<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 March 28, 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 May 6, 1998
         ---------------                           --------------------------
   Common Stock, $.01 par value                           5,470,831

  ____________________________________________________________________________
  ____________________________________________________________________________
<PAGE>
 
                              CANDELA CORPORATION
                                     INDEX

<TABLE> 
<CAPTION> 
                                                                     Page(s)
                                                                     -------

<S>       <C>                                                        <C>
Part I.    Financial Information:

           Item 1.  Condensed Consolidated Balance Sheets               3
     
                    Condensed Consolidated Statements of Operations     4
 
                    Condensed Consolidated Statements of Cash Flows     5
 
                    Notes to 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

 
Part II.   Other Information:
 
           Item 4.  Submission of Matters to a Vote of Security 
                    Holders                                             15
 
           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>
                                                                      March 28,          June 28,
                                                                        1998               1997
ASSETS                                                               (unaudited)
-------------------------------------------------------------------------------------------------
<S>                                                                <C>                <C> 
Current assets:                                                   
    Cash and equivalents                                               $  1,140           $ 2,674
    Accounts receivable, net                                              6,392             8,848
    Notes receivable                                                      1,094             1,284
    Inventory                                                             8,152             6,776
    Other current assets                                                    541               522
-------------------------------------------------------------------------------------------------
                   Total current assets                                  17,319            20,104
-------------------------------------------------------------------------------------------------
Property and equipment, net                                               3,207             3,523
Other assets                                                                610             1,210
-------------------------------------------------------------------------------------------------
                   Total Assets                                         $21,136           $24,837
=================================================================================================           
                                                                  
                                                                  
LIABILITIES AND STOCKHOLDERS' EQUITY                              
-------------------------------------------------------------------------------------------------
Current liabilities:                                              
    Lines of credit and short-term notes                               $  2,206           $ 1,488
    Current portion of long-term debt                                       360               339
    Deferred income                                                       1,765             2,071
    Accounts payable                                                      5,491             5,879
    Accrued payroll and related expenses                                    778               833
    Accrued warranty costs                                                1,362             1,338
    Income taxes payable                                                    163               516
    Other accrued liabilities                                             1,214               608
    Reserve for restructuring costs                                       2,125                 0
-------------------------------------------------------------------------------------------------
                   Total current liabilities                             15,464            13,072
-------------------------------------------------------------------------------------------------
Long-term debt                                                            1,063             1,519
-------------------------------------------------------------------------------------------------
Stockholders' equity:                                             
    Common stock                                                             55                54
    Additional paid-in capital                                           17,386            17,223
    Accumulated deficit                                                 (12,372)           (6,885)
    Cumulative translation adjustment                                      (460)             (146)
-------------------------------------------------------------------------------------------------
                   Total stockholders' equity                             4,609            10,246
-------------------------------------------------------------------------------------------------
                   Total Liabilities and Stockholders' Equity           $21,136           $24,837
=================================================================================================
</TABLE> 
 
The accompanying notes are an integral part of the consolidated financial 
statements.

                                       3
<PAGE>
 
                              CANDELA CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
<TABLE> 
<CAPTION> 
                                             For the three months ended:            For the nine months ended:
                                            March 28,           March 29,       March 28,             March 29,
                                              1998                1997            1998                  1997
                                                    (unaudited)                             (UNAUDITED)
-------------------------------------------------------------------------------------------------------------
<S>                                         <C>                <C>             <C>                   <C> 
Revenue                                       $8,617            $8,790           $24,962              $25,835
Cost of sales                                  4,774             4,112            14,100               12,747
--------------------------------------------------------------------------------------------------------------
Gross profit                                   3,843             4,678            10,862               13,088
                                                                 
Operating expenses:                                              
     Research and development                    659               609             1,979                1,737
     Selling, general and administrative       3,331             3,667            11,421                9,203
     Restructuring charge                          0                 0             2,609                    0
--------------------------------------------------------------------------------------------------------------
           Total operating expenses            3,990             4,276            16,009               10,940
--------------------------------------------------------------------------------------------------------------
Income (loss) from operations                   (147)              402            (5,147)               2,148
                                                                 
Other income (expense):                                          
   Interest income                                12                37                29                   68
   Interest expense                              (47)              (35)             (181)                 (67)
   Other                                         (12)             (271)             (109)                (237)
--------------------------------------------------------------------------------------------------------------
           Total other income (expense)          (47)             (269)             (261)                (236)
--------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes               (194)              133            (5,408)               1,912
(Benefit) provision for income taxes               0              (170)               78                  364
-------------------------------------------------------------------------------------------------------------
Net income (loss)                              $(194)             $303           $(5,486)             $ 1,548
=============================================================================================================
Basic earnings (loss) per share               $(0.04)            $0.06            $(1.00)             $  0.29
                                                                 
Diluted earnings (loss) per share             $(0.04)            $0.05            $(1.00)             $  0.27
=============================================================================================================
</TABLE> 

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

                                       4
<PAGE>
 
                              CANDELA CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
<TABLE> 
<CAPTION> 
                                                                  For the nine months ended:
                                                                  March 28,          March 29,
                                                                    1998               1997
                                                                         (unaudited)
------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                <C>
     Net income (loss)                                              $(5,486)            $ 1,548
                                                                              
     Adjustments to reconcile net income to net                                     
       cash provided by (used for) operating activities:                                                                  
          Depreciation and amortization                                 586                 374
          Provision for restructuring charges                         2,609                   0
          Change in assets and liabilities:                                         
              Accounts receivable                                     2,133              (1,073)
              Notes receivable                                           79                 883
              Inventory                                              (1,550)               (638)
              Other current assets                                      (40)               (343)
              Other assets                                              583                (852)
              Accounts payable                                          (88)              1,239
              Accrued payroll and related expenses                      (60)                 15
              Deferred income                                          (260)                 36
              Accrued warranty costs                                     36                 207
              Income taxes payable                                     (388)                 76
              Accrued restructuring charges                            (484)                  0
              Other accrued liabilities                                 640                (228)
-------------------------------------------------------------------------------------------------            
                  Total adjustments                                   3,796                (304)
-------------------------------------------------------------------------------------------------
Net cash (used for) provided by operating activities                 (1,690)              1,244
-------------------------------------------------------------------------------------------------
                                                                                    
Cash flows from investing activities:                                               
  Proceeds from sale of equipment                                        15                  45
  Payment for additions to property and equipment                      (185)             (1,610)
-------------------------------------------------------------------------------------------------
Net cash used for investing activities                                 (170)             (1,565)
-------------------------------------------------------------------------------------------------
                                                                                    
Cash flows from financing activities:                                               
     Payments of capital lease obligations                             (284)               (268)
     Proceeds from equipment financing                                   84                 218
     Borrowings from line of credit, net                                950                   0
     Payment of long-term debt                                         (468)               (502)
     Proceeds from the issuance of common stock                         164                  95
-------------------------------------------------------------------------------------------------- 
Net cash provided by (used for) financing activities                    446                (457)
--------------------------------------------------------------------------------------------------         
                                                                                     
Effect of foreign currency on cash                                     (120)               (274)
--------------------------------------------------------------------------------------------------
                                                                                     
Net decrease in cash and equivalents                                 (1,534)             (1,052)
--------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of period                           2,674               3,041
--------------------------------------------------------------------------------------------------
Cash and equivalents at end of period                               $ 1,140             $ 1,989
==================================================================================================
</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, 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. The results
   for the three and nine month periods ended March 28, 1998, 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>
 
                          March 28, 1998     June 28, 1997
                          --------------     -------------
<S>                       <C>             <C>
 
       Raw materials           $3,131            $2,429
       Work in process          1,398             1,023
       Finished goods           3,623             3,324
                               ------            ------
                               $8,152            $6,776
                               ======            ======
 
</TABLE>

3. DEBT

   At March 28, 1998, the Company had utilized $1,950,000 of the line of credit
   at an interest rate of 9.5%.  As of March 28, 1998, the Company was not in
   compliance with the financial covenant limiting the maximum leverage to
   3.00:1.00; the Company's ratio was 3.41:1.00.  This covenant requirement was
   waived by the bank.  All other covenants contained in the line of credit were
   met as of March 28, 1998.

                                       6
<PAGE>
 
                   NOTES TO 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.
<TABLE>
<CAPTION>
 
 
                                 For the three months ended   For the nine months ended
                                 ---------------------------  --------------------------
                                   March 28       March 29      March 28      March 29
                                     1998           1997          1998          1997
                                 -----------     -----------  -----------    -----------
<S>                              <C>            <C>           <C>            <C>
   NUMERATOR
   ---------                     
   Net income(loss)                    $ (194)        $  303       $(5,486)       $1,548
                                       ======         ======       =======        ======

   DENOMINATOR
   -----------                    
   BASIC EARNINGS PER SHARE
   ------------------------
   Weighted average shares
       outstanding                      5,471          5,406         5,471         5,406
                                       ------         ------       -------        ------
 
   Earnings(loss) per share            $(0.04)        $ 0.06       $ (1.00)       $ 0.29
                                       ======         ======       =======        ======
 
   DILUTED EARNINGS PER SHARE
   --------------------------
   Weighted average shares
       outstanding                      5,471          5,406         5,471         5,406
 
   Dilutive options                         0            385             0           385
                                       ------         ------       -------        ------
 
   Adjusted weighted average
       shares outstanding               5,471          5,791         5,471         5,791
                                       ------         ------       -------        ------
 
   Earnings(loss) per share            $(0.04)        $ 0.05       $ (1.00)       $ 0.27
                                       ======         ======       =======        ======
</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 March 28, 1998, a total of $484,000 was charged against this reserve,
   representing costs associated with the shutdown of the Scottsdale facility.

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

6. NEW ACCOUNTING PRONOUNCEMENTS
 
   In June 1997, the Financial Accounting Standards Board issued Statement of
   Financial Accounting Standard No. 130 Reporting Comprehensive Income ("SFAS
   130") which establishes standards for reporting and display of comprehensive
   income and its components (revenue, expenses, gains and losses) in a full set
   of general purpose financial statements.  Management has not yet evaluated
   the effects of this change on its reporting of income.  The Company will
   adopt SFAS 130 for its fiscal year ending June 26, 1999.

   In June 1997, the 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
   quarterly 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 has adopted SFAS No. 131 for its
   fiscal year ending June 26, 1999, and management is currently evaluating its
   effects on the Company's reporting of segment information.
 
7. YEAR 2000 ISSUES

   The Year 2000 issue exists because many computer systems and applications
   currently use two-digit date fields to designate a year.  As the century date
   change occurs, date sensitive systems will recognize the year 2000 as 1900,
   or not at all.  This inability to recognize or properly treat the Year 2000
   may cause systems to process critical financial and operational information
   incorrectly.  The Company utilizes software from third parties and related
   technologies throughout its business that will be affected by the date change
   in the year 2000.  An internal review is currently under way to determine the
   full scope and related costs to insure that the Company's systems continue to
   meet its needs.  All expenditures will be expensed as incurred and they are
   not expected to have a significant impact on the Corporation's ongoing
   results of operations.

                                       8
<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).

   While the core laser operations of the Company (consisting of the
manufacture, sale and servicing of lasers) posted positive operating results on
a stand-alone basis during the quarter ended March 28, 1998, the Company
incurred an overall loss for the quarter attributable to losses from its wholly-
owned subsidiary, Candela Skin Care Centers, Inc. ("CSCC").  On-going CSCC
losses have continued to utilize significant cash reserves of the Company.  As a
result of the continued losses from CSCC, the Company had decided to close the
Scottsdale LaserSpa(TM)  earlier in the year.  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.

   Due to the demand on the Company's resources to fund the skin care centers in
relation to the Company's core laser business, the Company has made the decision
to sell both the Boston and Scottsdale LaserSpas(TM).  A preliminary agreement
was reached in March to sell both facilities to Advanced Medical Alliance, a San
Diego, CA-based aesthetic/cosmetic services group.  Discussions to complete the
proposed $3 million transaction are continuing with the potential buyer on a
non-exclusive basis.  The sale of these facilities will enable the Company to
focus resources on its core business of developing, marketing and distributing
medical lasers.

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

   Total revenue for the three and nine months ended March 28, 1998 was
$8,617,000 and $24,962,000 respectively.   Revenues decreased by 2% and 3%
respectively, for the three and nine month periods ended March 28, 1998 in
comparison to the same periods a year earlier.  This decrease reflects a lower
level of shipments to South Korean distributors and elsewhere in the Far East.
Additionally, increased price pressures have resulted in lower selling prices
per unit in comparison to last year, and continued devaluation of the Japanese
Yen has negatively impacted revenues reported by the Company's wholly-owned
Japanese subsidiary.   Skin care center revenue for the nine months ended March
28, 1998 reflect five more months of operations at the Scottsdale facility in
comparison to the same period a year earlier.  The increase in skin care center
revenue for the three month period compared to the same period one year ago is
attributable to the capability to provide cosmetic laser procedures at the
Boston Spa which was introduced in April, 1997.
 
Revenue for the period ended March 28, 1998:
($ in 000's)
<TABLE> 
<CAPTION> 
                                    3 months                       9 months
                                    --------                       --------
                              1998        1997  Change       1998      1997  Change
                            ------      ------  ------    -------   -------  ------
<S>                        <C>         <C>     <C>       <C>       <C>      <C>         
Laser operations            $7,941      $8,226      -3%   $22,927   $24,138      -5%
Skin care centers              676         564      20%     2,035     1,697      20%
                            ------      ------            -------   -------
 
   Total                    $8,617      $8,790      -2%   $24,962   $25,835      -3%
 
</TABLE>

                                       9
<PAGE>
 
                              CANDELA CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (CONTINUED)
                                        
   Gross profits were 45% and 44% for the three and nine months ended March 28,
1998, compared to gross profits of 53% and 51% for the same periods a year
earlier.  Gross profit for the three month and nine month periods were
negatively impacted by increased price pressures and the decline of higher
margin shipments to the Far East.

   Research and development spending is associated with laser operations and
increased to $659,000 from $609,000 and $1,979,000 from $1,737,000 for the three
and nine months, respectively, ended March 28, 1998. These amounts reflect
increases of 8% and 14% over the same three and nine month periods a year
earlier. The increases 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 9%, from $3,667,000 to
$3,331,000, for the three month period ending March 28, 1998 compared to the
same period one year earlier. This reflects a savings of approximately $300,000
resulting from the Company's decision to close the Scottsdale Laserspa(TM) in
January.  For the nine month period ended March 28,1998, selling, general and
administrative expenses increased 24% to $11,421,000 from $9,203,000 for the
same period a year earlier.  This reflects increased operating expenses for the
LaserSpas(TM) of $530,000, non-recurring charges for legal and consulting fees
of $350,000, and an additional provision for potentially uncollectible notes and
accounts receivable of a domestic distributor for $550,000.

   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.  During the quarter ended March 28, 1998, expenses charged against the
reserve totaled $484,000.

   Loss from operations was $147,000 and $5,147,000, respectively, for the three
and nine month periods ended March 28, 1998.   For the same periods one year
earlier, profit from operations was $402,000 and $2,148,000, respectively.

   Other income and expense reflected $47,000 and $261,000 in expenses,
respectively, for the three-month and nine-month periods ending March 28, 1998,
compared to expenses of $269,000 and $236,000 for the same period a year
earlier.

   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 nine months ended March 28, 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
-------------------------------

   The Company has continued to utilize cash resources in the operation of the
LaserSpas(TM) and in the production of a new laser introduced in the current
quarter.  For the nine months ending March 28, 1998, cash used for operating and
investing activities totaled $1,860,000 which was partially offset by additional
borrowing against a bank line of credit in the amount of $950,000, and proceeds
from issuance of capital stock, upon exercise of stock options, in the amount of
$164,000.  After considering payments against lease obligations and long-term
debt, net cash provided by financing activities totaled $446,000.

                                       10
<PAGE>
 
                              CANDELA CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (CONTINUED)
                                        
   Cash and equivalents at March 28, 1998 decreased by $1,534,000 to $1,140,000
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 long-term debt, and the use of cash for operating activities of
$1,690,000.

   After reassessing the future funding requirements of the Scottsdale, Arizona
LaserSpa(TM), in December 1997 the Company decided to close this facility.  The
Company is currently evaluating the sale of both the Scottsdale, AZ and Boston,
MA facilities and is currently in discussions to that end.  A preliminary
agreement for the sale of both facilities has been reached with final
negotiations continuing.  Equipment leasing has provided a portion of the funds
used by the Company for the initial capital investment costs for these
locations.  Upon finalizing the sale of the assets the leases covering the
equipment will be paid in full using the sales proceeds to the extent that
leased equipment is sold or liquidated from the Scottsdale and Boston
facilities.

   In support of the Company's laser production operations and the development
of CSCC's LaserSpa(TM) operations, the Company maintains a renewable $3,500,000
line of credit with a major bank which expires on November 30, 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 and
inventory, all tangible and intangible assets, and a pledge of the stock of
CSCC. At March 28, 1998, the Company had utilized $1,950,000 of the line of
credit at an interest rate of 9.5%.

   The Company's Japanese subsidiary has borrowed funds to be used for payment
of equipment purchases made from the parent corporation.  At March 28, 1998,
this liability is $384,000, 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 $360,000 and $935,000 respectively, at March 28, 1998,
compared to $339,000 and $1,156,000, respectively, at June 28, 1997.

   The Company continues to pursue methods of expanding its current line of
credit and is seeking financing 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.

   The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year.  As the century date
change occurs, date sensitive systems will recognize the year 2000 as 1900, or
not at all.  This inability to recognize or properly treat the Year 2000 may
cause systems to process critical financial and operational information
incorrectly.  The Company utilizes software from third parties and related
technologies throughout its business that will be affected by the date change in
the year 2000.  An internal review is currently under way to determine the full
scope and related costs to insure that the Company's systems continue to meet
its needs.  All expenditures will be expensed as incurred and they are not
expected to have a significant impact on the Corporation's ongoing results of
operations.

                                       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.

   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.

                                       12
<PAGE>
 
                              CANDELA CORPORATION
                    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 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.  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.  In March 1998 the Company reached a preliminary agreement with
 Advanced Medical Alliance, a San Diego, CA-based aesthetic/cosmetic services
 group.  Negotiations to complete this sale are continuing on a non-exclusive
 basis.  There can be no assurances that these negotiations will be concluded
 successfully.  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, the 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.

   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.

                                       13
<PAGE>
 
                              CANDELA CORPORATION
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                  (CONTINUED)
                                        
   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 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 4 Submission of Matters to a Vote of Security Holders

       On January 20, 1998, the Company held its Annual Shareholder meeting.  At
       the meeting, the Shareholders acted upon the following proposals:  (I.)
       election of directors; and (II.) ratification of the firm of Coopers &
       Lybrand L.L.P. as independent auditors for the fiscal year ending June
       28, 1997.  All of the above matters were approved by the Shareholders.

       Votes "For" represent affirmative votes and do not include abstentions or
       broker non-votes.  In cases where a signed proxy was submitted without
       direction, the shares represented by the proxy were voted "For" each
       proposal in the manner disclosed in the Proxy Statement and Proxy.
 
       Voting Results were as follows:
<TABLE> 
<CAPTION> 
                                                                                        Broker
       Matter                          For       Against       Withheld      Abstain   Non-Votes
       ------                          ---       -------       --------      -------   ---------
<S>                                   <C>         <C>          <C>            <C>       <C>
 
I.       Election of Directors:
         ----------------------
         Gerard E. Puorro             4,078,983    N/A          54,867         N/A        -0-   
         Theodore G. Johnson          4,091,717    N/A          42,133         N/A        -0-   
         Kenneth D. Roberts           4,092,527    N/A          41,323         N/A        -0-   
         Douglas W. Scott             4,081,927    N/A          51,923         N/A        -0-   
         Richard J. Cleveland, MD     4,080,083    N/A          53,767         N/A        -0-   
         Robert E. Dornbush           4,092,027    N/A          41,823         N/A        -0-   
 
II.      Ratification of Independent Auditors:
         -------------------------------------
                                      4,106,752    16,015        N/A           11,083     -0-
</TABLE>

Item 6 Exhibits and Reports on Form 8-K

       (a)   Exhibits

             Exhibit 27.1,  Financial Data Schedule,  page 16
 
       (b)   Reports on Form 8-K

             No reports on Form 8-K were filed during the quarter ended 
             March 28, 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: May 8, 1998            /s/ Gerard E. Puorro
      -----------            --------------------
                               Gerard E. Puorro
                               (President, Chief Executive Officer)
 


Date: May 8, 1998            /s/ F. Paul Broyer
      -----------            -------------------
                               F. Paul Broyer
                               (Vice President, Treasurer and
                               Chief Financial Officer)

                                       16