wide range 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

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<PAGE>
 
                              CANDELA CORPORATION

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
         OF OPERATIONS (CONTINUED)
         -------------------------

operation will face competition from laser manufacturing companies that have, or
may develop, plans to open facilities similar to those of the Company 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 with these companies. Such
competition could have a material adverse effect on the Company's business,
financial condition and results of operations.

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.



ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------

At September 26, 1998 the Company held foreign currency forward contracts with
notional value totaling approximately $1,369,000 (190,913,999 Japanese Yen)
compared to $300,000 (58,625,000 Japanese Yen) at September 27, 1997.  These
contracts have maturities prior to January 14, 1999.  The carrying and net fair
value of these contracts at September 26, 1998 was $0 and ($32,000),
respectively, compared to $0 and $4,000, respectively, at September 27, 1997.

                                       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 17
 
      (b) Reports on Form 8-K

          No reports on Form 8-K were filed during the quarter ended September
          26, 1998.

                                       15
<PAGE>
 
                                   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: November 6, 1998       /s/ Gerard E. Puorro
      ----------------       ----------------------------
                               Gerard E. Puorro
                               (President and Chief Executive Officer)
 


Date: November 6, 1998       /s/ F. Paul Broyer
      ----------------       ----------------------------
                               F. Paul Broyer
                               (Senior Vice President of Finance and
                               Administration, Chief Financial Officer and
                               Treasurer)

                                       16